FIIs avoid India; Nifty to hover in 5500-5900 range: Bhat

Indian equities recently saw a decent run-up despite declining foreign fund flows and disappointing corporate earnings. The market has lost steam and is now headed for either a consolidation or some mild correction, believes UR Bhat, MD, Dalton Capital Advisors.

“Foreign fund inflow decreased from USD 4-5 billion in January to less than half a billion dollars now. I think the flow of FII money into India is ebb away,” he said in an interview to CNBC-TV18. The Nifty is seen trading in 5,500-5,900 range if global economic situation remains stable. But a fall to lower end cannot be ruled out if there is more negative news from debt-ridden Europe, he added. In line with consensus, Bhat also expects the central bank to cut repo rate by 25 basis on May 3, but doesn’t foresee major market reaction on this move. “Both money market and the stock market have factored in the quantum of rate cut. There has to be a big surprise, much higher than that if the market has to really bounce based on RBI action. The market needs more legislative action in terms of clearance of key bills,” he added. Also read: Opt stock specific strategy than buying index: Expert Below is the verbatim transcript of his interview to CNBC-TV18 Q: We have had a pretty sharp rally these last couple of days aided by liquidity. Is it looking like the market has more momentum or would you say much of that steam has been spent? A: I think much of the steam has been spent. We have had a reasonably good run this month with not too much of (foreign institutional investors) FII inflows. FII inflows have actually petered down. From January is was USD 4-5 billion, in February it was the same and in March it was about less than a couple of billion. This time it is even less than half a billion dollars. Therefore, the flow of FII money into India is ebbing away. Still the market has given a bounce this month. The results have, some of the major ones have disappointed the markets in terms of March results. So, I think the market has probably run its course and has spent its steam. It is now time for either consolidation or some mild correction. Q: Theme most of last week was the huge relief that we have seen in the macro situation with the drop in inflation, drop in crude, gold, etc. Do you think most of that has been baked into the market or do you see some more follow through if the Reserve Bank goes ahead with that expected 25 basis points cut? A: I think the 25 basis point cut has been sort of digested by the market, both by the money market and stock market. There has to be a big surprise, if the market has to really bounce based on RBI action. Otherwise, I think that has been sort of factored in. I think the possible effect on the current account deficit on account of international prices of crude and gold - that also has been factored in. The legislative action in the fag end of the Budget session is something that can keep markets sort of buoyant if there is some progress on the several bills that are expected to be passed. However, other than that, there is really nothing much. I don’t think the RBI action if it is 25 basis points can excite the market too much. Q: How much of a retraction in trade would you expect to see then? What kind of trading range do you think the market reverts to if your call is that the correction is due? A: The market should probably trade in the range of 5500-5900 if things are normal. However, if there is a big shock coming from somewhere like Europe, then I think it could give away 5500. Otherwise, I think 5500-5900 is a basic range one should work with. Q: What do you think the catalyst for that correction might be? A: I think it is lack of FII inflows and potentially some outflows also. The US market has given very good returns, about 11-12 percent up year to date and the Indian market, the divergence has been quite dramatic. So as a result, one could probably see that there is more money to be made in Japan. For example we are talking about USD 10-10.5 billion that has come year to date, but Japan has received some USD 65-70 billion dollars. Therefore, there is a lot of money going to Japan. There is reallocation of money that is possible. India has really not performed very well year to date even though 2012 has been a good year. There is a possibility of some reallocation of money coming into emerging markets, especially India. Therefore that is one thing that can influence the course of Indian market. Plus, you always have potential problems coming out of Europe because Cyprus has still not settled, one has got Portugal, Italy and run up to the elections in Germany. So, there is a lot of pain that could come out of Europe. This could influence the risk on, risk off trade. So, I think one needs to watch the Indian space quite closely and see whether there is even more money to be made in India or time for some caution. _PAGEBREAK_ Q: Are you expecting to see any major disappointments in earnings season this time around which could be another catalyst for a down take? A: Quite possible because I think quite a lot of the big ones have disappointed. They are the ones who have come out with early results. The ones typically that come later are the ones who have really no good story to tell. I think that is something that we should brace up for now over the next week or so. Q: If this market does see a correction or retrenchment to the levels that you were talking about, would you use that as an opportunity to buy into it or would you be a little cautious until you get more concrete positive triggers going ahead? A: One should start nibbling in, but not go the whole hog as it were. The market really does well and sustains it only if business confidence returns. I think that is far from coming, especially the sort of initiative. For example, the coal price pooling that was a big initiative by the government, has really not taken shape. So, I think some more momentum in terms of the policy impetus - that is required for business confidence to return and entrepreneurs to start thinking in terms of further investments. Q: Is there a line to be drawn though between a tactical call and a fundamental call in that case? Tactically, if the market continues to see this kind of liquidity, it is possible that this is the attempt in which we take out 5900 as well? A: That is always possible, but if the recent flows have been any indication where the momentum of FII inflows have petered down, it is difficult to make all that will go dramatically above 5900. Unless, there is some dramatic surprise from somewhere. However, tactically one should really look at 5900 has something that is the current peak and then work towards a potential correction. Q: What kind of expectations would you go into the policy event with because now there is chatter of perhaps the option of 50 basis points (bps) in terms of action? Do you think that’s likely and how do you think the market may react to that? A: The market would react certainly very positively if we have 50 bps cut. It is very unlikely that RBI will go the whole hog to 50 bps. A 25 bps is what the market is factoring in because we really have not got a grip on the CPI. It is still in double digits. For investors, probably that is what matters more. Therefore, while it is possible that the market might cry for a 50 bps cut, the RBI would moderate that and keep it at 25 basis points for the present. Q: How worried would you be about the data that’s coming in from China? We have had two-three data points that have come in weak. What do you think the repercussions would be on global growth and equity markets? A: I think that is one more of a series of bad news coming out of China. It will continue to have a good effect on commodity prices vis-à-vis India because India is a gainer of low commodity prices. I think that would be something good for India. Other than that, at least China can change the sentiment globally, is probably not on the cards. It is more likely to be the dramatic easing that we see in Japan and the consequent inflow of money there and stock market performance and the incremental good news coming out of US. These are the only two factors where the global markets might actually perk up a bit. However, it is not really going to be China or Europe for good news coming and therefore impact on global markets. _PAGEBREAK_ Q: How would you approach this market then? Would it still be a move towards defensives, some of the good quality private banking names or is there an attempt now to put some money into some of these volatile, rate sensitive, realistic names, etc? A: Too early for that because we really don’t know whether the follow up in terms of the land acquisition act, other stalled projects and problems with the approvals, etc has really not been tested yet. We really don’t know how far this will go and aid further investment and progress in these sectors. Therefore it is too early a call to make on things like real estate. However, rate sensitives, at some stage, probably the June quarter might be one of the worst quarters for public sector banks in terms of NPA accretion. After that there maybe a case for someone to have a look at these stocks, but as of now it should be defensives and private sector banks and the FMCG, pharma. I think this is where one should park their money. Q: Start of earning season has also seen a couple of the holy cows getting hit such as IT. How would you approach IT now? A: With the H1B Visa problems that are currently occupying centre stage doesn’t look like as if IT companies are going to be favourites of the market anytime soon. In fact, if you really see just before the Infosys results, IT sector had a very good run. There is quite some disappointment after Infosys and this would probably continue because the faith that the market seem to have on the IT leaders has been somewhat belied. Therefore, it will take some time for market to find further value there. Even though in terms of valuation they are probably at market multiples or thereabouts. It is not as if they are really priced aggressively. However, the outlook for growth should look a bit better before the market will take plunge into IT companies and find a great value there. Q: Where would you find safety in terms of valuations or in terms of performance now? A: Safety has to be from the defensives - that is where I think most money is parked especially of big institutions. Unless there is some big movement on the policy side, I don’t think people really go all out to buy the cyclical or even the industrials. There is certainly going to some lag effect between some dramatic policy movement and entrepreneurs starting to think in terms of new investments. Therefore, I think there has to be some good movement on the policy side before there other sectors, the cyclical and industrials start finding flavour of the investors. Till then it will be more or less same. Money would tend to flow in the defensives and the private sector banks. Q: In terms of a policy impetus what are you expecting to hear that could help improve the investment cycle? A: All these stalled projects need to be pushed forward for whatever reasons. They have got stalled, whether it is environment, land and several other reasons. Plus, I think another important one is recasting the finance of the electricity boards. There has been some baby steps taken there, but there is going to be much more. Finally all these projects have got stuck either because raw materials have to come through some government agency or other which has got stuck or otherwise receivables where some government agency either is not paying up. So, this cycle of shortening the working capital cycle - that is very important for confidence to return. Only when confidence returns, we would probably have some pipeline of new projects. That is when the market will certainly take the cue and start discounting better earnings growth and that’s what can take the market up.