China rallying may be healthy for India: Baer Capital

News came in last night that the US Federal Reserve may begin tapering earlier than later. But Alok Sama of Baer Capital says the rally in Indian equities has been a function of everything that has been happening at a macro level. Fundamentally nothing has changed, he says. There was a perception that Fed will push off tapering after everything that happened in the US in the recent past – debt ceiling, nomination of new Fed chairman who is considered to be more dovish than even Ben Bernanke, among others.

Also Read: Dec rally coming, mkt to run 10% more if 6250 snaps: JM Fin
According to him, the rally in India is almost purely a function of revival of risk appetite and liquidity flowing into the country. He feels, going forward, India may even be a collateral beneficiary of funds flowing into dedicated emerging market funds, on announcements coming out of the third plenary in China - the commitment to a more market-oriented economy, the commitment to the so called state-owned enterprises (SOE) reforms. He feels China rallying will be healthy for India.
Domestically, he continues to be more inclined towards defensives. Though he cautions, the valuations in the defensive sectors, whether it is in Fast Moving Consumer Goods (FMCG) or pharma, are really stretched at this point in time.  Below is the verbatim transcript of Alok Sama's interview on CNBC-TV18 Q: Indian markets have been up more than 15 percent from the lows that we saw in August. How are you feeling now about Indian equities, especially today after the overnight news of possible tapering earlier than later?
A: I am cautious. I think what has happened with Indian equities is purely a function of what is happening at a macro level. As you are aware people seem to be a little bit more sanguine about Fed tapering. I think a combination of the damage that was probably done to the US economy as a result of the wrangling in Washington over the debt ceiling and you have the nomination of a new Fed chairman who is perceived as being dovish even relative to Bernanke, a combination of those factors. People have pushed back Fed tapering and that has taken some of the heat off the emerging markets.
So the rally in India is almost purely a function of revival of risk appetite and liquidity flowing into India. It is purely Foreign Institutional Investor (FII) driven. There is very little breadth in this rally. If you look at the Nifty only 18 stocks are up for the year. I do not see too much substance in this rally to be quite honest. It is driven purely by liquidity and it is the sort of situation where if you are feeling lucky risk appetite goes up, you look for reasons to be bullish and people have kind of latched onto this story about elections and the prospect for change etc., but in reality this is purely a liquidity driven rally. None of the fundamentals have changed and that is true for India and equally true for other emerging markets like Brazil or Russia for example. So I am actually very cautious. Q: How high do you think is the possibility of this liquidity driven rally taking the markets to beyond the 2008 peak or do you believe that the Fed taper program will spoil the party?
A: The risks from my perspective are clearly on the downside. I think that you are probably in a trading range and you are probably close to the top of the trading range right now, so there might be a little bit of upside, but I for one would be extremely cautious. When it comes to emerging markets a lot of what is happening is purely driven by risk appetite.
The big wildcard out there is China. If you look at some of the announcements coming out of the third plenary in China - the commitment to a more market-oriented economy, the commitment to the so called state-owned enterprises (SOE) reforms - those could be a very good deal and to the degree that China takes off, India along with all other emerging markets is going to be a collateral beneficiary. You could see a sustained rally in emerging markets spilling over into India. So I think that is really the bull case. It is all macro factors. With respect to India it is a function of what is happening on the political scene which is inherently unpredictable. Q: In the last couple of days there is also this fear on reforms that all the incremental money will go to China and India may actually suffer because of that. Doesn't that concern you?
A: I do not worry about that at all. Very few people in terms of allocating liquidity consciously take those types of decisions. India will be a collateral beneficiary. If China rallies massively, that is a big plus for emerging markets across the board. You will see more money flowing into dedicated emerging market funds and there will be a spill over into India. People always make a big deal at this India-China competition etc. I think that China rallying is healthy for India. Q: On individual sectors in this rally we are now starting to see some participation coming from cyclicals. Do you still prefer defensives or have you started increasing your allocation to cyclical sectors?
A: I would still be inclined to be defensive. The case for cyclicals is people are hanging their hat on opinion polls. There is a perception that Bharatiya Janata Party (BJP) is more of a pro-business party. It is very clear anecdotally and otherwise that businesses at large would want to see a BJP government. People are hanging their hats on opinion polls which are notoriously unreliable in India. The path from here to a BJP victory, what kind of government is formed, what type of coalition, there are just so many uncertainties along the way that to make a case that there is going to be a transformation from a governance perspective, that there will be a revival in the investment in the capex cycle - to me that is a little bit farfetched.