See 20% upside in Nifty; buy cyclicals in 2014: Anand Rathi

A: These are early days for the beginning of a bull market. It is difficult to call what is the magnitude and length. However, 2014 should be reasonably good. We are looking at close to a 20 percent upside in the index for this calendar year.

Q: Next week is important because we kick start the earnings season and IT earnings will be in focus. This entire space has become such a crowded trade now with 90 out of 100 people recommending you to own IT stocks. What are your thoughts on that and would you bank on IT being the big gainer in 2014 again?

A: IT should continue to do very well. That is the same concern that I share where I think it is too much of a consensus view on IT but the valuations are fairly supportive. I don’t think it will be the best performing sector though. It should do reasonably well looking at a gain of 15-20 percent upside. The real opportunity might be in cyclical's. That is the sector one needs to watch out for in 2014 as the economy starts to improve.

Q: Cyclical's is a fairly large sector, if you could prune it down to some sub-sectors or if possible 3 or 4 stocks that you would like at current levels?

A: I would look at autos, I would look at engineering and construction, to some extent, the private sector banks. There are spaces where it will be very stock specific move but these are spaces where valuations are attractive, the worst is behind us. The recovery is gradual but markets will start discounting more of 2015. Market is fairly patient in terms of letting things evolve but early signs that things will start improving in these sectors right now.

Q: If you had to put some money to work next week for the longer term but immediately next week what are the stocks that you would recommend because we are getting some opportunities in some of the sectors that you spoke about?

A: I don’t track stocks at a personal level, so I would not be the best person to comment. But one should still stick with sectors like technology and pharmaceuticals for now. Engineering & Construction is a longer haul call, I don’t think timing it from a week or two weeks perspective, these are stocks that you want to hold from a two to three year perspective but lot of them could give significantly outsized returns. But you have to have patient holding period that is required for some of these sectors.

Q: How big risk is politics for this market? You had the Prime Minister's speech today and already people are talking about some populist measures over the next 3-4 weeks and in May or June you don’t know whether there is a decisive government, there is a risk. Do you think all these factors can play a part as we go into 2014?

A: With what happened in Delhi the equation has changed a bit. The worrying part is that some populist measures should come in or could come in. However, some of the Indian voters are far smarter. We have seen that in states like Rajasthan, where lot of populist measures were rolled out but the mandate was very decisively against the incumbent government despite the populist measures. People are looking at performance. While Delhi is really a wait and see in terms of how things pan out but the concern really is in the next 2-3 months. I don’t think it is a longer term concern.

Even if you look at a coalition government, in 1997-98 we had a coalition government and that is the time we had some of the best economic policies that were rolled out. So, I am not much concerned. Either form of government whether you have a NDA-led government or a third front or even a UPA, I am not as concerned. The economy is definitely turning around. The only thing that changes is the pace of recovery.

Q: Another theme that played out this week and has been playing out for the last couple of weeks is all MNCs increasing their stake in Indian subsidiaries and Nestle might be doing the same so they might be next in line. We have had good performers like Maruti, GSK Pharma, all of whose parent companies are planning to have gone ahead and hiked stake, is this a space that you like and if yes, anything specific?

A: I think the space is good but in the consumer area at least valuations are fairly stretched, stocks trading at 30-45 times earnings – so, the buybacks provide a floor end support but I think too many expectations are built into some of these stocks at this point of time.

Q: What about midcaps, they lagged behind largecaps last year? This year, at the start we have seen fair bit of outperformance, do you think this is just an aberration and largecaps would come back or could this be the year of midcaps?

A: I still think this will be the year for largecaps. It is too early for midcaps to start rallying because in the underlying economy, things need to move far more for things to improve for midcaps, start improving your balance sheets under stress. Yes, there are few exceptions that the companies have, are generating free cash-flows, balance sheets are healthy or there are more B2C businesses that are doing well. So, there are few exceptions but on an overall basis, largecaps would still tend to do far better than midcaps this year.

Q: You expect a 20 percent upside to this market through the course of the year, could that be threatened by the weakness that we might see in the global space because we are getting some hints of that?

A: I think yes, we have got mixed signals in terms of potentially looking at some weakness in data but also we have heard talks of taper. The global economy is improving, it is still fragile but is improving slowly and monetary policy - the West will ensure there is a fair amount of cushion to ensuring that there is no drop, no contraction going forward. So, policy generally is very supportive and I am not concerned as much about the global environment at least for the next 12-18 months.