Ambit's Gubbi feels sticky fund flows may limit market downside

Fund flows are currently dictating the direction of the market, Pramod Gubbi, Head of Equities at Ambit Capital told CNBC-TV18 in an interview Monday. With no immediate reason for reversal of the ‘sticky’ domestic flows, the downside seems limited, he added. However, he said he would prefer to ‘buy on dips’ as the market is expensive.

On the impact of the UP elections' results on the market, he said an untoward outcome could hit sentiment for a couple of days but the buoyant fund flows will limit decline.

Gubbi prefers a more measured approach in the information technology space despite attractive valuations. He said that besides short-term concern around protectionist measures in the US, there is concern on the fundamental issue of growth because of the the changing demand scenario.

Similarly, in the private banking space he said valuations were now becoming unjustifiable.Below is the verbatim transcript of Pramod Gubbi’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: What is the mood looking like towards India? We have not seen too much of foreign institutional investors (FII) flows but globally things seem to be indicating that the global economy is getting into better and better shape?A: Yes, indeed, I think now more and more people are believing that we will at least have three rate hikes this year, some have even pointed to potentially four. I think all that data points are suggesting that America is clearly on the mend and in fact on a strong footing as far as growth is concerned. That makes those rate hikes pretty much inevitable. So, all eyes on the Fed through March and I guess one quarter of a percentage point is pretty much in a pack. So, to that extent yes the recovery in the global economy is the clear driver of flows. I guess one other bit where we had hope for some clarity in the President’s speech last week was in terms of the tax cut proposal which can be the next big economic driver in terms of which way or to what extent the recovery continues. Will those tax cuts be a credible stimulus for the US economy to continue and attracting more flows because at this stage US markets are pricing in pretty much everything so for that to continue you will need another round of stimulus of which is what I guess the market will be waiting for.Sonia: The other big cue that everyone is watching is the UP election results. How important are the results from a market perspective? I mean the market is pricing in a BJP win but if there is an unfavourable outcome then do you see like perhaps a 5-10 percent fall in the market?A: It is really hard to actually link any sort of quantified movement in the market to that sort of a result. We have seen market in the past take these sort of results in their stride and move ahead. In the short-term at least market will be driven by flows and flows have remained quite buoyant both in terms of domestic flows into mutual funds, retail participation as well as the global FII flows which have turned positive. So, to that extent it is a setback of sorts in terms of the market sentiment, so maybe a day or two of correction, but then will revert back to the flows dictating the direction of the market. So, I won’t expect a significant reaction to an adverse UP election result.Latha: Would you say therefore that at least the bottom of this market is pretty protective?A: Yes, indeed, like I said the market is sort of self-fulfilling in a sense unless the market takes a series correction we don’t think that sort of sticky flows that we have seen particularly from the domestic investors will reverse. I don’t think people will stop their systematic investment plans (SIPs) without a reasonable 5-7 percent correction. But, once that happens and the SIPs stop then you will see perhaps shaper corrections, so to that extent it is sort of a self-fulfilling market. So, I would agree with you the downside is perhaps limited unless and until we see significant trigger which takes it below a level then we go down that downward spiral. Sonia: As of now as we speak the IT stocks are under a lot of under pressure and we do know that the US has now temporarily suspended the – expediting the premium processing of the H1B visas so once again there is another hurdle that has come through. How are you approaching all this negative news flow in the IT space? Is it a good opportunity to buy or would you stay away?A: I think neither, somewhere in the middle. I think we are taking a more measured approach. We are excited about valuations they are clearly attractive. However, I think the concern around the protectionist measure perhaps is more short-term. The real issue we are still grappling with is are the Indian IT companies in a position to compete in the new changing demand scenario around new digital technologies. That is a more fundamental driver of those multiples. Like I have maintained in the past there are couple of them perhaps over ahead of the curve and they will come out stronger. Of course these issues in the short-term are negative. Certainly, margins will have to take a hit as Indian IT companies spend more money on their on-site resources. But also in the short-term I think growth might take a hit particularly if this issue around premium H1B processing. You may have plan for some projects start with some resources going through, so those projects start may have to be held back. So, as a result near-term growth could also take a hit.Latha: Generally, are you worried about valuations at this juncture? Are you recommending buys or would you only buy on dips?A: Absolutely, generally speaking we would buy on dips, we would wait for valuations to correct a bit because we do think that the market are running ahead particularly ignoring some elements of the effects of demonetisation perhaps some sort of slow down ahead of GST also. But, selectively, I think there are handful of bottom-up buy ideas particularly in the small and midcap space particularly in areas where we think there will be a big benefit from formalisation of the economy, reduction in cost of land, reduction in cost of capital. Particularly, it is quite significant how sharply the cost of borrowing is dropped for a small midcap companies that can be real boost in that segment. So, outside of this generally speaking, yes, we would wait to buy on dips rather than at the current levels. Sonia: In the banking space how does one approach it now? Is it still the private sector quality banks that you stick with or at some point do you start to sort of increase allocation in PSU banks like State Bank of India (SBI) as well?A: Neither now because I think even the private sector banks have reached a level in terms of valuations that it is difficult to justify. We had been expecting them and they had been delivering significant market share gains, despite the systems credit growth being fairly anaemic some of the mid-sized private sector banks particularly have demonstrated very strong growth to justify those sort of valuations. But it is hard to see how long that will continue because they were areas particularly in retail lending where these guys were strong and they were taking market share. But increasingly, we see even the PSUs banks are targeting this sector and as a result market share gains at the same pace at which we had seen may not come through as well. We need to temper our expectations of credit growth even for the private sector banks and hence questions that sort of valuations unless and until we see significantly different investments cycle coming through which clearly is not under horizon. PSU banks again I think we still believe that the government needs to bite the bullet as far as assets quality is concerned. Take those losses upfront, recapitalise those banks because not only is it important for these banks to come back on the credit growth. It is also important from an economic perspective as and when the investment cycle picks up we need these banks to be in a position to support that. Latha: This market is expensive if it doesn’t deliver earnings of 18 percent growth next year that seems to be the consensus for FY18 earnings growth, yours?A: We are far from that, we are closer to 10 percent, bit nervous about that as well. So, remember we have seen this playout over the last three-four years consistently. We start off somewhere around that 15-20 percent number and end up almost next to nothing. Although this year we believe will slightly be better, but we are wary about how the economy will take the impact of GST. Speaking to people who are exposed to this sector are already saying that there is nervousness in the system where there is sort of deferment of purchases, de-stocking of a channel all this will have an impact on growth and earnings. So maybe the second half once GST is bedded down you will see some sort of a recovery but for the full year to demonstrate anything over a 15 percent growth my sense is that it would be a challenge.