Nitin Rakesh sees Nifty touching 5300, bets on banks

As the Indian market is looking firm with expectations of a rate cut uplifting sentiments, investors are building new positions in equities. Experts feel that the market seems to be on a strong foot and may rally further leading to the credit policy review.

Nitin Rakesh, CEO, Motilal Oswal Asset Management is hoping that the market may even touch 5300 and then look for more direction depending on the policy reforms. In an interview to CNBC-TV18, he said, 'In the longer run, the risk reward seems to be in favour of taking a call in equities keeping in mind though that the earning cycle hasn't broken down that much so even the upsides will not be as spectacular as we saw in 2003 or 2009. So, this will be a much more stable, muted kind of a move up probably not as much fireworks as people expected to be on the upside." He explains that the market has already factored in a repo cut of minimum 25 basis points. However, the Reserve Bank of India may even consider a 50 bps cut as the rupee has been losing strength drastically. Fall in commodity prices has also created room for further monetary easing, Rakesh points out. As an investment strategy, he advises sticking to defensive stocks as the market is not out of woods completely. But if one wants to play the beta stocks in the rally, then he prefers banking space rather than the infrastructure. Also read: Remain long, Nifty may see 5200, says Sudarshan Sukhani Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos. Q: How would you approach the global rally? How much would you give the market in this kind of a pullback? A: Clearly, it is a global tailwind of macro driven events; things in Europe, talks of interest rate cuts domestically in India, talk of policy action at the Prime Minister’s Office (PMO). So, the bunch of things that came together. Some say it was as surprise rally, some say it was expected. In the end, we ended up getting almost 3% yesterday. Given that we have just come off the earning season, which hasn’t been as bad as people were predicting it to be, given that we are going to be in a clearly significant monetary easing phase over the next 12 months or so, from a risk-reward perspective, it may not be a bad time to take a call on equities. I think we may see an upside surprise on some of the things that we just talked about. Q: There is a consensus of a rate cut, but now noises are getting louder of perhaps even a 50 bps. What are you expecting to hear in terms of a quantum? What do you think will surprise the street positively? A: I think 25 bps is probably in the price already. I won't be surprised with a 50 bps cut, given that we say pretty dismal number on the gross domestic product (GDP) growth last quarter. At this point in time, there seems to be some headroom for interest rate cuts, given the oil price drop, commodity price softening and growth falling off. So, I think clearly the focus is moving away from inflation management to bringing growth back. So, 50 bps seems like a reasonable number right now. Q: Tactically, how do you approach the current upmove in the market? How much more would you give it on the upside? Do you think we have put that fear of slipping all the way back to 4,500 behind us or is that still open? A: I think we tested 4,800. It may not be surprising to see the market go back up to 5,200, maybe even to 5,300 and then try to find some realism based on what happens on the policy front. I think the week of June 18 seems to be becoming a focal week from a global macro, domestic macro perspective. So that is going to drive a lot of the market short-term movements. In the longer run, the risk-reward seems to be in favour of taking a call in equities, keeping in mind though that the earning cycle hasn’t broken down that much. Even the upsides will not be as spectacular as we saw in 2003 or 2009. So, this will be a much more stable, muted kind of a move up, probably not as much fireworks as people expect it to be on the upside. Q: What's happening with risk levels and liquidity interest? We lost quite a bit of money in the first half of the week and this risk on hasn’t quite settled itself globally either. A: It’s early days; it’s actually a one day global rally. People are focusing a lot more on the event calendar. They are focusing a lot more on what happens in Europe. There are talks of QE3 again. So, it’s early days to call it risk on. If we get some sort of QE again, in whatever form it comes back, obviously you will see a gush of liquidity back into the global markets and will probably see some of that come in here as well. If you really focus on what's happening domestically, from an earnings perspective, in a macro monetary perspective, potentially we are seeing some revival of policy action from New Delhi. I think that might actually be probably more relevant for us in the medium-term than just pure liquidity, even though it’s important for the markets in the short run. _PAGEBREAK_ Q: Reliance will be in focus because of that AGM. In the past, we have seen that there has been some degree of disappointment, when no big bang announcements have been made. Do you think it will be the same thing this time? A: It is very hard to call because clearly the investors are expecting some sort of an announcement on what is going to happen with new initiatives and where the next set of profitability is going to come from. Barring that, I don’t think there is anything that much more that can be expected. It is very hard to call whether they are going to make any big announcements or no. Q: As a contra call, would you want to advise any positions or any investments in the infrastructure space because now there is a pledge by the Prime Minister to push through with infrastructure spending etc? A: Given where we sit and the way we look at portfolios, we are a little more conservative. So, the only place, within infrastructure, we may give a call will probably be capital goods. It is probably too early to call on the rest of the sectors. Within capital goods, I think there is a lot more margin on safety as well as there is a lot more cash flow predictability. That is probably our view. There are other ways to play the interest rate sensitive cycle than just pure infrastructure. Q: On domestic cues, how do you think the equity market will react to either no action from the Reserve Bank of India (RBI) or just about 25 bps because hope has been up to such a level that it seems like 50 is almost in the bag? A: I think this point it looks like 25 is what is in the price already. If it is not 25 and if it is zero then obviously the market is not going to like that policy action. I think the chances of that are low. I don’t think consensus is still pricing in 50, even though there are some murmurs and noises around 50 bps of cut. I think the market will be happy with 25-50. If it is neither then we have a problem. Q: What is a good way to play this current pullback, go with the rate sensitives, things like the banks or would you still look at some of the defensives which have come off quite a bit in terms of prices? A: I think defensive will always have to be part of your portfolio, given that we are not completely out of the woods domestically or globally. If you want to play the rally, obviously there is beta available and you can play the beta in many ways. We prefer to play it through the banking space rather than the infrastructure space. I think PSU banks are the most obvious way of playing the cycle, given that they had lost a lot of value in the last 12-18 months. Auto is another way to play it, especially the four-wheeler space. It has been paying the price for the whole interest rate cycle as well. Q: You did mention that the risk-reward is in favour of equities for a long-term view. How do you think the year will shape up, will it still be a plus-plus here for the market? A: From an FY13 perspective, we are looking at anywhere from Rs 1,225-1,250 Sensex earnings for next year and more than Rs 1,400 for FY14. So, we are in the range of 11-14 times two to one year forward. So, clearly, the risk reward does seem favourable. There are chances that we will be probably higher than where we are today by the end of the year, given just this dynamic and also the fact that in the long run, markets look at two things interest rates and earnings. Earnings have been stable. If we get into the earnings upgrade cycle and we see the falling interest rate environment, I think that is probably going to be the second trigger. Q: You were telling us about the consumption story and how you are positive on that. Would you think that there is more scope in autos? If yes, what would you prefer between two-wheelers and cars? A: Yes, I think that is another way of playing the interest rate cycle. Clearly, the two-wheeler space offers better prospects, given that there is no uncertainty of this diesel price hike and it has a much broader consumer appeal to it. If we get a good monsoon this year, I think we will see again robust rural demand. There is an export element in the two-wheeler space. So, you can get the currency play there as well. Broadly speaking, auto is a good place to be in, besides some of the other consumer names that traditionally used for consumption. Q: What is the fundamental call on Reliance? It has been at best the market performer, the buyback hasn’t covered itself in any glory. At Rs 700, what would you do with it? A: We have had a neutral call on it. From a portfolio perspective, we have not gone overweight. We have been fairly neutral on the stock, not negative, not positive. It is a tough. The real issue seems to be what the next trigger of growth is, from an earnings perspective. They got few things going on, shell gas in the US, they have domestic gas projects and they have caused some trouble. But clearly what is the next big trigger and that is one of the reasons why it has been a muted performer.