 "We recommend regular booking of profits: Daljeet Kohli")
In recent sessions markets have posted strong gains. Do you foresee any sharp correction in the near-term? What would be your advice to the retail investor in case markets fail to sustain their gains?
In our opinion markets are moving on two important reasons. One, the positive sentiment arising out of current government's strong resolve to provide impetus to growth. Second, there is abundant liquidity arising out of stimulus packages from one or the other big economic blocks.
However in the midst of all this the ground reality for Indian corporates has not changed much. As is evident from Q3 results many companies have reported below expectation results. We think that consensus estimates of very high growth in corporate earnings over next two years will be downgraded sharply.
Effectively, this means that the higher the market is moving the farther we are going from corporate performance. This would imply that risk is increasing by the day. If either the liquidity or sentiment turns around there will not be anything to support the markets at current elevated levels.
Our advice is to remain invested but be cautious of risk. We recommend regular booking of profits. We remain extremely cautious of valuation hence would avoid stocks that have moved too sharply without corresponding increase in earnings. Highly leveraged companies still remain out of our focus of investment.
Among other factors, 2014 witnessed higher participation by retail investors. Do you expect the trend to strengthen further in the current year?
As compared to retail participation between 2009 and 2013, there was definitely an increase in 2014. However, we have not seen any enormous change. There is still lot of scepticism and fear amongst the retail investors who even missed out the major part of rally in 2014. We have witnessed a few HNIs or groups with high volumes participating in the last few months but the current sharp volatility does not help the cause of retail.
What could be the broad market trend ahead of the Union Budget? Do you think the Finance Ministry will be able to meet street expectations, particularly those related to fiscal consolidation?
There is a lot of expectation from the Budget. Many market participants term it as "make or break" event for current government as market participants are not in a mood to show the same leniency to the government as was witnessed during the last budget when people ignored any let up in meeting the expectations.
In our view the broader fiscal deficit targets may be feasible due to the drastic decline in crude import bill though missing the revenue target has been a big disappointment. More pertinent is how the target is achieved. Cutting pre-planned expenditure or raising resources through large scale disinvestment of PSUs or natural resources may yield the desired numbers but market will not draw any confidence from that.
Do you agree with the prevalent view that the RBI will continue cutting rates for at least a year or two or the future stance of the central bank may change by the fiscal cues in the Union budget? How extensive could the rate-cuts be?
We expect RBI to cut policy rates by 75-100 bps in 2015. Out of this first tranche of 25 bps cut has already been done. We believe more aggressive cuts from RBI will depend upon two factors. First, is the monetary stance taken by the central banks of US, Eurozone and Japan and second critical factor would be the fiscal policies adopted by current government, some of which will become known in the Union Budget. If the government resists from following ultra-expansionary policies and maintains fiscal discipline RBI may have more room to cut rates.
With the outlook on banking sector remaining upbeat will it be advisable to diversify away from heavyweights to smaller names? How should one allocate funds between private and public sector banks?
We remain selective in buying banking stocks guided by their asset quality and valuation. We advise sticking to better managed front-line banks. In our opinion private sector banks will continue to outperform their public sector peers but since many of these private bank stocks have moved sharply in the last few months their valuations have become a bit stretched. Among private banks we like ICICI bank, Axis Bank, Federal Bank and Karur Vysya bank while among public sector banks we like SBI and BOB.
Within BFSI space we are positive on financial services stocks like Capital First & Bajaj Finance.
Globally, the euphoria over the American economy emerging out of recession has been offset amid concerns about growth slowdown in Europe and China. To what extent Indian markets will be affected due to global trends?
The Indian markets may move into a period of heightened uncertainty arising out of diversionary monetary policies expected to be followed by the central banks of US, Euro Zone and Japan. In current market perspective, think about the situation when large amounts of funds start moving out of India and emerging markets and get diverted to US as interest rate differential narrows down, then what will happen to Indian markets?
Market participants believe risk of fund outflow from India is quite low. However, we believe FII fund flow position over the next couple of months needs to be monitored as any reversal of trends might lead to huge negative impact on Indian markets where fundamentals are also not supportive.
Disclosure:
I Daljeet Singh Kohli, do not hold any position in stocks mentioned in this interview. However these stocks have been recommended by IndiaNivesh Securities for which I am Head of Research. IndiaNivesh clients & associates, directors may have positions in these stocks.