Given the prevailing weak sentiment, the markets have turned more sensitive to any negative news flow and over-reacted to reports of India revisiting the DTAA with Mauritius, Gaurav Dua, Head of Research, Sharekhan, tells Puneet Wadhwa. Edited excerpts:
The markets saw heavy selling on account of concerns regarding the Indo-Mauritius double taxation avoidance agreement (DTAA) earlier this week. Is there a genuine reason to be concerned or was this an over-reaction?
As clarified by the finance ministry officials, the talks are at a very early stage and the focus is more on transparency related to the sources of these foreign funds routed through Mauritius. Moreover, any renegotiation on the levy of tax would take time to be finalised and would be on a prospective basis rather than retrospective basis as was indicated in some reports. However, given the prevailing weak sentiment, the markets have turned more sensitive to any negative news flow and seem to have over-reacted.
What is your view on the markets and the factors that would drive them in the near term? What do you advise retail investors to do in the current market situation?
Our base case assumption is that the benchmark indices would consolidate around the current level for the next few months. The situation could be much better in the second half of FY12.
We expect some of the macro concerns to ease out and the interest rate hikes to peak out over the next couple of quarters. Consequently, we are advising clients to invest in a gradual and systematic fashion in the chosen stocks after doing proper due diligence.
Do you expect the Reserve Bank of India to continue its rate tightening stance going ahead?
We expect further rate hikes of 50 basis points (25 bps each in two revisions) by December 2011. After that, the RBI could prefer to pause and assess the impact of monetary tightening on inflation and economic growth.
However, there is a risk of further tightening measures if inflation remains sticky and commodity prices do not ease up.
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Which sectors are you bullish/bearish on?
We believe more in a bottom-up approach. There are opportunities for stock picking in almost all the sectors, especially in the mid-cap space. Though the benchmark indices have corrected 14-15 per cent since Jan 2011, some of the quality mid-cap names have lost 25-35 per cent and offer a much better return from the current levels.
What is your take on interest rate sensitive sectors? Is the time right to start bottom fishing?
We are underweight on the interest rate sensitive sectors. But, the valuations have turned reasonable now and investors can gradually buy certain stocks among interest rate sensitive sectors with a medium-term view. Among banks, we prefer private sector names like ICICI Bank, Federal Bank and Yes Bank. In autos, we prefer Bajaj Auto and Mahindra & Mahindra.
Reliance Industries has been on a downward spiral and hit a fresh 52-week low this week. Is it a good time to buy?
Reliance Industries is facing several near-term headwinds, resulting in the stock’s underperformance. After the steep correction in the past couple of months, the opportunity is right for investors. But one needs to take a slightly longer-term view in the stock due to a lack of near-term triggers.
Of its three key business verticals, upstream gas production and petrochemicals would start looking up in FY13 and FY14.