Mkt still in bull run; RBI's rate cut vital now: Damani

Q: How would you rate the first year of the Modi government? We have been hearing from market experts and they believe that the government has done well in its first year. It has delivered on most of the promises that the government had held up, perhaps not all of them have yielded results just yet. How would you assess the first year performance?

A: There has been some disappointment on the ground that things aren’t moving fast enough and in the market because the index has not gained on a year on year basis. However it is a classic case in the market of buying on rumours and selling on news. So, the market started having a bull run almost two years back when it first caught the whiff of a Modi win. So, there has been some selling after that. The good news is that the bull market is still intact and we are just going through a very painful probably sideways correction for a few months before it kicks-off.

The challenge now is for RBI to reduce rates. Once they do that all the steps that the government has taken now in the coal auctions, spectrum auctions will start bearing fruit. So, the ground work has been now laid, if RBI kicks-in with lowering interest rates the market would respond positively.

Q: You pre-empted my question because that is exactly what I was going to ask you. How crucial a trigger is it going to be for the Reserve Bank to cut rates? We just had that conversation with Arvind Subramaniam, he certainly believes that the RBI needs to do much more, needs to be aggressive as far as interest rates are concerned. What is the street expecting now given that Raghuram Rajan has already surprised the street twice over?

A: Even a token rate cut of 25 basis points would make the market very happy. The economists are expecting a repo rate cut but not cash reserve ratio (CRR), I am not sure exactly how it stacks up but even yesterday if you recall in Pakistan, the Bank of Pakistan cut the discount rate there. So, there is enormous pressure in the region globally to make interest rates aligned in some manner. So, I hope the RBI responds this time.

Q: Well everyone is hoping that the RBI will cut but a crucial overhang for investors is the lack of public spending. While a lot of money has been allocated to roads and railways, we actually haven’t seen that kick off in a big way just yet. The Finance Minister has said time and again that the government will push public investment; of course we also have that other big trigger to deal with which is disinvestment. The government is gung-ho about its disinvestment target; do you expect the Centre to start moving much more aggressively as far as its disinvestment plan is concerned as opposed to the previous years where we have usually seen the government’s bunch up disinvestments towards the end of the fiscal year?

A: Yes, I don’t know, it would light a fire though. You look back and see the previous government had done three or four, fifteen years ago. A bakery company, then they did CMC which they disinvested at 175. Today if you account for splits, the price is northward of Rs 4,000. Hindustan Zinc which has created so much value for the shareholder who bought it, so the government has said that they would do ones that are not profitable and not strategic to the nation anymore. Telecom companies, hotel companies-there is no reason for the government to be in those kind of businesses and if the government can be bold enough to say not five percent, not ten percent, we are privatizing this company, that will light a fire into this bull market. So, it is difficult to predict which side government is leaning on but what they have suggested is maybe hotel companies or telecom companies but they should look at all businesses which are not strategic to the country or are loss making and privatize them and that would really help.

Q: Do you expect markets to hit new highs by the end of the year?

A: My firm belief is that rather than try and look at a point correction or trying to time this or be too cute about it, the bull market is well and truly under way. There is no sign to suggest that this bull market has topped out. If you see those signs we will record them but right now I don’t see any signs. It suggests a painful correction going on. So, the correct way to look at this market is to buy great business at what we think is good valuations, they could be in the construction sector, they could be in the defence sector, they could be in the Make in India sector, all these themes will resonate with the investors over the next 3-4 years of the Modi government. Government has very clearly spelled out, they are focused on railways, defence, Make in India, construction. So, these are all themes that warrant investors’ attention and I think they will play out over the next five years. There are enough opportunities in those and in some other sectors. You look at the top five gainers, four of them are pharmaceuticals companies. So, pharma is clearly the leader of this bull run. So, there are ample of opportunities. The trick is to go do some homework, find some great businesses and hold tight. Like I have always said what is more important is not timing the market but time in the market.