Baer Cap cautious on India, overweight on FMCG & pharma

As India is trying to hold back investors, bulls only seem to be fleeing away. Experts are concerned that the policy paralysis overhang may drag the economy and market further. Alok Sama, Founder & President, Baer Capital Partners also warns that it is time to be extremely cautious on India.

In an interview to CNBC-TV18 he says, "I think if some of the factors cause a risk-off trade, then you could potentially see very easily a 20-25% downside in the Indian markets in a very short period of time. But again that is not my base case."
Investment, during FY12, dropped by a whopping 46% to about Rs 2.1 trillion from Rs 3.9 trillion a year ago.
According to Sama, the perfect storm for the Indian equities would be continued inaction by the policy makers, potential downgrade and continued rupee depreciation.
As an investment strategy, he has defensive stance with overweight on FMCG and Pharma. Below is the edited transcript of his interview. Q: What are your expectations from Jackson Hole - do you think it might be a powerful propellant for more risk-on starting next week?
A: Mario Draghi will not be there nor are the senior members of ECB executive council. So the focus will on Jackson Hole and the noise coming out of Ben Bernanke. Our base case is that the Fed is, by and large, committed to further easing. Unless there is a clear signal in terms of an improvement in the employment picture and the growth picture, the Fed is down the track for monetary easing, and to a great degree, that has already been factored into the market. I think the markets would be disappointed if the Fed didn't follow through.
With respect to the ECB and their plans on bond buying, setting targets, which they may or may not announce publically and what they feel the boundaries for Spain and Italy, for example, is what we are much more focused on.
And my base case for Europe is a muddle-along scenario. I think the ECB is moving in the right direction. Even though there are the pure monetarists within Germany who are not supportive of bond buying, there seems to be an agreement between the ECB and the main protagonists in Europe with respect to a bond buying program as long as there is a commitment towards fiscal reforms.
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The other piece of the picture, which has been more of a concern is the growth outlook. There is a scenario combination of austerity and limited monetary easing, and EU headed towards a depression. If they combine it with some concrete measures with respect to addressing some of the bottlenecks that have held back Europe labour reforms etc, there is an escape scenario where Europe does hold together. That is certainly our base case. Q: Given the kind of macro uncertainty, how should one be positioning their portfolio now?
A: I think investors should be fairly defensive. I think that people's expectations with respect to what happens in Europe have been reset. They are less concerned than they have been in the past. Some of the good news with respect to what the ECB might do has already been factored in.
 
Further monetary easing on the part of the Fed, Chinese Central Bank has already, to a degree, been factored in. So while there may be some upside with respect to Europe actually following through on some of what they have committed, I would be cautious. The rally has been on extraordinarily thin volume. It is not a true risk-on. It is a limited risk-on and the jury is out as to whether or not this rally has some genuine legs and how that translates into flows into India.
 
As regards India, one needs to be extremely cautious. A combination of the earnings outlook, corporate outlook with respect to growth, margins, the macro picture, the outlook with respect to deficit, rupee, rating agencies, lack of follow through on infrastructure reforms, there are lots of reasons to be very cautious on India. So our bottomline would be extremely cautious high cash positions and weight towards defensive stocks. Q: Do you expect that the global money into India to also be very defensively focused going forward?
A: I would stay defensive. To the extent that there are flows into India, they will gravitate less towards financials even though they are beaten down. What would happen in India is mirroring what is happening in the Western world. I mean the favoured stocks tend to be the pharmaceuticals, consumer staples, companies that are solid dividend history, dividend paying stocks - that is the right place to be in. Q: What have you made of the political developments and the parliament session - has that unnerved the global investors that you have spoken to?
A: There is an element of resignation with respect to political stalemate in India. I think people's expectations have been set at extraordinarily low levels. There seems to be a complete inaction with respect to some of the measures that are required urgently handling the fiscal deficit for one. Handling some of the issues the country is facing with respect to power bottlenecks is another. There is a potential for a ratings downgrade.
 
A lot of people expect again some inevitability with respect to that downgrade that will have implications for cost to capital. It will have implications for more negative headlines towards India and implications for the rupee very importantly. So these are serious causes for concern. I certainly hope and pray that New Delhi is focused and cognizant of those issues and those sensitivities with a real sense of urgency. We are very concerned about the bottomline. Q: Do you think some of the worries might begin to get priced in, something which may not have happened because of liquidity if the world were to go on to a risk-off mode?
A: There is a risk-off trade than there is a lot of downside for the Indian market. Frankly, the perfect storm for the Indian market would be global risk appetite receding. By the way, I am not sure that is going to happen. I am probably more sanguine about the risk-on trade than I have been for many months in the past. But the perfect storm for the Indian equities would be continued inaction by the policy makers, a potential downgrade, continued rupee depreciation, going to 60 overshooting potentially beyond. I think 60 is the base case.
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If you combine that with risk-off, a disappointment with respect to some of the policy measures that have been discussed in Europe, and very importantly, a disappointment with respect to Central Bank monetary easing globally, if some of the factors cause a risk-off trade, then you could potentially see very easily a 20-25% downside in the Indian market in a very short period of time. But again, that is not my base case.
 
Q: What is your sense of what will happen with earnings in terms of a trigger going forward? Do you think earnings have troughed out?
A: Our projections for earnings growth for FY13 are probably towards the lower end of expectations. So we will probably say 10% growth. From a valuation perspective, India is certainly not cheap. We are defensive and there are macro factors mentioned with respect to the rupee, in particular, the balance of payment situation, the fiscal situation that cause a lot of concern. Q: You are very cautious on banks as well. What are your biggest fears now?
A: We are very cautious on banks, banks with exposure to corporate lending, concerned about NPLs. There are HDFC and HDFC Bank which are probably relatively more secure. But the banks with a lot of exposure to the corporate sector like SBI, ICICI and others, we are more cautious on. Q: Is it just the public sector names where you are cautious on or would that extend even to the private sector names?
A: Yes, our preference would be private banks but having said that, we are concerned about the banking sector in totality. We do not think that is a good place to be in right now. The bull case in India in the near-term, medium-term is probably a risk-on trade, maybe even a turbo charged risk-on trade. We don't think that money is necessarily going to go into the direction of the banks.