Liquidity can take mkt to new highs; pharma a dark horse: Ambit

After a build of expectations because of good monsoon and government reforms, this quarter has been disappointing in terms of corporate earnings, says Pramod Gubbi, Director Institutional Sales, Ambit Singapore Pte. Ltd. Speaking to CNBC-TV18, Gubbi said abundant liquidity can take global markets to new highs, as major central banks are persisting with their easy money policies.  However, Gubbi cautions against buying shares at current levels as he feels the market has run ahead of fundamentals. The risks are more on the downside, Gubbi says.

On the banking sector, he says private sector banks are clearly taking the market share away from its government counterpart. There are a lot of structural reforms required for the public sector unit (PSU) banks.  Gubbi sees the pharma sector as a dark horse."It has had continuous negative news over the last year; the space is (now) beginning to see reasonable valuation, " he says. Below is the verbatim transcript of Pramod Gubbi’s interview to Anuj Singhal, Latha Venkatesh and Sonia Shenoy on CNBC-TV18..Sonia: It has been a hit and miss sort of an earnings but more misses than hits this time. What has your reading been?A: Yes, after a spurt of some positive hope in the last quarter this quarter has been a bit disappointing to that extent because expectations had gone up that there is some sort of a recovery and that will show up in corporate earnings and clearly that hasn't transpired. I would agree it has been more patchy but from an expectations standpoint it is more disappointing.Anuj: The other piece of the equation and that is continuing unabated. This month we have seen more than USD 1 billion from Foreign Institutional Investors (FII) in cash market, so much buying in index futures. Do you see that propelling the markets to all time highs?A: That has been in - it is very difficult to answer as long as the central banks of the world are maintaining their position. That will clearly continue to fuel the rally until the next big macro shock comes in but we have seen in all sorts of shocks being dealt quite deftly by the central banks and the asset markets continue to look the other side. There are quite a few events coming up later in the year which can feed those shocks but the question is can the central bank continue to deal with these by pumping in more and more liquidity. It is very difficult to answer as to when that will end. So, simply put the answer to your question is yes, the liquidity can take these markets to new highs.Latha: Now we also have central government liquidity from various governments don't we?A: Absolutely. Today's another event we are all watching out for in Japan while we keep hearing it about helicopter cash being the last resort but there is still some more room in terms of monetary policy action where asset markets     can get happier with more liquidity. So, yes, it is a very interesting world we are living in. So, I am not sure if anybody has the answer to when this will end.Latha: But therefore how are you approaching the Indian markets? Since there is always this danger about liquidity driven rally do you continue to buy or would you say for an investor this is a better time to stay away?A: It is better to stay away because given the lack of support from fundamentals or valuations the risks are more to the downside. Perhaps six months ago you could have said that valuations are still attractive. There is hope of recovery. Now, we have seen the hopes of recovery being dashed or at least being more realistic now and at the same time valuations are too punchy.So, you don't have that support anymore to justify staying in the market. So, at the market level you are better off taking money off the table before the next shock hits you. But there could be interesting opportunities from a bottom up perspective which is something that we have maintained for long where you can see earnings visibility and some semblance of valuation attractiveness.Sonia: So do you think bond funds will give you better returns over the next 6-12 months since you are recommending getting out of equity because there is this hope that there will be more rate cuts as well. So, investors love affair with bond funds has grown a little over the last 3-6 months. What is your own view?A: Our own view is yes, bond markets are already factoring in some sort of rate easing and in fact in our view overlooking any sort of upside risk to inflation. We have already seen both consumer price index (CPI) and the wholesale price index (WPI) inch up and looking ahead perhaps in the second half of the government tenure there are some interesting elections coming up. This is when we typically see the governments loosen their purse strings in terms of spending and so on. So, those obviously have a betting on inflation to the upside. So, I am not sure bond funds provide any better alternative compared to equities given what they are already pricing in and potential risk to inflation.Anuj: The stock of the moment now is Asian Paints, up 3.5 percent. So, their market cap has only gone up to crore 1.05 lakh crore. You have thoughts on this stock. It keeps surprising on earnings. The most valued stock right now maybe in the index.A: I would resist talking about specific stocks but this is a sector that we have liked where we think there has been a significant movement the unorganised to the organised sector and the branded players with strong brand and distribution continue to chug away in terms of market share despite macro and that has happened over many years and we don't see why that should stop going forward as well.Valuations like you said are a different matter. It is very difficult to justify those punchy valuations but for top class franchises the market is willing to pay that.Sonia: This news is just hitting us right now. Many of these auto companies have generated so much wealth for shareholders. What would your view be on two-wheeler makers like Hero MotoCorp?A: I won't comment on a specific stock but this has been a sector, not just in India but globally which has created significant wealth for shareholders time after time, different periods of history consistently. So, clearly this is a sector which demonstrates clear sources of competitive advantage in terms of brand and distribution and there is always consistent demand growth. Particularly in India there is enough in terms of long term growth potential given the penetration levels and growth in disposable income. So, in fact all segments of the auto sector are structurally positive in our view and particularly in India some of the companies have demonstrated really strong competitive advantage to drive that long term growth. From a short term perspective we might see some cooling off in demand unlike what we saw perhaps a year ago or over the last 12-18 months. Having said that for those with a longer term view this is a sector to stay invested in.Anuj: Let us talk about the overall market texture a bit. Where is the leadership now? Of course we have seen banks do phenomenally well but some of the banks have now moved much higher than their - some of them are at peak valuations now in fact. IT has fallen by the wayside. Pharma we keep hearing some bad news here and there. Where is the next set of leadership going to come from. Do you think it remains with banks?A: Yes, banks continue to be totally levered to the economy. Any sort of recovery will have banks but again time and again we have highlighted that. Within banks it is more of the private sector banks taking market share from the public sector undertaking (PSU) banks story. The PSU banks have got some sort of a run up in the recent past but there is a lot more to go in terms of structural reforms for you to get structurally invested in that segment. Having said that if you look at where the broader economic recovery is happening consumption continues to lead the way. While we might have some valuations challenges but it is one sector with some degree of earnings visibility.Pharma again could be the dark horse here. It has had continuous negative news flow over the last two years. It is about time we are beginning to see some sort of recovery in that where again valuations are reasonable. So, that could be one sector which could achieve market leadership.Latha: At the moment you said you are not a buyer but if there were to be some global liquidity glitch what is the downside for this market?A: It depends on what sort of ammunition is left within the central bank. If you reckon they are going to raise their hands and give up on their ability or their desire to stem the asset markets. I guess the downside could be quite significant. Remember we are at all time highs for most equity markets globally other than Europe and these can correct quite significantly given there has hardly been any sort of earnings support or underlying economic support.I won't even hazard a guess as to what could be the downside in that situation. If it is just an aberration yet another shock, maybe Italian referendum in October perhaps you have something to look up to in terms of the sort of downsides we saw earlier this year in January - February. The Brexit related downside was too short and to use that as a reference point but the January-February correction is perhaps an indicator of how much downside the market could have. But if it is more about whether central banks totally give up, then the downside could be much lower.