This is a rally to sell; most FIIs already bullish: Ambit

The ongoing rally in global markets is being largely driven by the European Central Bank's dovish comments, and hopes of liquidity injection through quantitative easing, says Pramod Gubbi of Ambit Capital.However, investors are beginning to realise the limitations of money printing by central banks, and may not be enthused beyond a point, he says.In an interview to CNBC-TV18, Gubbi says he will use the rally in Indian equities to book profits, because corporate earnings have not yet bottomed out, and there are no signs of any improvement in the economy at the ground level.He says the upswing is purely liquidity fuelled, and the trouble with liquidity driven rallies is that there are big downsides when the money flow stops.Gubbi feels India may outperform other emerging markets, but the margin of outperformance may not be huge. Also, India is unlikely to get any outsized share of global money pouring into emerging markets, as most FIIs are already overweight on India.Gubbi is bullish on companies with strong business models, and says he will hold on to his bets in the pharma and private sector banking space, even if valuations may seem pricey."Investors have made peace with the fact that if you want quality, you have to pay through the nose," he says, adding, "given the state of the economy, it makes sense to keep valuation aside for now and stay focussed on quality."He sees the results of the Bihar polls acting as a short term trigger for the market, but does not expect it to be a decisive factor either ways.Below is the verbatim transcript of Pramod Gubbi's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Interpret the European liquidity easing warning to us, how should investors approach and interpret this event?A: In the short-term you have seen how markets across asset classes have reacted here. It is clearly another gush of liquidity and a promise to keep that gush of liquidity keep coming for some while to come, which means that the markets tend to react on a relief rally but I would think this is time to step back and think about what this liquidity has done for the fundamentals of the global economy, be it in the developed markets or emerging markets over the last seven years since we have seen these sort of extraordinary monetary policy actions.On the ground, there is clearly a debate, America has clearly benefited somewhat but not as you have seen with a little bit of jitter from emerging markets in China, the Fed also decided to push back the rate increase. So this is not exactly clear that further money printing or quantitative easing (QE) can make a difference to the demand/supply situation globally in terms of fundamental economics. So I am not sure that the market will get spread from a long-term perspective by this another gush of liquidity, I think the market may see through it this time around and continue to question whether this will have any positive bearing on the fundamentals of global economy.Sonia: When we spoke with you last as well, you were telling us how you are circumspect on the markets, similar to what many other experts have pointed out but this market has been slowly climbing the wall of worry, what would you do at this juncture, would you stay away or would you sell into this market expecting this rally to fade?A: Absolutely. Being a fundamental focused houseview, we would look at what has changed on the ground and in reality absolutely nothing be it in the commodities world or the nature of emerging economies. If at all incremental data points have continued to remain negative. So to that extent we would go by fundamentals and sell into this rally because the amount of uncertainty and risk factors continue to remain if at all heightened. This sort of -- what I would call as -- a liquidity driven rally is always bound to have a significant downside when that liquidity goes away. It is hard to call when that goes away but fundamentally speaking I think this would be a rally to sell out.Latha: Is there any chance of Indian outperformance?A: It is, clearly we continue to standout amongst most emerging market, Asia Ex-Japan markets where we often tend to be clubbed into. To that extent, we might see some incremental flows but like I have highlighted in the past, positioning by most institutional investors across emerging market funds or Asia Ex-Japan funds, on an average has already been quite positive towards India. Tere might be a few exceptions here or there but on an average, any incremental flows into these risk asset classes will get by and large proportionately allocated to India.Sonia: We were just trying to play the Devil's Advocate here, there are a lot of things that are working in favour of risky assets as well. For example, fund flows are back into emerging markets as you mentioned. Globally things are looking like a bit more stable than they were in the past couple of months and technically too the set up is not as stormy as it was in the month of August and September, so don’t you get a sense that perhaps just in the very near-term till the end of the year, we could be looking at this risk on extending itself?A: Possible, like I said it is very difficult to call the timing when the risk on ends or when the market will see through this further liquidity infusion and the fact that it hasn’t made much of a difference to fundamental economy. So to that extent, we might as well continue untill Christmas and we all will be happy because this is a new year. However, I would rather not bet on a liquidity driven rally, stay focused on fundamentals which don’t look particularly good.Latha: When you stay focused on fundamentals, what are the tea leaves telling you about Indian earnings, is this the last bad quarter, will Q3 at least inch up in terms of earnings growth?A: I don’t think we are close to the bottom yet, there might be pockets where we have seen enough but by and large we don’t see any sort of indicator, which suggests that things are picking up if at all from the economy standpoint, we continue to see the economy decelerating and the effects of the new government in terms of cleaning up the system, being the attack on black money or the subsidy system continues to have a bearing on the ground in terms of demand destruction. All this is good from a structural perspective but I think the pain is here to stay for a bit more than just another quarter. It is hard to call whether Q3, Q4 is the bottom. We are pretty sure that we haven’t seen the bottom yet.For entire discussion, watch accompanying videos...