Underweight on India, fund flow disconnect a worry: HSBC

After hitting the technical year-end target of 21,750 for the Sensex, Jitendra Sriram, MD & Head of Research, HSBC India expects the market to drift further upwards from a sentimental perspective. However, Sriram believes the disconnect between the fund flow data from EPFR and SEBI which rounds to USD 4 billion remains a concern.The fund flow data from EPFR suggests outflow of money, says Sriram who is cautious on the market right now.

He also found a disconnect between the pace of market movement and corporate earnings. Sriram believes that the former maybe running ahead of itself.Overall, he feels the Indian market valuations remain expensive compared to other emerging market peers.Focusing on companies with good cash flows, he is cautious on market at the moment as there are seemingly many companies that are running away in the market which are on belief of hope rather than reality.Sriram sees the energy sector as a clear beneficiary as the government will be addressing the subsidies in the diesel pricing, kerosene pricing, etc. Seeing clarity on the utility space, he says that NTPC looks interesting as stock is trading near book value. Below is the verbatim transcript of interview:Q: Is this market still having steam to better that 6560 and go on to notch up significant gains before the elections?A: From a sentiment perspective, clearly if the market starts believing that the only outcome possible is a stable government and so on, I would reckon that it could drift up from here. But from a fundamental standpoint, I would say that there are two very big disconnects starting to appear. One from a flow perspective we are seeing big pullouts out of most markets if you look at EPFR data and even for India, the polling seems to suggest something like almost about a USD 3 billion kind of an outflow year-to-date whereas Securities and Exchange Board of India (SEBI) data shows you about USD 1.2 billion kind of inflows so the disconnect is almost about USD 4-4.25 billion which is quite stark to say. So, I would suspect that either it is kind of funds which are not monitored by EPFR something like a hedge fund that has cut shorts or built longs or it could be non-mutual fund kind of money which has come in like pension funds, endowments, etc which could be causing this kind of a disconnect; or it could be plain vanilla arbitrage money coming in which is effectively fixed income money in the guise of equity. But clearly, it is not something which raises too much comfort on the quality. The second big disconnect is the amount of a turnaround expected in terms of market in earnings and I would suspect that market might be running a little ahead of itself. First of all, do remember that government in an effort to meet the fiscal hole, has probably extracted a lot of money out of names like Coal India, and various other such state owned enterprises obviously will have a weaker other income stream coming in next year. Second issue is that the turnaround in the economy is also not going to be as quick as what the market expects because by the time policy comes into play and implementation starts, it is going to be a long time. So I would be more on the side of caution now, than on exuberance.

Q: In your note, you say that you have a target price of 21750 for the Sensex that is by the end of the year so that is somewhere around where we are currently. What would the stock specific approach be, in the sense, what are the stocks that you would start to get a bit cautious on now and would advise investors to take some money off the table?A: One needs to keep a very focused approach on the cash flows of a company because there are lots of names which are seemingly running away in the market place that are more on the belief of hope rather than on reality. And I would be definitely very cautious because the faster they go up I guess it is sitting duck for coming off as well quite quickly. From an election perspective, I would definitely say that probably some degree of domestic oriented names might be in order at this point of time. So stuff like energy sector is something that we clearly see being a beneficiary because whoever comes in will need to address the subsidy angle in the diesel pricing and kerosene pricing and so on. On the utility space related to the energy sector, we are seeing some regulatory clarity come in, may be settling at a lower level but even stock prices have corrected where some of the leading names like an NTPC is probably trading close to book. So these are names again that sound promising at this point of time. Other than that, with respect to infrastructure, clearly there are certain pockets one needs to be constructive about that may not be so much driven by state funding or it could be corporates and sectors that appear more stressed. Certain issues of multilateral financing say a DMIC, DFC project and beneficiaries of those like L&T could be something to look at. So these would be some change in stance from being completely pro-export dependent may be a year back.

Also read: Recovery in India needs to be investment-led: HSBC