Sanjay Sinha of Citrus Advisors says, in the event that the US cliff issue gets resolved on the positive side and the FII flows do turn out to be as strong as they were in the first quarter of 2012 then it is very likely that the market might touch the previous high within the next couple of months.
The Indian market rallied spectacularly in 2012. The Sensex jumped around 25 percent.
In an interview to CNBC-TV18, Sanjay Sinha of Citrus Advisors says, going forward, in 2013 first month, the market has apprehension about the looming US fiscal cliff. "The market has expectation that the FII flows will be very strong. In the event that the US cliff issue gets resolved on the positive side and the FII flows do turn out to be as strong as they were in the first quarter of 2012 then it is very likely that we might touch the previous high within the next couple of months," he elaborates.
As far as macro economic situation is concerned, Sinha says, nobody expects any fireworks to happen in a hurry. "If the economy has to come back on track, it will be a little more back ended. We are going to enter 2013 with very tempered expectations. If you have very strong FII flows in the first month itself then it might catch the local sentiment by surprise. So, it would be more like the market getting caught by surprise and therefore going to the previous high than the fact that we are entering 2013 with a very strong set of expectations," he adds.
He is fairly negative on metals going into 2013. He expects 2013 to be positive for the auto stocks led by consumption. He also expects banks to continue to outperform in 2013. "NPA will not be a worrisome factor for banks in 2013 versus 2012," he asserts.
Sinha doesn't expect the RBI to cut rates in the near-term.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What's your sense of how things are going into January? Are you prepping yourself for new highs or is this the end of the rally we saw over the last few weeks?
A: The last session of the Parliament was one of the most productive sessions in this month, yet it was not reflected in their performance. The market had already discounted that the Parliament would manage to get some of the legislations passed. Going forward in 2013 the first apprehension is the US fiscal cliff and the second expectation is that the FII flows will be strong. If both factors turn positive then it is very likely that we might touch the previous high within the next couple of months.
Q: The expectations from the market were quiet low when we started off in 2012, which is not the case right now. Do you fear that there could be a sense of disappointment creeping in as most of the market is expecting new highs to be touched in the first quarter of 2013?
A: If you see the sentiment on the street and measure that by the rollovers that happened in November expiry, a fairly bullish rollover happened in the month of December. But I don't think the market has actually delivered on those expectations. So the short-term speculative interest in the market has to a large extent got tempered. As far as macro economic situation is concerned, nobody expects any fireworks to happen soon. Even if the economy has to come back on track it will be a little more back ended.
We are entering 2013 on the back of tempered expectations and if we get very strong FII flows which come in the first month itself than it might catch the local sentiment by surprise. One thing that has been common in this rally is low local participation. And we might see the fruits of whatever is happening on the economic front in the later part of 2013. But the market may discount it in a more front ended way. So it would be more like the market getting caught by surprise and therefore going to the previous high than the fact that we are entering 2013 with a very strong set of expectations.
Q: How big an event do you think the RBI policy will be in terms of deciding the markets next direction?
A: It will be a big event. On the background of very low expectations of a rate cut if RBI does cut the rates then it will be a tailwind that the market will react to very strongly. And a rate cut would be very timely because the overall slowdown in the economy cannot be only attributed to lack of policy announcements from the government.
I think it would be an appropriate time for the RBI to add the right catalysts to this entire momentum by cutting rates and set the tone for the rest of the year. If the RBIs announcement of a rate cut comes in a background of a fairly strong FII flows for the first three weeks of the month, then the likelihood of the markets getting onto a very strong tempo is very high.
Q: The rupee had a miserable year, it touched the all-time low of 57.30 in June, now it is still languishing around that 55 to the dollar mark. What is the prognosis for how the rupee might move and in turn affect some of the sectors?
A: By the end of 2013, the rupee should have appreciated significantly against the dollar. This expectation comes from two things. First, I expect crude prices to moderate by second quarter of 2013. If that happens, then it will be a big pinch to the balance of payment account for the government of India. This factor should have some salutary effect on the rupee versus dollar exchange rate.
The next Budget will be far more responsible Budget as far as fiscal deficit is concerned. This initiative will not be ignored by the global investors or the impact that it has on the rupee-dollar exchange rate. So a combination of these two factors provides me the confidence that we’ll see the rupee far stronger than what we have seen in 2012.
Q: How do you approach some of these globally-linked sectors whether it’s the metals or a couple of autos now as well? Would you change your strategy around in terms of how you approach them next year?
A: I am negative on the metal sector, barring few exceptions. I think metal as a pack will under perform in 2013. However, I am bullish on auto stocks. The rupee value should appreciate going into 2013 and it would take away some pressure on input cost. If we add that local consumption will be strong then this should be a good year for auto sector.
Recently, couple of banks has also cut down their rates on auto loans. We will also see some of the impact of the direct cash transfer to the rural areas through Aadhaar probably reflect something what has happened in 2005-2006, where the Kisan cards gave a fillip to the sale of two-wheelers. So combination of these two factors should be good for the auto stocks and we have also seen the auto ancillary pack beginning to rustle up from this number that they had gone into for most parts of 2011.
Q: Where do you think is domestic liquidity moving? Are the redemptions coming to a close or do they still continue? What’s happening with the Domestic Institutional Investor (DII) community, is it that they are taken with some of the government offerings and they can't participate in the market? What do you explain this lack of domestic liquidity to?
A: I would attribute this to lack of confidence. I don't think there is any dearth of disposable savings in the hands of the investors. The year 2008 was a big dropdown for many investors. The next rally happened in 2009, which took investors by surprised and the fact that not many participated in that rally in a big way. On 5th November 2010, the market reached the previous peak of 21000 on the Sensex and 6300 on the Nifty which was very rapid and the fall after that took many investors by surprise. I think huge volatility in the market spooked the local participation and not so much the fact that it has taken so much time for the market to come back to where it was in the later part of 2007.
Lack of confidence can be attributed for the redemption that we see in the DII space. It might take some time for the sentiments to improve. I fear that the sentiment may come back when the market starts coming back close to the previous peak and if it is not able to hold that level for sometime then there could be another disappointment that the local sentiments will have and this will keep them away from the markets for a long time.
Local participant have a very short term outlook, they are interested in making quick money and not interested to hold on to their investments. Today, if an investor today has an outlook for couple of months then there may be some heart burn and if he has an outlook for 3-5 years then it is going to be one of the most beautiful periods of the equity markets in India.
Q: How do you advise getting back into the market for someone who is looking to do that now?
A: I would not advocate direct participation in equity because it requires much analysis and time. The fund route is the best route to invest around 60-80 percent of their portfolio; balance can be direct participation in equity. In last three-four years, SIP has not given decent returns in terms of an absolute gain in value.
It would not be rational to extrapolate that what has been experienced over the last three years in terms of SIP returns that will be experience over the next three years. The accumulated savings that have put or collected through the SIP route will also be a beneficiary of the market upsurge over the next three years and it will more than compensate them for the disappointing returns that they have received till now.
YTD the market is up roughly about 24 percent and if you see where has been the maximum interest in the last year, it has strongly been in the debt funds where the returns has been around 8 or 9 percent. So in a span of just one year the market has probably more than compensated somebody for having been here vis-à-vis a return of about 8-9 or even 10 percent in fixed deposit. So going forward in the next three years if the market is able to give a fairly healthy return it will surely compensate them for the lacklustre return that they got through the SIPs in the past.
Whether they choose an outperforming fund or they choose an SIP would be a function of their asset allocation like how much of the money is already committed to equity and how much can they afford to invest on a regular basis would be factors which will decide as to whether they should put some lump sum in an outperforming fund and start an SIP or just do a lump sum investment.
Q: How would you approach the banking space? Despite having asset quality pressures banks have done very well in 2012. Do you think the best of the banking rally is behind us given the fact that you do not expect the Reserve Bank to cut rates anytime soon and asset quality pressures still persist?
A: No, on the contrary I believe that banks would continue to be an outperforming sector in 2013. Despite negative background, if the banking as a pact has delivered one of the best sectoral returns in 2012, in 2013 the economic environment will be much better and we all know that some of the reasons for the NPAs to accumulate is also a function of the economic environment. So I would expect NPAs not to be as worrisome a factor in 2013 as it was in 2012.
I think the Reserve Bank of India should start the rate cut cycle in 2013 and my expectation is that the total quantum of rate cut that might happen in the calendar year 2013 might be anywhere between 75-100 bps starting from January. So that would also be a factor which would favour banks, because if it triggers a decline in the G-Sec yields it would also boost their treasury gains. So, overall I would still expect banks to be one of the choicest sectors for 2013.
Q: This week is extremely heavy with respect to IPOs. What is your view on the Credit Analysis and Research Limited (CARE) IPO, what kind of listing gains are you expecting to see and what would you advise investors?
A: The listing gains in this issue should be substantial. The street is expecting a listing gain of about Rs 100-150. I think one should stay invested in this security because we don’t have too many listed plays on the rating front. Actually, we don’t have too many rating agencies anyway in the country. But CARE has one advantage that if they want to diversify abroad, there is no restriction on them because the ownership is purely Indian and therefore that is an added advantage they have. Of course compared to the other rating agencies such as CRISIL, they do not enjoy the same premium as what the others have.
Q: Are you confident about next year as this year has been in terms of returns because the markets has had tendency not to repeat performances back to back and everyone’s pointing out how this year has started off on a low and then is ending at a bit high, whereas the next year the onus is on the market to up its performance compared to what it has done through December?
A: The market gave a return of about 40 percent for three successive years from 2005-2007. I think 2013 we be a year of volatility. I think we will see the rally more front-ended in 2013 and we might have a significant period of lack lustre market and then the rally may renew its momentum towards the later part of 2013 and that would be a more enduring rally which will probably continue for the next couple of years.