Rocking Budget, rate cuts can bring FIIs back: Udayan

December was not a great month from flows perspective, FIIs pulled out about Rs 4,000 crore and even January has not started on a great note. There could be a whole lot of reasons for that. One could be the global risk off which is making investors a little shy of emerging market investing at this point in time, there could be China outperformance which could be weighing on investors putting incremental money to competing markets like India – that could be one reason. The other could be that we are walking into an earning season which is not expected to be exactly great here. So for various reasons it is possible that FIIs for the moment have taken their foot off the paddle and that is leading to a bit of difficultly on the part of the market to edge higher. Last year was a great year for FII flows and the market kept on making new highs because at every level there was cushion of fresh liquidity coming in which has not been there for the last five weeks. So there are fundamental issues, there are global issues but there are technical issues as well right now which are preventing the market from going up. The last time we spoke, there was some talk about Credit Suisse report about how many of the sovereign funds might not be able to pull in as much money into market like ours because of the way crude has collapsed and these things are very difficult to prove and certify on a weekly or daily basis but the fact that the last five weeks have been disappointing in terms of flows coinciding with a complete meltdown in the price of crude might also add some credence to the talk that was going around a few weeks back. 

Sonia: How worried would you be about this global scare, is it just noise or does it have the capability to derail global equity markets including markets like ours?A: The last couple of times we have been scared but we have not been roiled to a great extent. Every time we have jumped to say this is the big correction and what is going to happen with global markets. It has just been routine correction and market has bounced back. It is difficult to say whether this time is a bigger correction which is looming because of global factors also this will be manifest over the next few weeks. However, between now and January 25, you will hear good news and bad news like last night was a bout of not so bad news and market responded positively. Who knows two days later you will hear something opposite and market may fall once again. I think right now in the next three four weeks till we have some kind of conclusion on the Greek problem, market might be volatile within a range both currencies and stock market and traders might be in a somewhat tight spot at this juncture. On bad days they will short the market then the market will give them bounce back and once again they will be caught on the wrong foot. My sense is that over the next few weeks you might see the Nifty in a fairly volatile situation between 7,900 and 8,300. It is only 400 points but if you are on the wrong side of 150 point Nifty move, it may make you look silly. This is not a great time for traders to jump in and take big long or short trades. I think investors might cherry pick if the market goes down a lot but for traders it might be little hot to handle the way the volatility is shaping up over the last few days.

Latha: You said that you will need patience to see the market perform from hereon, are you saying that there is definitely no Indian outperformance at least in the first half?A: That depends on a lot of things because for India specific things you have got a lot of triggers out here which may work in your favour or not, we have got the Budget which I think the market will build up into a big thing, justifiably this time around. We have got the Reserve Bank of India outcomes right after the budgets and I think the market is priming itself for a rate cut so any kind of dovish commentary and action from the Reserve Bank of India plus the Budget sets India on a course of outperformance relative to the rest of the world -there is no question about that. Those events have to play out along the lines that we are hoping but there are potential triggers, but having said that my fear is if FII flows do not pickup after this kind of weak start to the year that we have seen already, you may struggle for the market to go up dramatically because we do not have the fundamental tailwinds playing in just yet. The market is going up on hope and triggers, it's going up on an election result, on hopes of a good Budget, on hopes of rate cuts but the reality is that the market is getting expensive with every up move which is why you have seen the last couple of times the Nifty getting stalled around that 8,400-8,500 level and this earning season will probably prove once again that the reality will take a little bit more time to catch up.

This quarter will probably have another tepid earning season and I remember last quarter too we were disappointed with the earning season and we were saying earnings need to catch up but this quarter will probably not be the catch up quarter once again. So, market will be volatile, we may inch up after a good Budget but I think we need to do a little bit of work out here before the market really takes off in a directional kind of a manner. So I am not suggesting there is a massive downside to this market maybe its only 7,800 and no further but the upside I think will lead to be a slightly more gradual unless we have a rocket of a Budget in February.Sonia: How does a retail investor approach this market now because the view that we have got in the last couple of days is that the many macro positives whether it is the land and coal ordinances, whether it is Wholesale Price Index (WPI) at zero all of that will really out way the negative global cues, is that your view as well? A: There is nothing wrong or no structural breakdown which one can speak about in the Indian context. Sure, it is taking a bit more time but there is nothing which has happened right now to suggest that the economic upturn which the market began pricing in a few quarters back has come to an end and there is a u-turn, some more patience is required and patience does not come easily to the stock market but I think we will probably need to wade through a couple of quarters before we get there but that is not a structural u-turn. I think the case for India is still fairly strong out here - there is no problem with that - it is just that the market might have priced in quite a bit already and some adjustments might to be made which is why I think what happens in the February-March period is very, very important in the relative trade that we are talking about.

India has a very good chance of relatively outperforming because a lot of the commodity heavy markets will underperform because of what has happened with crude, I think the US will face a fairly significant number of challenges, as interest rate start going up during the year. India is in a potentially sweet spot, we just need to play our cards right over the next couple of months and we will be there. The other thing is the choice of sectors, you mentioned investors. I think a little bit of a readjustment of the portfolio may not be a bad idea because last year a lot of people played the industrial upturn or the cyclical upturn through some of the capex related plays and maybe that will take a little longer to play out, maybe some of the easier trades belong to some other sectors also IT might continue to struggle a little bit because of the global issues which have cropped up, sectors like metals, energy may not do very well. So rather than focused just on the Nifty I think a little bit of realignment of the portfolio to play the next two quarters out my not be a bad idea.

Latha: What would you align in favor of, also separately the Bank Nifty or the PSU banks - that was the best trade last year?A: I think bank still remain a good trade, if there is massive global volatility I think private banks will come off, there is no umbilical cord as such but, they generally tend to move in the same direction. You have seen some of the high quality private sector banks lose ground over the last two or three sessions and private banks might struggle a little bit. I do agree with your point that banks remain the place to be putting in incremental money to work if the markets come off very significantly and that is an area one would like to add.However, for other sectors you would need to be a little bit more choosy and careful because one could say autos, but in autos I think if the market comes off a little bit more to 7,800 levels, you would look to be buying names like Maruti Suzuki and avoiding names like Mahindra and Mahindra for the moment, Mahindra and Mahindra has been a underperformer of-late but I do not think its underperformance has come to an end. If the European volatility continues, you may want to give Tata Motors the skip for the moment, long-term it still looks great but for the moment it may not be a rank out performer. So even within sectors you may need to be just a little careful about what you are buying, so buy a few banks, buy a few autos as the market comes off. If you are playing long- term cyclical recovery or industrial recovery - some of the cement companies actually have not gone anywhere in the last three-four months, there probably is a case for buying into one or two of them as well. I would have avoid names like metals at this point in time with so much volatility, avoid IT for the moment. I know there is a lot of talk about getting into oil and gas names but the way crude has collapsed and I do not see USD 90 per bbl back in a hurry. There might be trading opportunities in names like Oil and Natural Gas Corporation Limited (ONGC) but I would stay clear of oil and gas for the moment because there might be just too much of volatility for the lay investor.