Market will sell-off if BJP fares badly in 2014 polls: Pro

He sees the market selling off if the Bhartiya Janata Party fares badly in the general elections next year. Expectation of the BJP-led NDA coalition returning to power has been one of the key triggers of the recent rally.

Schiessl says he prefers midcap shares over large cap shares at this point.

Below is a verbatim transcript of the interview

Q: Indian markets were buoyed by Iran's deal with the EU yesterday. Is it just a knee-jerk downtick in crude prices or do you see a sustained downtick in crude prices if relations between Iran and the West begin to improve?

A: The impact on crude, in the short term, is relatively positive. But I guess we need more time to see what happens with Saudi. If there is some assistance from Saudi could impact crude going forward. What is driving the difference between West Texas and Brent is what is going on in US and I don't think that has changed. It is positive in short term but there are implications in the longer term.

Q: Let me come to equities, this year from May 22 to be precise until early September we saw an anti emerging market (EM) pro developed markets (DM) trade. From September until mid-November it was a pro-EM and may be static DM trade. Now has the pro EM trade played out? Are funds questioning valuations at these levels in EMs?

A: I think you can certainly argue that the initial reaction to the tapering talk a few months back was excessive particularly in twin deficit countries like India and Brazil. I would agree we have had a bounce back and India has outperformed the developing markets. Are we finished here? India is complicated at the moment because of elections. Certainly as investors we will keep an eye on the state elections, it can provide a short term noise and further flows, if Modi gets the result which a lot of foreign investors are hoping then you might get another push up in the Indian equities.

But overall the tapering noise has calmed down a little and for the Indian markets to push higher we will need to see further evidence of sustainable growth in developed markets which will therefore lead to better export. If India can play from that front and we will be waiting for the export data to come out, that would certainly help. It will push the whole argument of bottoming out of the capex cycle. So in a nut shell the easy part has already happened from the overly distressed levels we have seen earlier. Now we need fundamentals to start kicking in.

Q: When do you think tapering may start?

A: Our official house view is December to January. Less likely in December but if economic data justifies it then December other wise the early part of next year. The key question is the economic data coming out of United States and we are all focused on that. So yes early part of next year or perhaps December.

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Q: When tapering comes will the fragile five, the EMs in general suffer another rout?

A: I sincerely hope not. We have had the initial shock phase of markets trying to adjust. EM is a huge space, what we saw in August was the twin deficit EMs where hit the hardest. So the question comes back has there been a reform in the interim to make sure that they are not hit as hard. For example in India we have a got a new governor in charge of the RBI and I think he is certainly doing all the right things. So I would say it’s hard to see a similar reaction in an economy like India.

But that said we need to make sure that the reforms that are ongoing and are happening, we need to see the currency be fairly stable as well. So I hope the market is a little more discerning when tapering starts. At the end of day if the Fed starts to taper then that’s very good news for the underlying macro situation in America, so that should help the Indian export sector or the EM exports. So ultimately that will be good news.

Q: Rightly or wrongly the market perceives a BJP government to be better. Are you staying back till December 8 to watch what will happen?

A: I agree with you particularly at the moment foreign investors are getting fascinated with the prospect of Modi and obviously a few state election come out and if the BJP does well as the consensus is then market will take that favorably. But polling in India is a difficult science and people have got it wrong many times. Therefore if the BJP doesn’t do as well as expected then I agree with you, the market would likely see a sell off. Particularly foreign investors, the foreign investment has started coming into the market but that might very quickly reverse and exit on bad poll data.

Q: In that case will you be wary of investing up until May until election results are know?

A: We are not changing our stance in Indian exposure at the moment, just for these state elections. We are staying solid and looking at long term with our investment horizons then just short term political noise. That said, there is obviously a little bit of risk either way. But at the moment we will certainly not increase our allocations in India, in a broader equity sense if we were to put some money in an emerging market I think India has had a good run, and until we get this political noise out of the way, I think at the moment we will just wait and see but as I said in our actual portfolios and existing investments we not altering how we are viewing things too much.

Q: How do you see the benchmark Nifty in the next six months. Has it more or less peaked or can it make big gains?

A: I think if we move the politics to one side I think if we saw some more evidence of capital spending coming through, the cycle bottoming, I think India could do very well. But we need that fundamental data to start coming through to show the economy is basing out and showing some growth. So without that some sectors are going to have a re-rating process, some of them, some of them more secretly adjusted industrials have been moving quite aggressively on the hope that the data will come through. If data doesn’t get through there is risk there but still there is ambiguity about whether the economy has based out. You need to see some proof before index can break above current levels.

Q: At the moment what stocks do you like in India?

A: We haven’t really changed our stance too much. It continues to be a polarized market. A lot of foreign money is sitting on quality sectors like exporters, IT and discretionary plays. We’ve maintained a balanced approach. It hurt us in the middle of the year but has been a little bit better in recent months. Some of the midcap names haven’t re-rated as much as the large cap names. If you look at Larsen and Toubro (L&T) for example, we missed the boat on that one. But we still find value in some of the midcap space. That’s the area we are focused on right now.

Q: The government is divesting from four stocks in December: Coal India, Indian oil and two smaller ones Power Grid and NHPC. Will you buy anything especially the bigger stocks like IOC and Coal India?

A: I think Coal India has its attraction. We don't currently own the stock. We don't own Indian Oil either. So we won’t be taking part in any potential divestment say in those two stocks. But I would agree with you, has implications for other stocks in that sector.

But I think the broader appreciation would be, we need to see the government divesting and they obviously got very ambitious targets, which I think there is a great deal of scepticism from the market about the government hitting those targets.

We need to see a little bit of divestment, with the market where it currently is. So we won’t be taking part in those deals, but it will obviously have implications on the stocks in that sector.