Nifty rally unlikely to sustain post Budget: Quantum AMC

The expectations in the market are currently very high from the Budget but one is not sure what can be delivered. So in the follow-up to the Budget, Nifty may hit 9000 levels but the rally may not sustain going forward is the word coming in from Nilesh Shetty, Associate Fund Manager-Equity, Quantum AMC. So, one has to be a careful investor at present.Talking about portfolio allocation, he says it has been a one-way rally for the financials so far but the NPA cycle is not yet over and valuations are still expensive there. The space may not outperform from current levels. So, the house has reduced its allocation into financials and are in a wait and watch mode.The December correction scared investors into defensives, pharma and consumer staples, says Shetty. At Quantum they do not have exposure to any consumer staples and pharmaceuticals. However, they have increased their allocations into power utilities and gas utilities with a longer term time frame of about five years, he adds.

Below is the transcript of Nilesh Shetty's interview with Latha Venkatesh & Ekta Batra on CNBC-TV18.Etka: Your thoughts on the Nifty. It is profit booking after nine consecutive sessions of gain, overall what would the setup be according to you and do you think 9,000 would be on the cards ahead of the Budget?A: Expectations are running fairly high right now even though December was a bad month for the index; it has scaled back much stronger from there suggesting that the expectations from the Budget are very high. I am not sure what can be delivered in the Budget relative to expectations build in because valuations right now are very expensive across sectors. So even if good Budget comes through, you might not see outperformance from those levels which are being set right now. You might hit the levels you are talking about 9000 but a sustained rally from those levels looks difficult to us given that valuations across sectors look expensive.Ekta: What would your view be possibly on couple of these financial stocks? We have HDFC Bank which is in focus on account of the approval that they have received from the Cabinet Committee on Economic Affairs (CCEA) on fund raising. How would you approach it ahead of a possible equity dilution?A: I will not be able to comment on individual stocks but financials have had one of the strongest rallies since August 2013 when the taper tantrum broke valuations across Indian equities. Since then they have just had one-way rally and given that the non-performing asset (NPA) cycle is still not over and large dilutions especially across public sector undertaking (PSU) banks are still in the offing, valuations there are relatively expensive. We have reduced our allocation to financials purely on valuations and we continue to wait and watch. Our sense is given where the earning cycle is playing out at least outperformance from current level looks difficult and you might some negative surprises.

Ekta: How would you approach the entire pharmaceutical space now or maybe even defensives in that manner because we have seen the likes of Hindustan Unilever, Asian Paints take the lead in terms of the gains that we have seen on year to date (YTD) basis or rather in January series. Do you think that they would possibly continue the momentum that we are seeing or maybe money could shift into sectors which have underperformed at this point in time on the hope that cyclical could takeover?A: The December correction scared the market a bit and a lot of the money then went into defensives and you saw consumer staples and pharmaceutical rallying in January. However, we are not sure how defensive these sectors are at 40-50 times earnings; purely the valuations make these companies fairly risky. Our sense is as eventually cyclicals have to lend earning support and money has to come back to cyclicals but defensives right now are purely running on the risk averse nature of the market where they are indicating that even if something goes wrong, I want to stay invested and play on the upside. So that is what is driving valuations in defensives right now. Purely on valuation outlook, we have not had exposure to consumer staples since last four years in the fund or to pharmaceuticals. These are good businesses but at 40-50 times earnings we are not sure how defensive these businesses are.Ekta: What would you portfolio allocation be toward. Would it be high beta infrastructure which still has some way to go, metals which have underperformed last year?A: Last year we have been lightning up on a lot of the cyclicals, so lot of the engineering companies, banking and metals moved out of the portfolio. Where we have found value has been relatively steady return companies primarily utilities, so we have increased exposure to power utilities as well as gas utilities but the portfolio is build for a longer term, so it is a five year view. So, in the near-term we understand it might underperform but we expect over five term it to catch up as well as outperform relative benchmarks.Latha: From a trader’s point of view is the market likely to see some correction pre Budget?A: I do not know pre-Budget if it will correct given that expectations will keep on rising from the Budget, but our sense is that – and given that we are stock specific, it is very tough to find stocks which makes sense in terms of valuations right now, especially the earning cycle remain fairly weak and when we are building out earnings for the next three-four years, a lot of these stocks are factoring next three or four years earnings.

So upsides from current levels looks very difficult to us but we have had that view for the last six months now and cash level remains fairly elevated, it is now at historic high in our fund but we can be patient and we will wait for valuations to correct. We do not know what will trigger that but our sense is valuations across the board are fairly expensive right now.