Market is giving signals that investors need to take money off the table across sectors regularly, Ajay Srivastava of Dimensions Consulting tells CNBC-TV18.He feels the recent rally has been driven by a combination of global liquidity flows and short covering if positions.He says investors need to be very stock specific in their approach and will have to be cued in to global cues.According to Srivastava, fundamentals of the economy are still weak, though strong global liquidity could take stocks higher in the short term.He says there has not been much of fresh investments into Indian equities based on conviction about fundamentals.He expects March quarter earnings to be lacklustre, but says the market has already factored it in.Srivastava feels the market is underestimating the impact of the drought, and that a full-fledged economic recovery is not possible in the face of such a severe drought.Srivastava is bullish on cement because he sees improvement in capacity utilisation rates an also no big capacity addition near term.He is advising investors to buy as much of tax free bonds as they can as interest rates could fall below five percent over the next year. He says there will only be a 3-4 month window to lock into high interest rates, adding that tax free bonds are a much better bet than equities at this point. Below is the verbatim transcript of Ajay Srivastava's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: The market has moved a good 12-13 percent from the Budget day lows and now we are staring at the earning season. How do you approach? Would you want to take profit or advice people to taking profit before the earning season?
A: I think it is very sensible, what you alluded is correct. It is not only this season but the market is giving a signal that we need to take profit off the table regularly of various sectors. I think that is a bottomline. It is not a thesis of five year investment - that use to work some time perhaps still works for some stocks but bottomline is that given the amount of vicissitudes in the market that we see, is very important for investors to take profits off the table. It is hard to come by and when they come by, take it off the table; any company news, sector news, industry news, global flows. I do not understand the switch on and switch off. It is like an electricity bulbs perhaps that one day somebody decides to switch it on and everybody wants to invest money; one day everybody wants to take away. Therefore, we don't know when the switch off is going to happen, so take money off. We have been doing that regularly with our investors, with our own portfolio and recommend the same.
However, coming back to the results, we all know that it's going to be lacklustre but by and large market has factored it in, maybe few surprises here and there but the key issue is when you said medium-term, where does the fundamental look. The fundamental look weak, the global scenario might change put more liquidity in our hands to give the market up but the fundamentals are looking much weaker and that you must keep in mind when you are investing. You must be stock specific and have a reason why you are investing. Herding into investment strategies is not the smartest thing to do in this country.
Sonia: We have still seen 10 percent rally in the month of March, so the market has picked up quite a bit from the lows of February. Where did that come from? Was that just a pullback rally in a downtrend or do you think that there could be some more steam to that?
A: The answer is clear - nothing change fundamentally to change the thing. Globally USD 40 billion odd rushed into emerging markets (EM), we also got our share and the market went up. There was also reason perhaps that people were getting little bit of fatigue with despair or fatigue with pessimism, so they said enough of pessimism, we need to jump on and move the bandwagon the other way round perhaps that is so, but I do not think we invested on a fundamental reversal; I think we all invested based upon the fact that there were big buy orders in the market which triggered shorts to get squeezed out and therefore the market rally. If you look at net of delivery position, net of customer position; I doubt very much that people have put a lot of fresh money in the market at this point of time. Yes, lots of shorts must have got hammered over there but that is all about the market is, but I doubt the fact that Indian fundamental reversal is driving the market today or is driving people to invest in this market. You may have sectoral and small stories. You may outlier like Ashok Leyland or perhaps Eicher Motors, very expensive but nonetheless but the fact is we are not investing on fundamental; we are investing on global flow basis and so we got to be queued on to that bit rather than saying that our fundamentals have changed._PAGEBREAK_
Latha: What will you pick as gold from the rubble? Would you stick with consumer stocks, are you seeing the first signs of some consumption buying going by the March numbers of two-wheelers?
A: Definitely not, in fact when you say gold out of rubble, but what happened in March, the rubble became the gold. So what was rubble of last year, the steel companies became the gold of current year. Therefore, one would tend to put the universe to say that put a context to this thing that India for instance is going through perhaps the worst drought. I think most of the stock market analysts and industry is underplaying the importance of what is happening on the field, in fact I was disappointed when the Reserve Bank of India Governor did not mention a package, a scheme for the drought hit states. What happens to people who borrow money in those states, the small traders, the businessmen and farmers' loan; not single news about package. We lost our conscience but at the end of the day with such a big drought staring in our face, we believe that economic recovery will be buoyant. I do not think so. Therefore, net-net you buy stories, you buy stories and we have discussed before, the egg company has given a good reward maybe chemical company turned around yesterday, they gave a good reward but it is not a market driven. I think you got to be very clear why you are buying a specific story. Some sectors are always good like in pharmaceuticals you will find two or three good stories, in chemicals of course yesterday the whole rally happened but in fast moving consumer goods (FMCG) space you do not want to be there. The competition is intense and if there is a reversal, if there is a drought, the price of basic products, raw materials should go up, technically that is a way it should work, so raw material prices going up, you cannot get the prices up and therefore the margins get squeezed.
The second important point is that you need to be in sectors which are in sync with the government policy. Therefore, I keep saying that policy is good for construction companies maybe cement, I am not too sure what cement numbers look like but perhaps that could be a place to hide but I cannot find more than 30-40 names which have a sure fire franchise revenues which could perhaps stay unaffected irrespective of the drought situation and the pressure which will come on the government to do something about it. The Supreme Court is already at it and maybe the government will come and that impact has to come, you cannot have a situation and the nationalised bank story has not ended. It is just taking a break from the news headlines. It is going to reverberate back in the month of May when the results come out.
Latha: Is cement a theme you would play?
A: The theme has played out. In my view the real ticker on cement is already over. If people want to jump in today then you got to wait for a year at least. I think the first 25 percent of the stock market has gone from the system; you need to be ahead of the curve. After all the investors have bought into the stock, the story is out in the market then if you go buy - that is not a smart way to put your money in. So cement is a good sector, it will give good returns from the government policy from three year perspective but if you are in a hurry to make return then that is not the place, wait for three years or two years perhaps. You will see about 20-25 percent returns coming from cement stock companies for two-three reasons. One, as utilisation goes up, they will change the price models of their and competition is going down, consolidation is happening and not significant new capacity hits the industry in a five year scenario. You will see a big gap and the debacle of capital goods is going to be that gap which is a favour of the industry is that there will be a big gap in capacity coming on board. So if you project three years down the line, you will see that not many cement companies are going to have added capacities coming up which gives strong leverage in terms of price. So from a three year perspective it is a must buy. Immediately can you make return in next 30 days. I am not so sure.
Sonia: What is the smartest way to utilise your money in a market like this. The last time we spoke with you, you said don't invest in stocks. Invest in bonds. It could be the best strategy for the year perhaps. Would you stick with that?
A: Of course yes. We have put all our customers' money in tax free bonds; they were in short supply but whatever you could grab, you grab the stocks and we have done that brilliantly as a strategy. I still believe that even at these rates when the next issue comes out, you need to grab these things because the trajectory of the interest rate is down, we could even sub-5 percent interest rate in the next year or so. So we are talking of almost 50 percent change in the value of the portfolio. I do not see equities giving those kinds of returns. So the best strategy for investors is whatever long debt instruments you can grab and best is tax free bonds for high net worth investors, grab it. It is going to do much better than equities. The strategy has paid off already in the last one-one-and-a-half years, we have done far better than equity and this is a last maybe five-six months where you can lock into high interest rate bonds or bonds etc that you can get and just ride this through because 30-40 percent gain is not easy to come by in debt market and you are on a peculiar cusp to cash it. So do it now.
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