Mkt buoyed by global cues; Nifty may head to 5600: Experts

A positive verdict from the German Constitutional Court gave a new lease of life to global as well as domestic markets. Indian equity benchmarks made the most of the positive mood and the Sensex soared past the 18,000 mark, recording a six month high closing. The Nifty too moved above the 5400 mark, ending the day at 5431.

Sudarshan Sukhani of s2analytics.com advises, "The Nifty needs to cross 5450 on a closing basis or give the impression that it is going to do so during intraday trading and that will be the sign when traders should again go and buy or add to their positions or restore the positions that we exited earlier." If those levels are breached, Sukhani believes the Nifty is headed towards 5600.
S Naren, CIO Equity at ICICI Prudential thinks markets are not cheap at the moment. According to him, global triggers have been affecting market and all eyes would now be fixed on the US Federal Reserve. If the Fed does not go ahead with another round of quantitative easing or QE3, markets would surely be disappointed, he feels.
However, the domestic environment looks pretty good with the monsoon picking up and FII flows to India increasing over the past couple of months, said Naren. Further, a decision on diesel price hike would add momentum to the rally, he believes. Moreover, defensive sectors like pharma and IT are going to book profits if inflows are to continue in the absence of a fuel price hike, added Naren. Here is the edited transcript of the interview on CNBC-TV18. Q: It is 18000 that we are nudging on the Sensex now. What's the view from hereon after seeing all the global triggers play out?
A: I think the global triggers have been playing out. Of course we have the Fed meeting where I think more and more people are expecting quantitative easing or QE. If there were to be no QE, I think the market would be disappointed.
On the local side, clearly monsoon has been a big benefit. I think the monsoon has improved significantly in the last two months and that is likely to reduce the risk of food inflation spiralling very significantly. On the other side, we all were expecting a diesel price hike. We continue to expect a diesel price hike which has not yet come. I think if that were to come, it would add momentum to this rally.
FIIs have been investing a lot in the last two months and I guess that is also because there have been a lot of concerns. China is slowing down very fast and that has helped Indian flows. I would say we have to watch some of these factors but, having said that I think markets are not really cheap at this point of time. Q: In the first three months of the year we saw high beta stocks doing well, the likes of infrastructure. In the last three months it has all been about the defensives like pharma and IT stocks, going forward till the end of the year which are the sectors that you would bet on?
A: If you were to see a diesel price hike, you would see many of the sectors which have been underdogs, doing well. If you were to see no diesel price hike and flows were to continue then it would continue to go to the leaders, similar to what we have seen in the market in the recent past.
At the end of the day when the money comes in and if you have a diesel price hike, there are number of sectors whose fundamentals improve. If the money does not come in and we still have old problems of oil pool deficit etc, the money is likely to go to all those sectors where you are sure of earnings. So the trend that played out in the last three months will continue. Q: Do you have any view on the aviation sector because now it seems like we could get closer to some resolution on FDI in aviation, would it make sense to plough in money in these companies or do you think that even if there is FDI in aviation many of the global aviation companies may not be interested in these loss making entities and the stock prices are just going to hover where they are at this point?
A: Essentially what the gurus of investing say is that aviation is a trading sector, you cannot be invested. I think it would remain a trading sector.
For a large fund house to take a trading position in a sector which is volatile is very difficult. So possibly in the last five years we have not invested in the sector at all and we have been the gainer for it. Maybe as a trader there maybe an opportunity but for an investor it is difficult at this point of time in the aviation sector. Q: With respect to the entire banking space, what's the call that you are taking because a few people have started looking at PSUs on the back of good valuations because they have fallen down quite a bit or would you continue to look at private banks on account of more relative comfort about the asset quality?
A: I think it is one of the sectors which will benefit significantly. Monsoon improvement should help because food inflation is likely to be much lower. Having said that, I think there is a necessity for fuel price hike for the sector to actually improve because once you have a fuel price hike there is a good possibility of an interest rate cut which would be the biggest trigger for the sector.
I think we have been looking at it on a continuing basis but we have been waiting for a fuel price hike to increase our weightage in the sector. At this point of time there seems to be retail lenders who are trading at very high valuations. It looks to me that many of the corporate lenders are also likely to enter retail lending, so maybe retail lending margins are at a high. Therefore, from that angle the view that we've been having is that maybe it’s time to book profit from the retail lenders and look at some of the beaten down stocks in the sector.
However, we will still be cautious but the day we see a reform I think we will change our view and we might miss the first few percent. But that's a call we are willing to take.
_PAGEBREAK_ Q: What should one really be expecting now in terms of any kind of policy action either economic, fiscal or monetary? The RBI has not changed the policy rates since the month of April and now there has been no diesel price hike, so perhaps the RBI may not need to move at all in the next policy. What are you expecting to hear?
A: At this point of time I think RBI through all the statements have made it pretty clear that the moment they see fiscal consolidation, they will believe there is a good space for monetary easing. I think they are just waiting for fiscal consolidation. It is a good strategy from the point of view of stability and in our opinion we would see interest rate cuts the day fiscal consolidation is seen.
That's a problem at this point of time. If you see the direct tax numbers which have been reported in some of the media I think the growth in direct tax is also coming off. So we have a situation where the tax collections are kind of plateauing at this point of time because of the lower growth in the economy. That is why it’s impetrative to see a drop in subsidies so that you create space for monetary easing to give an impetus to the economy.
I am sure that the RBI is looking for an opportunity to cut rates or cut CRR and things like that. The condition at the moment is not giving them that space. But if they see a little bit of space I think it will happen. Q: What constitutes reform from the government side which could get the market very excited? You spoke about if we get some sort of a reform then perhaps the beaten down sectors will do well and then you will make that churn in the banking space. What would be enough for the markets to start rallying high? Will just a token diesel hike be enough?
A: I think a decent diesel price hike would be the simple reform that we are expecting at this point of time. I think everything else is much smaller given that we consume 8 crore litres of diesel a year and today the subsidies are like Rs 17.
I think just that results in a subsidy of more than Rs 1 lakh crore a year and I would say that is the only big issue at this point of time. Otherwise, India is still a structural growth story. It’s still a growth driver. In all those things we are much better but the Rs 1 lakh crore diesel subsidy is really a problem at this point of time. If they take care of it, we would consider it as having taken care of most of the issues at this point of time. Q: Do you think 5600 on the Nifty is an easy target now or do you see better levels ahead by the end of the year?
A: It is always the case that no one can predict markets. It is very difficult to predict levels. What we can clearly see at this point of time is markets are at fair value. There are a set of so called quality stocks which are really expensive and the rest of the market is reasonably cheap. The aggregate of the two is a fair value.
So we have a set of stocks which can go up significantly if you were to see a slight difference in economic environment. At the same time quality pack is trading costly and it is there only because people are running away from other sectors.
Markets are at fair value. There is opportunity in many of the economy sensitive sectors. Flows are a function of what is happening in the world and as we have seen at various points over the last three years, there have been improvements after that deterioration.
We have always been seeing this kind of an oscillation. We believe that kind of oscillation will continue in the form of volatility and we have believed in that for the past three years and there is no reason to change it.
Although, in the recent past some of the decisions that Draghi have taken and today the German Court has announced is pretty positive. But, as long as you have a lot of leverage in the economy, you are going to see volatility continuing but Indian outlook is clearly dependent on how we are managing to move the current account and fiscal deficit over the next 6 months.