Calm before storm? Ambit's Gubbi says market 'dangerously' quiet

The market has been really quiet, especially in the US, where the benchmark S&P index has seen the longest stretch of contained movement. It is wise to stay cautious as the market has been dangerously quiet, says Pramod Gubbi of Ambit Singapore.

In an interview with CNBC-TV18, Gubbi says pockets of growth and recovery in the Indian market runs alongside pockets of disappointment, and hence the market is fairly balanced at present.

However, he does not see a broad-based recovery at the macro level.

On the appointment of Urjit Patel as the new RBI Governor, Gubbi feels that it is pretty much business as usual but one needs to keep an eye on how the banks are going to be regulated.Below is the verbatim transcript of Pramod Gubbi’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: It is sort of in a limbo, this market, don’t know which way it could head because we do have a lot of cautious cues like the impending Fed rate hike, etc. How are you approaching the fag end of the year? A: It has been eerily quiet particularly in the US I guess it has been the longest stretch in many decades of pretty much contained movement. I think the data point has something close to 30 years of a seven week run of where the S&P hasn't moved more than 1 percent on either side and that too on volumes that have been consistently declining. So, it has been quite dangerously quiet so something has to give at some stage. Like I said the risk clearly are on the anvil, it could be coming from anywhere. The Fed rate hike is one of many such factors and hence given that you would rather be cautious at these levels.Latha: How are you approaching the Indian markets itself, is this a spot at which you are shrinking away from buying? A: The market has a whole wave clearly shied away from -- it has been a market where there have been pockets of recovery, pockets of earnings growth with equal number of pockets where we continue to see disappointments. At the macro level, we don’t see a broad based recovery, recovery continues to be led by consumption. There is hardly any activity on industrial side, private capex remains far on the horizon, government capex indeed is slowing down. To that extent, you have fairly balanced market and that will drive our market strategy as well. Our investments are buys at this stage would be coming from those sectors, we are seeing those recoveries particularly in the areas of consumer staples, consumer discretionary and financials which are exposed to retail and consumer lending. Sonia: What do you do with some of these spaces that seem to be in a bear market now, spaces like technology, do you think that the correction could last some more time or are you looking to perhaps take a contrarian bet on some of these names like Infosys? A: It is hard to say now; perhaps a few months ago you would have thought that there has been enough of correction in these stocks and want to have a look at some of the names who are actually investing into the trends of the changing market demand. However, since Brexit and what forecast or what outlook you have for the global economy, you would have to believe that if there is a change in the market in the last three months, IT spending is looking downwards compared to what we saw three months ago.To that extent, that is an additional data point you need to factor in that any recovery is unlikely to be broad based and given the additional challenge of changing demand pattern, it is not an obvious case for investing and it is not like valuations are compelling either. So, I think technology is something that we would stay underweight as well. Latha: What does the new Reserve Bank of India (RBI) governor mean to a stock investor? A: I think it is pretty much business as usual if I can put it that way because at least on the monetary policy side, the new governor has been pretty closely involved in both the framework and how institutional change in monetary policy in India is being shaped going forward. So, to that extent, there is hardly any change. Perhaps, something to look forward to is the way banks will be regulated and that is where the outgoing governor had been fairly active and we are not particularly sure about either the credentials or the intentions of the new governor. He clearly is perhaps one of the finest monetary policy economists but until the banking regulation, I guess we will have to wait and watch. Sonia: One sector that has done pretty well this quarter has been the auto space, whether it is names like Tata Motors or even some of the domestic plays, some of the luxury bike makers like Eicher Motors. Is this a space that offers more value and what pocket would you be most bullish on now? A: Across the board we have been quite positive on automobiles particularly passenger cars and commercial vehicles (CV). Passenger cars continue to be a structural story for us given we continue to be a very underpenetrated market and given the consumerism that I highlighted earlier in terms of long-term trends, that is a clear case for investment at this stage. Commercial vehicles, we have had a decent run. I think we are looking at a breather for some time ahead of new regulatory changes that will kick in at the end of the year. So, perhaps volumes will start to pickup in Q4 ahead of those regulations coming in place. However, that again remains a structural story now you have given the sort of under investment in that space over the last five years since the last downturn. Two wheelers on the other hand, while the demand story remains robust, we are a bit apprehensive in terms of the competitive scenario. Outside of that, the overall demand for the auto sector, we continue to be positive. Latha: We were just talking to Udayan Mukherjee about this theme, about midcaps, is the easy phase over now? Will it be a lot more of individual stock picking and will it also mean the need to wait a little longer for returns?A: It is never easy, it has always been -- stock picking is not the easiest of things. It is easier on hindsight but it remains as challenging as ever that you have to go out bottom-up identify good quality management teams who have demonstrated reasonable degree of quality for long periods of time and work upwards. To that extent, midcaps tend to operate with a little bit of disconnection from broader economy. It makes it that much more challenging in terms of you can’t simply identify a few sectors and start filtering those names. So, to the extent that you look back and see the midcap rally, it is unlikely to continue that way. It will be more selective and it will take that much harder to pick the winners. Latha: Leaves us with your feelings on the market itself, say either end of 2016 or 12 months down the line, do we see the index having at least touched a 9,300 at some point, are your broadly bullish that the global liquidity will keep coming? A: There is no reason to believe that the liquidity should shut off but if we were to call a market strategy or a market call on the back of liquidity, I won’t hazard that that strategy because nobody has been able to understand that how long this will continue. People thought that perhaps Brexit or a Fed rate hike, any such event will pullback the liquidity but this continues to go on and on. So, I would not go near that but it is simply based on fundamentals, like I said, it remains a fairly balanced economic recovery and in terms of sectors also there are equal number of sectors which look interesting and  those which are not compelling. So, to that extent, at the market level, I would not see too much of an upside, slightly positively biased but broadly in the same range that we are in.