Difficult to expect run-away market from here: Ved Prakash

Even as the environment in terms of fund flows has been supportive for the Indian market, macro factors such as inflation and crumbling GDP numbers may pose a situation where it would be very difficult to expect a run-away market from here, said Ved Prakash Chaturvedi, chief executive Capital Markets & Investment Management Group at L&T Finance Holdings.

In the same breath, Chaturvedi goes on to say, "given the fact that our markets have not rallied now for four years or more, and the global liquidity environment is still supportive, maybe the downside is also limited. Hence, I think the market will remain in a band. I suspect that the upside is limited."
In his view, unless something changes dramatically in the macro environment, either on the policy front or on the interest rate front etc, the market may not see much change significantly from here.
Meanwhile, with the F&O expiry underway, Sudarshan Sukhani of s2analytics.com advises traders not to hold any positions. At best, they should have about 10% or 15% of their normal volume on the long side.
Sukhani added that the market will then dictate its next course of action. "If it is willing to go up above 5400 then long positions should be added as the market crosses thresholds 5430-5450. If it cracks on Monday, think the advisable action would be to close your long positions and then even below 5350, start selling," he recommended. Below is the edited transcript of the interview. Q: Are we likely to consolidate from hereon, see a bit of profit taking or perhaps, after pausing for the next few days, the market has the strength to move higher?
A: Let us evaluate the global situation and the local situation, to look at where the market can go. Worldwide, we have expectations of quantitative easing by major central banks.
There are a couple of events like the Fed meet on August 30 and the meet in Germany on September 12 to see whether they want to support the European stability mechanism etc.
Notwithstanding, the environment in terms of fund flows has been supportive and we have been beneficiaries of this. This year itself, we have got close to USD 11-12 billion of fund flows.
However, there is significant concern with respect to growth rate in China and Europe. I think the global stance towards emerging markets like India will remain a sum total of all these influences.
Let us look at the domestic factors. The GDP growth numbers have been scaled down significantly, thanks to the global situation as well as various domestic factors. We are expecting a sub-6% growth rate.
Inflation is not cooling down in a hurry. Hence, it is not expected that interest rates would come down. As a result of all this, earnings growth numbers for companies are in the region of 9-10% estimated for this fiscal year and there are similar estimates for the next fiscal year.
If you combine all this, I think we are presented with a situation where it would be very difficult to expect a run-away market from here.
At the same time, given the fact that our markets have not rallied now for four years or more, given the fact that the global liquidity environment is still supportive, maybe the downside is also limited. Hence, I think the market will remain in a band. I suspect that the upside is limited.
Unless something changes dramatically in the macro environment, either on the policy front or on the interest rate front etc, I don’t see the market changing significantly from here. Q: What is your view on the entire FMCG space? Do you think it’s a good time to book profits in them or would you hold on to the stocks that you have?
A: Many of these companies have been beneficiaries of the growth that they have shown and the kind of interest that investors have had. So, whether it is FMCG or pharma or some maybe private banks, there has been investment and investor concentration and institutional investor concentration in these areas. Valuations have run up especially in light of the fact that the market is clearly rewarding quality corporate governance, quality management and visibility of earnings growth.
Hence, as I said earlier, since valuations in these sectors have already run high, it is very difficult to accept that valuations will keep going up from here. The next leg of the rally will have to be driven by a new set of sectors; leadership has to pass. Leadership cannot pass unless there are dramatic changes especially in the local macro environment; it has to be on the policy front or it can be some change in the interest rate environment and so on.
So, I think the market will wait for those cues before leadership passes and before we see a fresh set of legs, which can drive the market further. Q: What is the implication of the entire coal scam on all the companies that are implicated?
A: I am not an expert on politics and economics of politics. So I would find it difficult to comment on that. But I think if you look at the long-term history of the Indian market, it has reacted to more fundamental factors as a whole rather than any individual events.
I think that story would continue. So, the market will continue to react to earnings growth and broad level performance, to my mind, rather than individual events. Q: What would your approach be to a stock like Bharti and the sector in general now?
A: I won’t comment on stocks but our sense is that given the uncertainty around this sector, it is something which we have to be careful about. At the moment, we advise caution in this particular area. Q: What have you made of the trend of midcap underperformance?
A: We had USD 11 billion of inflows from overseas, yet, the midcap index has significantly underperformed the broad market indices. Clearly, money is moving into large cap, quality governance, visibility of earnings stocks, and as we discussed earlier, much of this rise is in the FMCG, pharma, certain private sector banks.
Hence, valuations here have run up significantly as a result of which many other areas have been ignored. Now from past history, we know that for the medium term investor, big money has been made from here.
Clearly for somebody who has a 3-5 year view, there is a lot of opportunity because the differential in valuations between companies is huge. Many of these companies, which have not performed are actually well managed high quality companies but out of flavour because of either reasons of macro policy or reasons of the market cycle or the economic cycle.
Hence, for an emerging economy like India, the market cycle will turn and some of these macro policies issues will eventually get addressed. There is a lot of value in this market. As I said earlier, the patient medium term investor will extract this value. However, it does not seem to be happening in the next month or the next quarter so investors will have to be patient.
But my sense is that given the fact that certain key economies in the world are slowing down, commodity prices should come down. Monsoon has not been so bad and that might easy off inflation in course of time especially with the base effect that could cause interest rates to come down and it might seem to be a very different market. But I guess it is sometime away. Hence, investors, at this point of time, are sticking to the safe stocks and are staying away from midcaps.