Euphoria is short-lived; govt policy is vital: L&T Fin

Ved Prakash Chaturvedi of L&T Finance Holdings explains to CNBC-TV18 that the near-term is the best time for investors to take positions thanks to positive events such as the initiatives announced by the ECB and the Fed. However, Chaturvedi adds, the euphoria is short-lived and calls for government policy initiatives to sustain the markets and economic growth.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Most of the triggers have played out well. What positions should an investor take to capitalise on the moves being seen in the market now?
A: I think it obviously depends on the investment horizon. My feeling is that in the near-term there are several positives including the initiatives by Bernanke and Draghi. More recently, the liquidity position in India has turned benign and there have seen significant overseas in flows into India.
At the ground level in India, though the consumption engine is running strong, it is the investment engine where has raised macro-economic concerns most of which are regarding interest rates. I think that in some of these areas there are early signs of steps being taken and in the last 48 hours a lot of euphoria has been injected into the market.
I feel that this is an indication of investor appetite and a belief that the situation could turnaround very quickly. The sense of optimism could return provided some of the macro-economic problems are addressed on a sustained-basis. So, in the short-term I would still be very cautious. But over the medium-term, if the initiatives are sustained, I guess the markets should turn positively and this is a good time for investors to take positions.
I think the markets have been running on the back of a few defensive sectors over the past three years and the valuations in these sectors are stretched. I don't see these sectors carrying the markets to newer levels. The situation will change only if the macro-economic scenario changes significantly. Q: Are you expecting the RBI to move on rates on Monday or do you think because of continued inflationary pressures, the central bank might not have the scope to do so ?
A: I feel that the RBI may initiate a 25-bps cut based on growth, the clamor from industry and steps being taken to contain fiscal deficit. Q: What is your position in the banking sector which has high expectations of being able to lead an upside rally? If banks are bullish on the market beyond the highs of 2012, would you accumulate any of these beaten down PSU banking stocks or would you stick with private sector banks?
A: In the rally so far, private-sector banks over a long period have outperformed and for good reason. But in the past, interest-rate-cut cycles benefit the PSU banking segment significantly. So, this prevents any general estimate about the entire segment and certainly calls for being selective on high-quality banks with low NPAs and adequate capital in the PSU banking sector. Q: What is the next road-block for the market? Do you think this liquidity gush could take it through the 5,600-level and then from there, do you believe that this market has more upside leg?
A: Let us not forget that what we are seeing at the moment is driven by several engines. There has been an increase in liquidity in the Europe and the US and we have seen in the past that the euphoria generated by the inflow of liquidity evaporates over a period of a month or two. Other significant drivers are the decisions being taken at the macro policy level in India.
But I am not too sure whether the euphoria that has been generated by these steps will last. I think the focus will shift back growth in earnings come the quarter-end in September and the pace of the economy as reflected by the growth in earnings. So, this cycle will continue for some more time and the markets will be in a trading band.
However, somewhere in the next 18 months, the markets will record a more sustained uptrend primarily triggered by four factors- a stable political situation, a strong rupee, more benign interest rate scenario and continued inflows into the country
All of these combined will start to show the market that the uptrend and sentiment is more sustainable But some of the immediate euphoria generated in the last few hours by events in Europe and the US will evaporate.