Macros will confuse; Pharma, auto best bets: AQF

Nitin Raheja, CIO, AQF Advisors explains to CNBC-TV18 that the macro-economic situation will be confusing till the effect of the reforms sinks in. He advises investors to bet on interesting opportunities in the pharma and the auto sectors.

Below is an edited transcript of the analysis on CNBC-TV18. Q: As an investor how would you approach this run for the market? Is this a start of a secular bull market or are the moves based purely on sentiment and liquidity?
A: I think it started off with sentiment and liquidity. With improvement in sentiment, liquidity has been the big driver of this move. But in the longer term, we have observed these cycles occurring in the market every eight years- in 1992, 2000 and 2008.
Between that eight-year cycle after the end of a bull market, there is a four-year cycle of correction, consolidation and bottoming out. And in the fifth year, there is a phase of consolidation. That’s where pretty much the markets are.
Our view is that somewhere towards the end of this year, the bottom of the market has been clearly seen. There has been a consolidation over eight-to-nine months. There could probably be little more in the offing in the next couple of months. But yes, I think the trend is going to be towards the upper-end, taking the markets to new highs. Q: What are the sectors that are going to lead the markets to new highs after this phase of consolidation? What is the shift in allocation of portfolio that you would advise?
A: Our focus on the portfolio is purely bottom-up, primarily because the midcaps have played a huge role. The case of undervaluation has allowed them to catch up in the last couple of months. So we continue to believe that at least for the shorter-term trend, the markets will be more focused on the market bottom up and that’s really been our broader portfolio approach.
Going ahead, as the government introduces some more reform measures, you will probably start seeing the cyclicals or the stocks which are heavily influenced by government policy, like infrastructure stocks, also come back because it is my firm belief that if the whole reform programme has to be in place, you will sooner than later see measures in infrastructure come into play. Q: Do you see any incremental improvement in the macro-economic factors or do you think the economy will continue to deal with slow growth and high inflation?
A: The macro-economic factors are going to be muddied for some time. Sentimentally, there has been a boost in terms of policy reforms. But I think for that to translate into an increase in the amount of investment into the economy, the uptrend is probably going to take some time. So, I think the macro-economic factors will be a little confused and muddied. The scenario of inflation will probably continue to have its effect. Q: What do you think of the entire auto sector? What would you bet on in the auto names and which category would you look at?
A: Among the auto stocks, I think our choice is Tata Motors purely because the valuations represent a very attractive case for investing in the company and with Europe also starting to ease a little bit. Our other favourite is Mahindra and Mahindra, because it has clearly got its act right as far as the utility vehicle segment is concerned. Q: Any significant impact of the pharma pricing policy and how would you position yourself on the pharma segment?
A: I think the pharma segment has been weighed down in the last one month by this pricing policy. However, the overall impact is going to be marginal. With a lot of large companies having a well-diversified domestic and an export business model. So there are interesting opportunities in the pharma sector. Our choice is Wockhardt and midcap-company Alembic Pharma. Q: What do you think the next round of government reforms will focus on? Which sectors would you play in order to trade on these expected reforms?
A: I think the two sectors that require attention at this point of time are mining and land. Over the next six months, the government will out positive signals, most importantly on GST. If GST is implemented, there will be a 1-1.5 percent jump in the GDP growth rate. Apart from this is the implementation of the DTC in the Budget. Q: Do you think this spike in crude could be the fly in the ointment and restrict the upside in the market?
A: Given the Indian market, crude has the potential to disrupt a whole rally. However, it is heartening to note that the rupee has been strengthening against the dollar. Crude has entered a trading band, but I am not too perturbed at this point of time. However political tensions and a further increase in crude, could upset the applecart. Q: What is your approach on the entire UB Group of stocks?
A: I think these stocks are going to run on hope. A breakup of the stocks reveals there is longer-term value especially in United Spirits if it gets this whole debt-restructuring right. Kingfisher is going to continue to be buoyant on hopes of a strategic partner and money coming in. That’s where the UB Group is probably going to rest.