Pre-election rally is over, rupee to see 65/$ soon: Ambit

After the recent run-up seen in Indian equities in Diwali, most market participants are now worried if the market is poised for correction given the uncertainty on Federal Reserve tapering and the upcoming general elections at home.

Andrew Holland, CEO, Ambit Investment Advisors Private is cautious on the Indian market with a short-term perspective, but believes that market will not fall significantly from hereon. He expects the Nifty to find support at 6000 level. He further added that most of the pre-election rally has already played out. “The Modi factor has already played out for the state elections and for the general elections; it is a different ball game. So, I wouldn’t be banking only on this factor,” he added. However, he hopes for a stable government post 2014 general elections. On specific stocks, Holland is betting on export-linked companies like Bharat Forge and is bullish on Tata Steel, Hindalco and Hindustan Zinc. On the flipside, he recommends moving away from defensives into cyclicals now. Meanwhile, the Indian currency which had started showing some signs of stabilisation, is weakening once again in the last few days and Holland sees it slipping to 65/USD by November-end courtesy local and global uncertainties. Timothy Moe of Goldman Sachs told CNBC-TV18 that the Indian market will not react severely when the Fed actually rolls back stimulus because external factors for India have moderated. (Read More) Holland completely disagrees with this view, he feels no one actually knows what the actual tapering will be like and how severe its impact will be on all asset classes. He further added that the US and Europe are now showing reasonable signs of recovery and the Fed is likely to taper QE by December-January. However, the consensus expects it to happen in March 2014. Below is the edited transcript of Andrew Holland’s interview with CNBC-TV18 Q: It’s been a great run this market has had since the month of August but now things are stalling a tad bit perhaps for the lack of any great triggers in the near term. How are you positioning yourself at this point? A: In Diwali, the run-up we were excited that there is going to be no tapering, liquidity is going to remain strong. The past few days or the past week has shown that, that is not going to be the case. But our view of tapering happening in either December or January, nothing changes from that. So, you are going to get bout of excitement like the European Central Bank (ECB) cutting rates without not having anything at the margin. The longer with this, the more we are looking up for bubble around the world. The property market is one where we are seeing too much exuberance. Money is going into that asset class rather than equities and emerging markets. We are a bit nervous now. We do not think the market is going to fall significantly, we might get to see 6,000 on the Nifty but December-January could be very messy months in terms tapering and the expectation from new Fed Chairwoman and so on. I am a bit more negative on a very short-term. _PAGEBREAK_ Q: On one hand, the Fed is looking to taper, it might happen in December-January as you indicated but on the other hand the ECB has eased the liquidity conditions by cutting the rates. So, how do you marry both these and thereafter what does it mean for flows coming into emerging markets like India? A: What the ECB did was to help the currency weaken. The euro has been strong of-late and so it is more of a move towards weakening the currency and it was to promote growth. The good news is that the US and Europe are starting to show reasonable signs of recovery, but a lot of this extra liquidity is going into asset classes like housing and that is where the next bubble could emerge if its already happening. Emerging markets are on pause. For India come the end of November once the RBI measures of attracting funds into India is over, we could see some currency weakness; we are seeing it across all emerging market currencies at the moment. India has been held back because of the flows that we are seeing by the Reserve Bank of India (RBI), but once that is over, you could see another bout of weakness for the currency and maybe taking the rupee towards 65/USD level again. Q: The big buzzword at this point in time is politics, for the lack of triggers people are pinning their hopes on Modi led rally in the market and eventually if Bharatiya Janata Party (BJP) comes into power things may dramatically change. What is your view on how one should approach that particular trigger if they have not benefited from this rally? Does it make sense to put any incremental money in the market at this stage purely because of this trigger? A: I do not think so. The Modi factor has probably played out already for the state elections but for the general elections it’s a completely different ballgame. So, I wouldn’t be banking on that. What I would hope for is that whoever comes to power has to form majority and its not some messy coalition, which would stall the economy, that’s for sure. The second point of strategy is that we believe in 2014 we will start a new bull market; whether that highs the market, lows the market, we do think that will happen. This is predicated on the fact that we are expecting GDP growth start accelerating from 2014 onwards, initially led by domestic consumption which is an ongoing growth story for India. But then we expect an investment led growth initially by the government in terms of new projects and funding projects which will start to help GDP grow from 4.5 percent this year to 5.5 percent and then 7 percent. So, it feels a bit like 2002-2003 where you are seeing a lot of projects being cleared, starting to pick up, you cannot touch and feel but it is happening so we think from that you are going to see earnings accelerate. We moved away from defensive sectors apart from the IT sector more towards cyclical such as industrials, utilities, autos and materials.