The market is likely to hit new highs in 2014, but it may not necessarily be a smooth ride getting there, says UR Bhat of Dalton Capital Advisors.
In an interview with CNBC-TV18, he sees foreign fund flows into India slowing down. Also, given the changed political dynamics in Delhi after the recent elections, the probability of a stable government at the Centre after the 2014 election has reduced slightly.
Bhat sees the RBI hiking rates twice by March, and he sees inflation continuing to be a concern.
He says IT is a safe bet because of the recovery in the US economy, and he is bullish on pharma and FMCG as well.
Bhat feels the infrastructure sector may have finally bottomed out.
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Below is the verbatim transcript of his interview on CNBC-TV18
Q: In 2013 India got about USD 20 billion worth of inflows. Do you think that pace may continue or is there some threat to that?
A: There could be a threat to that largely because of the fact that this USD 20 billion came on the back of Quantitative Easing (QE). However, QE will probably be thing of the past with January bringing in the first taper. The other way to look at it is USD 20 billion but the market in dollar terms is still down, so therefore it is lot of money for the market to be even at this level given the amount of disenchantment you see among domestic investors. The fact is that expecting USD 20 billion is a bit of a stretch. I think we could certainly see some inflows but not of that magnitude.
We need at least half that number of USD 20 billion for financing our Current Account Deficit (CAD). It will not be smooth because once the taper really starts biting there could be a lull, if not some outflow. So this could cause hell of a lot of volatility in the market and it will be a great day for traders, but not so much for investors.
Q: Of the fragile five along with whom India tanked, the rupiah, riyal, rouble, the performance of the Indian rupee has been much better than the others in the comeback period from September, as well something has been set right in the external account space, our trade deficit has narrowed to some USD 6-7 billion a month and CAD even for the quarter is coming down to USD 5 billion, so it was an amazing performance. Given all that do you think that there is a minor outperformance likely for India when the inevitable tapering happens? How do people normally behave ahead of an election? Don't the FIIs normally pay more importance to the political economy and if there is an expectation of certainty would they really leg it out?
A: I think if there is an expectation of certainty they will play to that, doubtlessly but I do not know whether that is very much there. Probably there was a feeling that there is an expectation of a stable government with a strong leader before the Delhi elections. After the Delhi elections the dynamics have changed, because the Aam Aadmi Party (AAP) can be a party pooper, in which case the level of uncertainty has increased on the political front. I think that would play out among foreign investors also because in the run up to the election you will see the amount of noise increasing dramatically. And you could see that what looked like almost certainty about a better government will be in place may not be all that true.
Especially, from the FII viewpoint the competitive politics seems to be the competition on increasing subsidies and it is not on getting more efficient government in place, which is not exactly what capitalists would like.
Therefore, I think there is a touch of uncertainty there. With the increasing level of uncertainty it is not a given that people will say that come elections and we will be fine. I do not think that is the dictum anymore.
Q: Traditionally highs have been achieved by the Sensex and the Nifty in the January or at best in February. This is going to be a vote on account. So do you think that we would reach a kind of high in January and go into a lull?
A: Highs would happen. Two big uncertainties are election and tapering. The pace of tapering is very important. USD 10 billion in January probably may not impact all that much and if there is more expectation from the election outcome and even probably better results come in the first half of January or the first three weeks of January, there is a possibility that we could make new highs. However, the sustainability of that is in doubt on account that the pace of tapering might actually accelerate and the uncertainty on the election front might increase. So, these two are big imponderables and to say that we have a great track to receive FII money is not right.
Q: How do you approach sectors now? Give and take everything we have been fretting a lot about the economy, about the fact that our index has hardly moved this year, but there has been a lot of money that has been made in individual sectors, look at IT, pharma, a lot of midcaps etc., where do you think the maximum potential to make money lies in 2014?
A: IT is almost a safe bet I think because the US economy is doing well and most of their exposure is to the US, so that is one good thing that can come up. Plus also the fact that there maybe some stability in the short run in the rupee, but over the next 12 months rupee will be much lower than what it is today.
Q: When you say good thing in IT what do you mean, because so much appreciation has already taken place. Relatively do you think it is still better to keep your money in IT or is there a higher appreciation in other sectors?
A: There could be further money to be made in other sectors, but in IT there is a continuing story there. Of course valuations have become expensive, but the fact is as long is there is good news that keeps coming in that sector people at least will not disinvest and there will always be new people who will come and say that this is the safe sector.
With tapering, with liquidity becoming tighter in international markets rupee will start depreciating because the US dollar will start appreciating. Therefore on these two counts, on the US economy doing very well and on the potential depreciation of the rupee IT would be probably a star in 2014.
Plus in addition the usual pharma on accounts of exports, pharma and FMCG would continue to do well. However, the joker in the pack would be the sort of infrastructure sector, power. These are the ones that will start making some gains in the expectation that a new government will have to address these issues.
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Q: How would you play the banks at this juncture? From what we have seen in the past foreign investors are more sensitive to macros, so do you think inflation can be a major spoiler?
A: Inflation continues to be the spoiler and with further oil price hike in the offing and one-time correction that has to be there sometime inflation would not be something that would give comfort to anybody. Plus there would be probably at least another couple of episodes of interest rate hikes, because the December statement looked like an apology for not having done it, so therefore in January they will have to do it. If the oil price hike transmission mechanism continues there might be one more rate hike.
That being the case the outlook for inflation does not seem to be very good. General feeling is that inflation is more structural. It is all fine for us to say that it is just vegetables and in December everything will be fine and in January everything will be fine, but I think it is more structural. The transmission mechanism of the oil price hike would take some time, especially the secondary effects would take quite sometime for it to play out on inflation. I do not see interest rates giving us any comfort in this year.
Q: Today, the Lanco and the GVK Power is up. Do you think we have reached a stage where at least we would not bleed them unnecessarily? Delhi Electricity Regulatory Commission (DERC) raised its eyebrows the moment the Delhi government spoke of slashing tariffs, subsidies is another matter, so do you think at least power companies now can look to something positive?
A: I think we have hit the bottom there in terms of the policy uncertainties. At sometime they should realise that this is like any other business and the investments have to get a reasonable return. If you really see at both ends; whether it is supply of raw materials or whether it is payment for dues the government arms are there, so the government has to do something about it. Increasingly, as you see if the economy starts picking up and the demand for power increases they will have to sort out these issues.
Therefore, having invested so much of money on the ground these people deserve to get a return sometime and those days are not very far away.
Q: Will you buy anything now in this entire gamut of infrastructure space?
A: The asset sales have to be finally correlated with some change in the regulatory environment, in the government policymaking. You cannot find someone to buy assets with the sort of level of discomfort that is on the policy front. I think once the policy changes, once electricity boards are able to pay, once the bottleneck in coal supply is addressed I think they will get a very good price and that is when everything will look fine. It is probably at least a few quarters away, but the direction seems to be right.
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