Cautious on hope trade; buy pvt banks, autos: Dalton

Also there is a slowdown in FII inflows.

He is cautious on the hope trade. However, he believes the Modi trade is worth playing. He says cyclicals will start looking better on the hope that huge changes will happen.

He is bullish on private sector banks, cyclicals such as energy auto companies.

Below is the verbatim transcript of UR Bhat's interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Latha: Election surveys are indicating that there could be some kind of certainty for the government after the elections, the NDA seems to be sweeping the popularity polls. Do you think there is more juice left in the hope trade?

A: The hope trade could probably take it as far as the all time high, generally all time highs are not broken so easily so therefore there would probably be some small time correction but after that further positive news is required because the base case today is that the NDA will form the government and probably Narendra Modi will be the prime minister. But as we go along we will have more surveys till at least April and after that there is a lull on the news front. So that is when people will have to make their own judgments.

And it is not a given that everything will be hunky-dory as per the opinion polls because even with NDA having 200 plus seats, if they have to look out for support for about 60-70 seats, the sort of combination that will come will probably not enable the Prime Minister to have a very important say in matters. So there will be lot of pulls and pressure. So the base case that there will be a very strong leader and the economy will take a turn for the better that is not a given.

So I think increasingly people will come to realize that it will be some sort of government which may have a strong leader but would be constrained by other political forces that will probably pull him down from taking all those big measures that generally the market is assuming.

So there would be certain amount of trepidation as we go along plus we have not seen the last for the taper so the taper would be there. The problems in Ukraine have not been solved, I think there will be further problems there. And today the hope rally is also supported by the current account deficit figures that came out yesterday.

But if you see the services which account for 60 percent of Gross domestic product (GDP), that has been contracting for the last eight months. So what are we really seeing in terms of GDP growth numbers that will probably be not even 6 percent as most people believe. Lots of people are saying that it will be probably closer to 5 percent. So there is lot more effort that is required to take the market up from here.

Finally the proof is in Foreign Institutional Investors (FIIs) coming in. Now if you see the first two months of last year, saw something about USD 9 billion coming in. we are now struggling with USD 0.5 billion. Therefore it is not as if so much more money is going to come in and even if there was some small outflow at least earlier we had LIC which could step in. But today LIC has been completely incapacitated by being a wing of the government as it were or the government treasury. So they just have sell everything that they have to accommodate further PSU divestments. So there are a lot of structural changes that have taken place so it is worthwhile being a bit cautious on the hope trade.

Sonia: What do you mean by cautious because most of the people we speak to in the market, they say that although with the new government there is no assurance of things getting better but at least there is some relief that things may not get worse so if you have funds now do you deploy it into the system and do you increase your weightage in some of the key sectors like banks, IT, etc or do you just await for some concrete results on the policy front?

A: The more the trade as I call so that is worth playing in the sense that there will be lot of hope if NDA forms the government so it is worth taking that call that there would be a sudden change in the fortunes of cyclicals as far as the market is concerned not exactly in terms of fundamentals but cyclicals will start looking better because there will be some hope that a few changes would happen. But the market will give the government six months time to see whether there will be some results out of that and if he is going to be pulled down by coalition compulsions then market will make its own mind as to whether this is sustainable or not.

But the hope trade will probably play out if the election results are anything like what current surveys suggest.

Sonia: So what is a great place to be in at this point?

A: Private sector banks offer a good opportunity plus cyclicals at some stage. Autos might be a good opportunity. Cyclicals means private sector banking, even in energy there is lot of hope when the new government comes into place. So that is probably one place where one could have some select stocks in the portfolio.

Latha: Wanted to ask you about fixed income, would you say that fixed income because markets are at their highest point historically that fixed income is now offering a better return or closing the gap with equities?

A: Long duration fixed income securities, fixed income funds are the place to be in. I don\\'t know whether they would give great returns in the next six months but over the next couple of years I think there is lot of money to be made there because I think interest rates would fall after some time and by that time the market would have seen this and therefore there may not be great opportunities there but this is a time to get into long duration fixed income funds.