The market today saw a lot of triggers from the RBI policy as well as the hike in excise duty on diesel and petrol. In an interview to CNBC-TV18, UR Bhat, Managing Director of Dalton Capital Advisors shared his outlook on various stock specific bets and where the market is headed hereon.
Below is the verbatim transcript of the interview:
Q: Were you disappointed the he didn’t cut interest rates and are you disappointed that the government has hiked excise rates on petrol and diesel?
A: Not really, both are on expected lines. At least the cut didn’t come about; that I think was very largely expected considering what he has been doing, what he has been articulating for quite some time now.
This is sheer opportunism, the government increasing excise duties every month or as it were profiting from softening of crude oil prices. However, that is par for the course; he has to meet those 4.1 percent targets so whatever is possible he has to do it.
Q: On one hand, we have heard the government call for lower interest rates saying inflation has come down. On the other hand, one of the key inflation triggers which is crude oil prices is softening and you are not fully keen to pass on the full benefit of it to consumers. So, you are speaking in two tongues there because you are saying inflation is coming down, crude is on a southward journey, this is a good time to cut rates but we won’t pass on the full benefit of lower crude prices to you because we have got our fiscal deficit math all wrong.
A: Absolutely but the point is that as long as from the base it doesn’t go up it is alright as far as inflation is concerned. It doesn’t have to come down. So, he is making use of that because it is inflation neutral if he doesn’t increase oil prices. However, if he reduces it is going to be advantageous but he has to help himself.
Q: What did you make of Rajan’s toning down of his inflation expectations? That is what is keeping the markets from really going down today?
A: He is just reading the data right. The data points towards that direction and therefore he is just articulating those thoughts, which have encouraged him to bring down the inflation target 6 percent by March 2015 itself instead of a year hence. So that is the way things are going. Of course he has guarded himself by saying that the base effect might kick in by December 2014 when inflation might actually tone up a bit but as long as it is below 6 percent it should be par for the course, he will continue with these thoughts as of today.
Q: What would you count as some of the key triggers between now and the Budget that is really typically always the big trigger for markets, will these triggers move the markets higher or should we prepare for some degree of correction?
A: There are no big triggers; the next big important economic event is the Budget. Before that, you have some legislative progress.
Q: But none of it is going to be with any degree of finality. These are just baby steps towards the ultimate outcome.
A: Yes I think building some consensus on these legislative proposals that would probably energise the market a bit. Otherwise, I think the market might – because there are almost three months now till the budget so for three months the market that has gone up by about 42 percent from February, sustaining that is very difficult. So I think it will either consolidate at these levels or there might even be mild correction because people are sitting on lots of profits so therefore they might not wait for three months to increase the profit, they might as well book some profit and wait for the next turn.
Q: What do you mean by mild correction?
A: Mild correction maybe few percentage points, 3-4 percentage points; that is possible but nothing much more than that.
Q: Will that warrant a move back to defensives or do you think not necessary?
A: Not necessarily because it could as well be a time correction as discussed. So, it may just consolidate at these levels unless there is some negative sort of news from abroad from what happens in Europe or the Middle East or whatever. However, otherwise it should be around these levels with a slight downward bias for the next one month at least.
Q: What is the portfolio design that you are recommending at this point in time?
A: Overweight on cyclicals is the way to go because that is where the big delta could come with some important announcements in the Budget or at least economic policy statements if not the actual Budget numbers. So, that is where one needs to be. If you are investing for the long-term that is where the biggest impact of changes in policy might show up. So, that is where one should be.
Q: You are not scared by the fact that we have as yet seen very little progress on ground which I am not blaming any government for because these are sticky situations to get out of?
A: Some incremental changes are there. They are all issues that never had quick fix solutions. However, they are making the right effort and the market is prepared to give them some more time to address these issues but Budget is sort of the upside limit; they have to do something by then.
Q: Within cyclicals what do you like the most, are there any kind of industrial specifics that you like?
A: I think engineering, private sector banks, autos these are the ones, which probably will have the best impact when the policy changes occur.
Q: You are not betting on pharma, IT as a currency bet between now and let us say the next few months?
A: Pharma has done very well. I don’t know whether there is a huge amount of incremental gain to be made out of that. However, IT has been a steady performer. If the outlook on the rupee is continuing to be one of depreciation IT can do very well because especially their biggest market US is doing very well, the GDP numbers have been extremely good plus also the US dollar is gaining its strength vis-à-vis other currencies. So, therefore it might even have a very good run against the rupee also. So, therefore all these are pointers to towards better IT performance. So, one needs to be neutral to mildly positive on IT.
Q: How do you play the midcaps because everybody now wants the next big multi bagger idea? Is the story over for sometime or do you think there are quality companies out there, which can be relative bargains?
A: There certainly would be but they are somewhat illiquid so therefore it is not really for institutional investors. But quite a lot of hope is there already built on to the midcaps because they have had a phenomenal run. So unless there is further action because there is lot of earnings growth that is built into these models now. So I think earnings growth has not come about till the September quarter results. One really has to see some progress in terms of earnings growth, some progress in terms of gaining market share. Without that I don’t know if it can really perform very well from here.
Midcaps like Motherson Sumi, Bharat Forge, Eicher Motors have done very well, people are sitting on lots of profits there, they are happy with that and if there is going to be a big move in the market next you can as well be in the large caps and get the right sectors.
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