Bearish on PSU banks, rupee weakness to persist: Religare

The benchmark Nifty could be rangebound between 5600-6000 as markets across the world grapple with the prospect of lower capital flows, feels Tirthankar Patnaik of Religare Capital Markets.

He sees the rupee remaining weak in the near term, and is cautious on the equity market. In an interview with CNBC-TV18, Patnaik says he prefers to bet on defensive stocks, given the uncertainty in the market post the US Federal Reserve's recent comments on quantitative easing (QE). He expects the US Federal Reserve to start trimming its monetary stimulus from September onwards. The other key risk for global equity markets is China's growth turning out to be lower than expected. Patnaik is bearish on the rupee and sees it falling well below 60 to the dollar, unless the government takes steps to increase capital flows. Patnaik is hopeful that the government will take more steps to increase foreign direct investment limits across sectors. He is bearish on PSU banks. Also read: No ceiling on number of new bank licences: Chidambaram Below is the edited transcript of his interview to CNBC-TV18. Q: What have you made of the last couple of sessions for the market? Are you getting the feeling that this pullback is done and there is an outflow situation building again? Will the market have a chance of regaining some ground? A: At 5,600 levels, there was possibility of a bounce back. The markets moved up in the last eight-ten trading sessions but macro indicators are not really changing. My top-down perspective changed as the government has come in with more policy initiatives. The gas price hike was taken fairly positively by the markets and index heavyweights like Oil and Natural Gas Corporation (ONGC) and Reliance Industries essentially moved up. Over the last one week, that has driven the market. But, given that global macro situation remains quite fluid, one would not expect the bond and equity outflows to really taper off just on this news after a particular time. So we will expect the markets to remain range bound. At this moment we see weakness. Q: How heightened does the risk remain that market may through this month, see accentuated flows through the bond or equity market which in turn puts more pressure on the currency too? A: On the currency, some amount of support came in at 60. While we see currency battling around these levels for the next one-two weeks, the overall prognosis remains quite bleak. We are expecting the Federal Reserve (Fed) to start tapering off by the September meeting so global currencies will start showing the effects. We are already seeing volatility resume. The emerging market (EM) bond spreads have been down over the last couple of trading sessions from about 380 to 330 basis points (bps). But Brazil yesterday was down 4.5 percent. So this volatility will be negative for the markets. Therefore the downside is there even at current levels. We expect the markets to remain in a range bound level from 5,600 to about 6,000 with a lower bias. Q: You are quite cautious in terms of a portfolio stance. Within that caution, there are spaces which were considered classic defensives like IT and FMCG. That has started to come off too due to growth concerns. So, how do you really position yourself in a market like this where there is no great leadership from any individual sector? A: We will maintain the defensive and cautious stance. At the moment, a lot of worry is that defensives that have been doing better than the beta are the ones to fall with the outflows. However from portfolio positioning perspective, one would remain focused towards these sectors. Overall, given there is a question about India's GDP growth improving in FY14 or FY15, there is concern about the currency and the prognosis remains bleak. We are looking at currency levels going well beyond 60 by March FY14. So we would maintain our positioning in terms of dollar denominated portfolio, IT and pharma would remain overweight in our model portfolio. The other thing; yes, we are expecting cost of funds to still come down. The central bank would be in a position to control the interest rates and not the currency from an impossible framework. So we would be playing certain select rate cyclical plays like housing finance companies. _PAGEBREAK_ Q: Is there a threat to that 5600 level if the dollar index goes above 84 which looks like a possibility? Will it induce another collapse in the EM currencies? A: For the last many months, some amount of big tail risk is taken out by the liquidity infusions in the global markets; be it Japan or US. So, we would not expect numbers to go materially below 5600. But, after the Fed’s recent comments about tapering, that degree of uncertainty has come in. If you had asked me this question a month back, I would probably say 5600 should be a bottom for the markets; given that we are still looking at 9 percent growth. We are still looking at about 5 percent growth for the gross domestic product (GDP). Globally, things are much worse. Commodities are coming down which should be positive for India. However, given the current volatility situation in the global markets and assets, on one hand the dollar has been strengthening. On the other, the crude strengthened given the geopolitical risk in Egypt and Syria. Things can go below the 5,600 levels although the possibility seems low but we will not rule that out. Q: The key differentiate for the market at this point will have to be what policy delivers. Oil and gas got done. But now there is a talk that the focus is back to more populist measures, something like the food bill etc. What else would you expect to see in terms of policy impetus through the course of this month? A: The talk that the government has been pushing is to raise FDI across major sectors. From our perspective, we have only two expectations. We expect them to keep raising diesel prices which will reduce the fiscal burden. It will also bring down under recoveries. On the second side, given that the government cannot do much about the current account deficit (CAD), they can open the door wider for capital to come in, which is what we have been seeing. ECB limits have been made easier by RBI over the last one week or so. Foreign Direct Investment (FDI) yesterday in telecom was raised to 100 percent. So government is doing what it can to raise capital to let capital come in. Another point they did two weeks back was raise foreign institutional investor (FII) limit in sovereign debt from USD 25 billion to USD 30 billion. Not that money is coming in now. But this is something that they are expecting to do. What we will expect in the near term is more FDI announcements to come in, possibly raising debt limits further. More structures on gold imports were expected. The indications are that they have come down over the last two months or so. But we will not rule out more import restrictions on gold going forward. Q: Is the best behind the banking space, not just the PSUs, but for the private lot too? A: We have been negative on PSU banks for quite some time. We do not expect numbers to be fairly good even in any kind of revival in this quarter result season. For private banks, yes we would be sellers now. The numbers are not going to be good and any kind of capital outflow from India would hit financials the most. Foreign investors are massively overweight on financials in their portfolios. So, we would not be buyers into private banks as a sector at this point in time.