Emerging market has not been the favourite of international investors, but India has been spared the drought so far, says UR Bhat, MD, Dalton Capital Advisors. Calling the current optimism in the market as a hope rally, he cautioned investors to be watchful of fundamentals since the momentum is built around hopes that India will get a stable government.
Speaking to Sonia Shenoy and Latha Venkatesh of CNBC-TV18, Bhat says domestic investors have not been supporting the optimism shown by foreign investors for couple of years, but must be very cautious if they want to participate in this aspiration rally since it is still not clear if Centre will see a stable government post elections. He predicts a lot of uncertainty and volatility in market after the elections are concluded.
In the ongoing debate of choosing between cyclical and defensive stocks, Bhat says the former will be the best delta in the run up to elections. He strongly believes any-time-safe public sector banking space does not deserve a look-in at present, particularly after the United Bank fiasco. He advised investors to stay off PSU banks for few more quarters but can dig in quality private banking names. Within the IT and Pharma sectors, he said one needs to build a portfolio which will be influenced by election outcome.
Below is the verbatim transcript of UR Bhat, MD, Daltcon Capital Advisors with Latha Vennkatesh and Sonia Shenoy on CNBC-TV18
Latha: How are things poised for the market? We are getting these political developments. Do you think along with the global cues turning slightly positive at least this morning? We are now protected at 6000; the market can may a dash beyond 6300 at all?
Bhat: Recent high has been 6300, o I think that is very difficult to break but quite a lot of this rally over the last couple of weeks has been based on hope, based on some elections survey showing that things have better than what initial indications were. We are going towards new election surveys which point out to majority of one formation or a possibility of a decisive government; I mean that hope rally can continue. However, the economic fundamentals do not support this as of now, whether it is within India or even outside India where the US economy is doing quite well and the Chinese economy is not really doing that well. So all these things don't point towards great situation wherein inflows would come and as it is emerging market flow have been negative for quite sometime now. They have not exactly favored its international investors.
India has been spared the blushes till now so that is something we need to watch because even when 2008 happened, in India the actual fall in the DOW was about 6-8 months earlier. So, we take some time in responding to global events. So we need to watch that space very closely but the point is there could be further developments on the political fronts, which can neutralize any negative sentiment there.
I think we are in state of luck; we need to watch this space very closely, we need to be very sure that we understand that this rally is a hope rally therefore we need to watch this space very closely.
Sonia: Your caution was echoed by an earlier guest who joined us from (2:14) where he said that expects to see more outflows from emerging markets and India has been spared but that may not continue going ahead. If there are more outflows, do you think the bottoms for this market is protected at 5700-5800 or is there a sense that could be taken out as well?
Bhat: Outflows of about half a billion to a billion per monthcan be managed because there is enough dynamism within the market to absorb that sort of outflows. However, if it is more than and since the Indian market has really been run by international flows and domestic investors don't seem to be supporting the optimism that the Foreign Institutional Investments (FII) have been having for the last more than a year now. So, therefore as long as it is orderly, as long as it is in small trickles whatever floor you have suggested could hold but if the outflows are dramatic, say about USD 3-4 billion a month than all bets are off.
Latha: Are not enthused by any of the incremental development in some of the cyclicals like power, the central electricity regulatory commission (CERC) decision is getting mended?
A: These are small positive steps but on whether these things will change the return profile on the massive investment setup made in the power sector, I don't think so because what the CERC order is really talking about is ensuring that you don't make losses on those investments but getting a reasonable return on that is a far way off.
Therefore, we need to really see whether the next step would be taken in terms of changing the whole contract itself, to see that they get reasonable return or they go back to the regulated return sort of scenario. If that is the case then yes things are different. However, as of now it is probably to ensure that the previous losses would be partly recovered and will not make losses but that is not the purpose for which corporates make investments, they need a return.
So, either you open everything to the market or otherwise if you want to control it then give a regulated return like what NTPC gets but we are somewhere in between as far as the private sector is concerned.
The market is probably celebrating that that Tata Power will not have to take more losses on Mundra but whether they will get good returns on it, that is still far away.
for the entire interview watch video
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