Start of bull run, but 6-month consolidation seen: Siva Cap

Similarly, he feels the RBI is being too cautious in cutting interest rates.

Below is the verbatim transcript of Sridhar Sivaram's interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.Sonia: It has been slightly slow for the market but is this the best time to be stock picking in this consolidation phase?A: Possibly. Given the fact that we have had a huge run last year and earnings have not kept pace with that. So there will be a consolidation phase, one has to pick and choose stocks, sectors right now. I do not see the market going anywhere in the next six months because it is going to take at least six more months if not more for the economy to recover and finally earnings growth is the result of stock price movements. If we do not get that then I do not see this market going too much higher from here.Reema: So six months more of this consolidation phase?A: Yes, I would say that is a good thing, it is a time correction and if we do not get any price correction which is better because if you have too much of volatility then that scares retail investors and they get a bit nervous. So that would be the best, maybe we would see a 10 percent correction in last month. Those are normal for any bull market. I would still continue to believe that this is a start of a bull market.  Reema: Speaking about institutional investors, a lot of these retail people have also become savvy, they watch for what the foreign institutional investors (FIIs) are doing and they have been seeing FIIs pull out money from the cash markets and even now although the selling is stopped by them, they are not putting in money so everyone is watching the day when the FIIs will start investing in the Indian equity market. What will be the markers which you think in your conversation with a lot of institutional investors will be the turning point when FIIs will start getting bullish on India and corroborate it with flows?A: To start with, if you go back and see what happened last year, India was like there is no alternative (TINA) market, there was no other market n which people were bullish at that point of time and multiple factors went in India’s favour such as new government, commodity prices falling, more confidence in the Central Bank, all this resulted in more FII money coming into India.A lot of things have changed and the flavour for emerging markets have shifted to some extent to other markets such as China that has done well. Korea, Taiwan have surprisingly done well this year. I do not know whether it is by default or by design but countries with current account surpluses seem to be doing well.So I do not know if this is a precursor to interest rate hike coming from the US because if you look at countries like China, Korea, Taiwan, Russia and Hungary, all these have done well. It Seems like there is a pattern here that current account surplus countries have done well and if you look at the Fragile 5, all of them are struggling. In fact, their currencies have weakened at least by 4-5 percent.It is not very drastic but there seems to be a pattern here that FIIs are trying to play safe right now which is if interest rates in the US were to go up, there is a possibility that there could be a currency hit in emerging markets and the most vulnerable are the Fragile 5 because of their current account deficits (CAD). Maybe India is slightly better positioned which is why Indian currency is reasonably stable right now as opposed to some of the others. I would say that lot of these factors are playing into the market knowingly or unknowingly. I think for India also as I said, earnings growth have not kept pace so once all this falls into place, maybe India will come back but there is clearly a story for India. Even the Fragile 5 currencies have depreciated apart from India.Sonia: But the fact is that we have to be aware of the impending rate hike by the Fed which will take place in all likelihood in the month of September, so when that comes through, do you expect there to be a big snowball correction across emerging markets including India or do you think it will just be a sentiment trigger that should be used as a buying opportunity?A: My view is that it will not have too much of an impact because this is already well documented, well-written, people are already fearing this. If you go back and see what happened to the fear of tapering and the actual tapering, the fear of tapering caused more damage than actual. This could have the same impact which is the rate hike may not have such a significant impact because most of the Central Banks are already preparing for that. So Indian Central Bank is creating a watch to increase our foreign exchange users. So I do not think it will have so much of an impact but if the event is behind us, it will be great because then people can look forward to the event after the rate hike in the US. 

Reema: Earnings have stopped deteriorating, if we do get a Fed rate hike then that is unlikely to ruffle feathers too much in the market. Are there any triggers which can push the market significantly lower? Where would you see downside for the market till the end of this calendar year in your phase of consolidation?A: If there is a major global crisis because of rate hike, some currently crisis.Reema: But you do not see it likely, right?A: I do not see that. So I think the market at best may have because of earnings disappointment like we saw this quarter or some taxation disappointment which was unfortunate. We should not have had that. Those are event specific reasons for which the market may correct otherwise I see a consolidation phase here. I do not see too much of a downside, maybe 10 percent which is normal for any bull market to have. So this is a story for the next year, FY16. FY15 is like a consolidation here and if somebody wants to play this market then he should be looking at 12 months from here and start accumulating stocks.Sonia: Today we complete one year of the Modi government in power. In your interactions with foreign investors and investors on the whole, has the government been relatively successful in putting India on the global map as far as investments are concerned?A: I think it has. On a broader base the government has done all the right things. The prime minister has been travelling to a lot of countries and that helps the image of India which had taken some sort of a beating before that and even from a policy standpoint there has been a lot of clarity. There maybe some disappointments here and there but on a broad base a clear roadmap has been given. It is much slower than anticipated. So there was expectation that the recovery would be faster which has not happened. It has been much slower and I would say that maybe the government has missed the trick which is to boost consumption because that is what results in a recovery because investment cycle typically takes a longer time and if you see corporate India is already sitting on excess capacity. The private investments are going to take time, so I would have hoped that the government had done a bit more on consumption like government spending, which has not happened for three years now. So if you go back and see United Progressive Alliance (UPA) in the last year had cut government spending. This government when they took over in May, had cut government spending and tax cuts in the first Budget. we got bonanza because of low commodity prices. We could have passed that on with a tax cut which is what happened post Lehman, UPA had done a stimulus by giving tax cuts both on the excise side and on the personal taxation side, which has not happened. So I think the government has missed the trick because they are too focused on the fiscal deficit but if the growth comes, revenues are better and fiscal always falls into place. They have taken the other route which is focus on the fiscal, cut everything and as a result we have seen enough reports suggesting that consumption is at ten year low growth rate and I do not think Reserve Bank of India has helped much.My view is that they have been too cautious, they should have been much more aggressive. If the government and RBI had worked together, which is the government focusing more on expansionary policy on the fiscal side and RBI on the monetary side with a clear roadmap that we will be a bit expansionary in the first few years but we will bring it to course, maybe the recovery would have been faster. Right now I do not see the recovery, we would have all expected recovery to happen in the 12 months, which has not happened. We are now pushing it back by 6-9 months if not 12 months. Therefore, in my view the government has missed the trick.