See Nifty in 5600-6000 range; food bill a burden: Dalton

Presenting his outlook on the market to CNBC-TV18, UR Bhat of Dalton Capital Advisors said that the Nifty will trade in 5,600-6,000 range and rules out the possibility of the index falling below 5,500 level. 

The market does not look good for taking risks due to an improving US economy and better job scenario, he said. This was evident in the month of June when both foreign institutional investors (FIIs) and domestic institutional investors (DIIs) were net sellers. He expects FII outflows to continue. The Automatic Data Processing (ADP) employment data in the US on Wednesday showed an addition of 188,000 jobs in the private sector. With such numbers and bad European markets, all talks about tapering of US Fed’s quantitative easing (QE) programme look real now, he said. Speaking on surging costs for the government, he sees the oil expenses to be huge on the back of the rupee touching 60/USD levels again. He also does not expect the Reserve Bank of India (RBI) to cut key interest rates. The food security bill too will be a big burden, he adds. Also read: 8 ways to avoid losing money in stock market Below is the edited transcript of his interview to CNBC-TV18. Q: Whether you are expecting a little more of capital outflows now that the employment data that came in yesterday looked very good. If the employment numbers that come on Friday look closer to 200,000, are we bracing ourselves for some falls in the coming weeks? A: That is the most sensible thing to do. If we see the circumstances prevailing in the international markets, we started with the Quantitative Easing (QE) taper and it looks like as if the US economy is getting to better shape. So, all the talk about the QE taper is probably real now. The situation in Europe is getting worse. The political situation in Portugal, problems in Greece and the political situation in Egypt is getting worse. Things do not look very good. There have been downgrades of the European banks. The risk appetite is really waning. The US economy is doing reasonably well; the Dow gave a year-to-date (YTD) a 13 percent return. It is a minus 12 percent return by the Indian market in US dollar terms. Therefore, there is actually a huge chasm of almost about 25 percent YTD underperformance of the Indian market vis-à-vis the US market. Given that the outlook in the international market is not very good for risk taking, we should brace for further outflows. Especially in June, we had an outflow after almost about 12 months from Foreign Institutional Investors (FII). June is probably the first month after more than about 12-13 months when both FIIs and Domestic Institutional Investors (DII) were sellers. Clearly, the outlook for the market is not very good in terms of flows. So it is best that we brace ourselves for such an eventuality continuing. Q: Do you think that this market has formed a bottom for itself at the 5500 level? Or that theory is also out of the window because of these fresh fears from the likes of peripheral Europe etc? A: These fresh fears are there. But they are not as bad as to lead to a breakdown of the European currency or sovereign default or any bank collapsing. So, I do not think things are as bad as what they were a couple of years ago. There would be certainly fears ensuring that the risk-off trade is really not on the cards. As far as India is concerned, I think 5500 is really a bottom. Things are not too bad to pierce 5500. All said and done, things also do not look very good. We also have the food security ordinance which clearly looks like a self goal in economic terms. Therefore we have a situation where things are not really conducive and given the current account deficit (CAD). The rupee depreciating to upwards of 60, plus the oil prices at USD 100 plus levels; the oil bill is going to be really big this time. So the outlook on CAD is not very good. Outlook on fiscal deficit cannot be very good with the amount of money that we have to allocate towards food security. So no great news is seen coming from anywhere that should help investors take further risk-on. Q: Are we setting ourselves for a rather difficult 2014 when the Food Security Bill will take its pound of flesh? I know it is little too medium-term, but does 2014 look much cloudier than 2013? A: That is what it looks like as of now. The other important point is, given the rupee weakness, there is really no talk of further interest rate cuts other than what the public sector banks are going to do. From the Reserve Bank of India (RBI) viewpoint, I do not think there is any case for further interest rate cuts. If there is no possibility of further cut interest rates, there is distinct possibility of further pullout from the fixed income market by FIIs. So things really look very confusing. One ray of hope in the run up to the election there would probably be further public spending by the government. That could probably change sentiment a bit. The amount of money that goes into an election is good for the economy. Q: When will the rupee weakness start to show up in the earnings or in the profitability or corporates? Which are the sectors or stocks that will be impacted the most? A: The June quarter results will start seeing the impact of this. To a certain extent, the impact of rupee depreciation can be capitalised in the balance sheets. But those who deal in imports will certainly have to show it in revenue. That is certainly on the cards. Quite a lot of these companies have foreign borrowings of a very high degree, especially telecom. That will start showing up pretty soon. _PAGEBREAK_ Q: Where do you hide? You correctly pointed out that there are so many clouds on the horizon. What would be sector-wise or stock-wise places to hide, relative outperformers? A: Sector-wise, if you have to really be in equities, it is same old Fast Moving Consumer Goods (FMCG), pharma, private sector banks. All the others are exposed to very high levels of risk .If you have an appetite for risk and if you are a long-term investor, maybe this is not a bad situation to be in. But for a short-term investor or someone who has to ensure that you publish Net Asset Values (NAV) everyday, this is not the ideal situation. FMCG, pharma, private sectors banks are the only sectors where one could hide. Q: Where do you stand on IT stocks? Do you think the big overhang the immigration costs, the visa costs is already discounted and one can start to buy these stocks? A: The sharp rupee depreciation has really helped the IT companies whether the cost involved in the immigration law changes in US. The last word has not been said about it. It is still early times. There is a possibility of some dilution of the norms that were to come. All said and done, the pecking orders of the IT companies have really changed. They are not really in terms of size anymore. They are in terms of earnings growth. The big ones are really going to show hardly any growth; at least on a Quarter-on-Quarter or Year-on-Year basis. The midcaps, the midsized IT companies are the ones who are really showing reasonably good traction and the biggest of them all Tata Consultancy Services (TCS). Other than that, quite a lot of them have lost their way. This is reflected in their prices. That is the pecking order that most investors have as of today for IT companies. Q: What about the oil and gas space? There are brokerages who are quite positive on Reliance Industries and that stock has been dormant for so many years now. Do you see a breakout in names such as Reliance because of the trigger? A: Not really. The gas price hike would certainly take sometime for it to show up in terms of better earnings. As of now, the outlook on the quantum of gas is not really all that good. I do not know whether that is the ideal stock to be buying into. The Oil Marketing Companies (OMC), structurally, are really undergoing a dramatic change with this monthly increase in diesel prices. Things might look up for OMCs as we go ahead. This is if the government has a will to continue this diesel oil price hike on a monthly basis even during election time. If that were to be the case, then OMCs certainly offer better value than the others. Q: Ten percent rupee depreciation is a 10 percent import tariff for the entire economy. There would be some winners on that which will start showing in the earnings? A: Not really. The corporate India has such huge External Commercial Borrowings (ECB). That has been the fashion for the last three-four years where everybody borrowed from outside saying that it is cheap quite largely on an unhedged basis. Some of them of course have a natural hedge. This is going to show up quite dramatically in the corporate earnings over the next couple of quarters. There are very few ones who are really domestically oriented. They are the ones, the FMCG companies, the pharma companies which are big exporters. These are the ones which will really shine in comparison with quite a few others who are having a tough time. All said and done, the private sector banking space is really interesting. Despite huge chasm in valuations between public and private sector, private sector banks have been able to manage their Non-Performing Assets (NPA) quite well. They have been going ahead with reasonably aggressive growth without really impacting on the financials in terms of NPAs too much. That is something that the market has recognised and is really giving premium valuation to these companies. _PAGEBREAK_ Q: In terms of the trajectory for the market now, will this volatility continue? Although we might maintain that range that many investors have been talking about since the start of the year, but within that range itself will it will extremely volatile? A: Yes, within the range it will be volatile. The range could be somewhere between 5600-6000. That is the broad range. It would be volatile as there is enough news flow that unsettles markets almost everyday. So, the market will keep feeding this new information into prices and that will result in sustained volatility. Volatility is something that we will have to live with as we go to the run up to the elections. Q: What about the power stocks? You have to give the government credit that they are doing everything possible. Maybe that is not enough. But they are still doing a great deal to ensure fuel and perhaps somebody who would come and buy the power. Is there anything in that space that you can buy as a distress purchase and see things sort out themselves in the next 12-24 months? A: Power stocks are really an interesting opportunity, because given the sort of scarcity of power in this country the government is taking right steps. Of course, we need much more aggressive steps. The government really will have no other go than to take those steps as we go forward given the level of shortage in power. The power companies which are gaining on account of possible improvement in supply of gas, coal and recasting of the electricity board's finances, these are the things that can really offer multibagger opportunities. Therefore, the way to invest is to look at companies which are slightly less leveraged. Not the ones which are excessively leveraged and who are going to benefit from these things and stay put there. I think over a year or two things should look much, much better in this sector. Q: For the second half of the year, which is the asset class that looks like it could yield good investments? Equities will be volatile and within a range. Fixed deposits have no chance of rates moving. So that does not look like a good investment in any case. We have also seen the selling rout on gold as well. For the rest of the year what kind of an investment strategy would you recommend? A: It should be certainly an asset allocation among these including of course fixed income and fixed income securities. Fixed income securities might not be a bad idea. The fact that there may not be at least interest rates hikes in the near future and if things improve there might be slight softening of interest rates, that offers a reasonably interesting asset class. You have to keep buying equities when there is a lot of pain in the market. A long-term investor should certainly allocate a significant amount of money to equities. Probably he could time the market better. But since nobody can really get to buy these stocks at the bottom, one has to keep nibbling as and when there is confusion in the market. As of now, I do not think there are a lot of people who are very bullish on gold. So that is probably best avoided as of now.