This stock rally is different, market showing maturity
Jul 27 2014
A foreign brokerage last week said the fact that everyone is overweight on India is itself a reason why one should sell stocks. What are your views? If otherwise, what gives you the confidence on the domestic economy and the market?
The stock market has a tendency to move in the opposite direction if the general perception tends to be totally one-sided. The market movement is also unidirectional. The rally we have been seeing for the past four to five months is different from what we used to see earlier. The market is showing signs of great maturity. There was no move on the upside that necessitated a freeze of trade, even after the NDA government got full majority. No doubt there is euphoria, but the optimism seen now has an element of caution associated with it.
The interest rates and the inflation numbers appear to have peaked out, while on the external front oil prices have not moved up much. The currency has not shown too much volatility and with the government keeping the curbs on gold imports, which has the power of changing the current account, the exchange rate may remain stable in the days to come. The proactive stance being taken by the government to streamline economic policies will have positive effects on the economy over the next two years. These are the factors that will drive the market now and it looks like the rally may continue.
Geopolitical issues, a possible monsoon failure and a fresh inflation spike have been cited as the biggest worries at this point. These apart, what are the downside risks you see for the market in a year’s time?
Geopolitical issues may definitely have an impact on the market, like the recent crisis in Iraq and Ukraine, which may have effects on oil prices. The monsoon has not been as bad as one feared it would be. At the most, it would be deficient, but the effects may not be severe as long as rainfall is fairly spread out. On the policy front, any delay in policy implementation would be treated as a big negative by the market.
If the domestic economy is readying for an upturn, don’t the midcaps look under-bought? If so, in which sectors do you see the biggest opportunity in this space?
Market capitalisation does not decide whether a stock should be bought or not, unless it is a very smallcap stock. It is the quality of the company and the sector within which it operates and growth potential of the stock that should determine your investment in a stock. There are stocks that have given better returns even if they are not classified as largecaps. If the domestic economy is readying for an upturn, companies that have strong balance sheets but weak profit and loss accounts because of economic slowdown and not company-specific reasons, will be the first movers at the earliest signs of green shoots in the economy.
Banking, power and infrastructure stocks were among the leaders of the recent rally. Do Q1 earnings numbers justify their elevated valuations?
With the rise in NPA levels for public sector banks in the last two years, these stocks were available at very cheap valuations of around 0.50 per cent price to book value. With the formation of a government with absolute majority and with the perception that the government will have full strength in Parliament to implement policies, the fear of rising NPAs abated and this started a revival in PSU bank shares. Private banks have managed the NPA levels better and with the likely upturn in the economy, banking as a sector will be one of the first movers. Further, banking and finance together have a weight of around 27 per cent weight in the major indices and any secular bull run is not possible without good movement in bank stocks.
FIIs have been credited with driving the market this calendar. Do you expect the flows to remain unabated over the next two quarters and thereafter, considering that the quantitative easing programme is winding down and geopolitical uncertainties are rising?
The flows have been continuous, but nothing different in a big way from the flows seen during the previous year. If the inflows continue at this rate, the net flow would be in the range of Rs 1.20 lakh crore to Rs 1.30 lakh crore, as was seen last year. This is in spite of the US Fed reducing its bond-buying programme from $85 billion to $35 billion. A year back, liquidity drove the market but this time it may be that corporate performance and economic growth will drive the market, supported by FII flows. Key risks include geopolitical uncertainties, which at present, do not look like a major worry.
What is your outlook for the rupee? While RBI is believed to have built up a strong forex reserve, do export-oriented businesses look safe to bet on?
The forex reserves are at $317.07 billion near the all-time high of $321 billion. This will help curb volatility in currency movement as it may help support the local currency when there is heavy demand for foreign currency. Global factors will be key drivers of the rupee. A stable and less volatile currency will be more favoured than a volatile currency. RBI will make efforts to have a stable currency regime and we expect the rupee to remain in a range of 58-63.
How critical are the revival in consumption demand and kickstarting of the capex cycle to profit recovery for India Inc?
Revival in consumption demand is necessary for the initial stages of economy recovery and revival in capex cycle would be the final confirmation that the economy has started to look up.
A reversal in the interest rate cycle is another trigger India Inc is desperately waiting for. What is your outlook on this front?
The interest rate cycle is stable at this moment and it does not look like it will change before the end of this year. The recent fall in inflation had an element of base rate effect associated with it. RBI may wait to see the effects of the weak monsoon on consumer prices before it initiates the process of rate reversal.
How have you been playing the market of late? Which are the sectors you have been avoiding and which ones are you going with? Why?
We remain invested fully and allow the portfolio to manage the volatility. We are positive on banking and finance, automobiles, pharmaceuticals, engineering with a neutral bias towards consumer sectors and IT. We have not shown much interest in real estate as a sector at this moment.