Future of rally dependent on central bank action: Karvy PWM

Equities worldwide have rallied strongly over the past few weeks on hopes of monetary easing by the US Federal Reserve and the European Central Bank. Indian equities have benefited from this positive sentiment by way of strong inflows, which helped the Nifty sail past the 5,400 hurdle with relative ease yesterday.

But higher the indices move, worries rise about the sustainability of this rally. According to Varun Goel of Karvy Private Wealth, the future of the rally is dependent on further action by central banks, be it the US Fed, ECB or even the Reserve Bank of India. In an interview to CNBC-TV18, Goel says that the market is headed into September with hopes that the Fed announces QE3 at its Jackson Hole meet. He also believes the market is hoping to see a rate cut from the Reserve Bank of India. “I think if Reserve Bank of India (RBI) does carry out a repo cut in the September policy, we would expect this rally to continue,” he said. From a macro economic point of view, Goel says the situation is improving for the country. With a revival in monsoon, worries about food price linked inflation have subsided. Therefore, on the whole, Goel is positive about the market going forward.Also read: Why Mudar Patherya bets on Pitti, Orient Bell Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Q: Would you say that the market will now comprehensively break 5,400? Are you all advising long positions for traders? A: I think last fortnight has seen a significant global rally. I think it is basically on the back of easy global liquidity and expectations of further monetary easing by the US Federal Reserve and the European Central Bank. We are going to have a meeting of the US Fed on September 12 and 13 in Jackson Hole, and that is where traditionally quantitative easing has been announced. Markets believe that it is probably the last window before the US presidential elections for further quantitative easing to come in. So I think essentially what we have seen is all risk assets rallying, be it commodities, crude oil or equities, and India of course has benefited from that. As far as domestic factors are concerned, the last one week has seen a significant revival in monsoon. So I think a lot of concerns about food price linked inflation pressures should subside if the rainfall continues to be robust with the next few weeks or so. I think we are going into September with expectations about a rate cut. I think if Reserve Bank of India (RBI) does carry out a repo cut in the September policy, we would expect this rally to continue. As far as the earnings season was concerned, I thought the earnings were more or less in line with expectations. If I leave out the energy sector, the earnings growth was quite robust, with positive surprise from quite a few sectors. So overall it looks positive for the market as of now. Q: One stock which has fallen off the cliff is Bharti Airtel, which is down around 3.5%. How would you be placed on that - as an opportunity and adversity? A: I think the telecom space as a whole has been undergoing a lot of regulatory uncertainty. I think we will come to an end on that uncertainty in November as and when the 2G auctions happen. Till that point of time, most of the market participants are going to be a little circumspect on the sector. But I think if you look at valuations, they look extremely attractive and definitely the sector looks extremely attractive for long-term investment. _PAGEBREAK_ Q: Your list of preferences still appears to be largely defensive. You like FMCG, healthcare types? A: We definitely would still go for a large exposure to FMCG, healthcare. Selectively we are beginning to like automobiles and private sector banking names. I think till the time we see a rate cut happening in September, we would not go into a very aggressive sectoral allocation. At the same time, we continue to believe that there is still a lot of undervalued opportunities in pharma and FMCG space which have significant upside potential. Q: In your non-core preferred sectors, are there stocks that you like? A: What we have seen for last three-four months is a significant cool-off in commodity prices and those auto ancillaries which are direct beneficiaries of that, be in the tyre space or battery space, are definitely going to benefit. I think the remaining half of this fiscal is going to be the story of about margin coming back on the back of significant decline in commodity prices. Also, as interest comes down we are going to see some effect of interest rate softening in terms of the net profit levels. As far as banking space is concerned, I think that lot of regulatory uncertainty about the gold sector and of course the microfinance space more or less things seem to be settling down. I do believe there are a lot of undervalued opportunities in that space also. Q: How would you be placed on the likes of Infosys post the fillip that we saw yesterday on the stock? What is your outlook on the IT sector? A: We believe IT at best could be a market performer from this point of time. I think the rupee depreciation story has largely played out. There continues to be a significant amount of pressure as far as the volume growth is concerned for most of the tier I companies. The worst signal that we got from this quarter results was that most of the big players have now started to compromise on pricing. I think margins could be under further pressure in the next few quarters. So we don’t believe that IT can be a market outperformer from this point of time. Q: Any disclosures? A: We could be advising all the stocks and sectors that we discussed to our clients.