Macro challenges to keep market mood jittery: Purushottam

Going by the macro-economic backdrop, Sangeeta Purushottam, Managing Director, Nine Rivers Capital feels it is hard to get very optimistic since many of the macro challenges are likely to remain. However, the liquidity is the key that is holding the market and the hope of more liquidity coming in because of global factors.

“It has also become a fairly bipolar market in terms of valuations between the defensives and the non-defensives. If the market has to have a sustained rally, it is the non-defensives, which need to move up but it is frankly very hard to take a call on them right now,” she said. Also Read: Choppy Nifty below 5350; Sesa Goa, Sterlite top losers According to Purushottam, defensive should be the main element in your portfolio although they look expensive. “In anticipation of a rally, one can take some high beta exposure but to switch the other way round is just too early. That switch will happen further down, I think maybe 1-1.5 years down the line, when we see some signs, we will see the fundamentals of the sectors picking up. If you are playing into a trade or a rally, it makes sense to add some high beta but you cannot move away from the defensives unfortunately right now.” Below is the edited transcript of the interview Q: We did see some kind of a surprise rally given the consistent downgrades of gross domestic product (GDP) and bad news on the fiscal front. Nevertheless, we have seen the money coming in. How are you looking at the next six months going by the macro-economic backdrop? A: If we look at the macro backdrop, it is hard to get very optimistic since many of the macro challenges are likely to remain. If we even look a year forward, there is a political scenario, which will again drive economics for the next couple of years. There are no signs yet despite hopes that after presidential elections, there would be a fuel price hike or there would be some steps taken on reforms except for what has happened on general anti-avoidance rule (GAAR). I think reforms will be slow; the macro picture will grind down for a while and then may be slowly start to grind up. It is hard to get optimistic looking at that. However, surprisingly liquidity has been fairly strong. I think that is the key to holding this market and the hope of more liquidity coming in because of global factors. I think that remains key. It has also become a fairly bipolar market in terms of valuations between the defensives and the non-defensives. If the market has to have a sustained rally, it is the non-defensives, which need to move up but it is frankly very hard to take a call on them right now. Q: If you do see this next leg of liquidity coming to the market, how would you rejig your portfolio to be in sync with the global mood? Would you still continue to be pro-defensives or would you start accumulating some of these cyclicals? A: We do see a burst of fresh liquidity coming in; we will obviously have a rally. But in my opinion, that rally will be not very long-lived unless we see something changing on the macro front. This means that for a while, we will see money go into the beaten down sectors because the valuations are closed to cycle lows; they will move up for a while but if you look beyond six months, it will still make sense to have a reasonable amount of defensives in your portfolio. I think it would be a little risky to get out of defensives completely and switch into the cyclicals. Cyclicals will see a move but I do not expect that to be very long-lived unless we see some progress on macros. Amongst the cyclicals what could happen is that the metal pack may see a stronger move. Last time, when there was an injection of global liquidity, we did see metal prices move up and there could, therefore, be some fundamental basis for those stocks to rise but we need to see how that plays out. Q: How would you approach stocks like Bharat Heavy Electricals Ltd (BHEL)? A: I think the entire capital good pack, in general, is obviously dependent on an upturn in the investment cycle. As we have been seeing, not only has the newsflow on that been negative, it is hard to predict when that is going to pick up because we are not seeing any signs of a turn in the cycle. If anything, we see the discretionary consumption cycle itself beginning to slow down, which has become the last phase of a slowdown. In BHEL’s case particularly, it is the excessive exposure to the power sector, which is a concern. There are some movements there. But the core issue, at the centre of the power sector problems, is getting consumers to pay of removing subsidies, which were given to a very large section of consumers and of tackling a whole lot of structural issues. Time and again, we see a patchwork approach to having things cleaned up. But unless that is sorted, that mess will keep coming back. In the power sector also, what has happened is that this is a capital goods company, so we have had capacity creation happened over the last 10 years. This drove the rapid growth phase for a company like BHEL. Going forward, that rate of growth is never going to come back. There is a structural slower growth that the company is looking at apart from its near-term problems. _PAGEBREAK_ Q: Would you use the opportunity or would you use the slippage that we have seen in some of these private banking names like Axis Bank to pick up the stock? A: I am a little skeptical of Axis Bank in particular because I think there are some question marks there on the asset quality compared to some of the other private sector banks. I would be more comfortable with some of the other larger names than Axis in particular. Q: What would you bet on in terms of sectors? A: For the moment, you would need to have the defensives in your portfolio although they look expensive. In anticipation of a rally, one can take some high beta exposure but to switch the other way round is just too early. That switch will happen further down, I think maybe 1-1.5 years down the line, when we see some signs or you can at least anticipate that in a few months from now, we will see the fundamentals of the sectors picking up. If you are playing into a trade or a rally, it makes sense to add some high beta but you cannot move away from the defensives unfortunately right now. Q: Metal buyers are reporting lower and lower sales, all the hot rolled coil (HRC) buyers, the automobile buyers, construction are not doing well if you are looking at longs. Of course, Tata Steel should be treated more as a global player, even there, one knows that one is plodding with very poor demand. Is this largely a liquidity argument that when money comes metals would get some bit of it or is it only a sentimental play? A: Yes, it is only a liquidity argument. Q: We understand that the sugar association has said that production is likely to fall and that may propel prices as well. How are you positioned on the sugar sector? A: I do not follow the sector very closely. Let me say that at the outset but sugar from whatever I have seen of it for the last few years, tends to follow a two-year cycle. When I had looked at the valuations of sugar companies, they were trading at cycle lows sometime back and they still remain low. From a valuation point of view, the companies tend to trade at a significant discount to book value at the cycle lows and then move up to about 1.5-2 times book value. At this stage, we are trading at significant discounts to book value. The sector has not done well for a couple of years and given the newsflow coming in about shortage in production, it has positive implications for price. So, there is a combination of earnings improving along with lower valuations. I think sugar should do reasonable well.