Don't see much upside in the markets till at least a quarter: U R Bhat

Interview with U R Bhat, Director, Dalton Capital Advisors (India)

With the Reserve Bank of India maintaining a status quo in its monetary policy review on Tuesday, all eyes are now on the outcome of the US Federal Reserve meeting in mid-December. In conversation with Purva Chitnis, U R Bhat, director, Dalton Capital Advisors (India) shares his view on the road ahead for the markets in this backdrop. "The markets do expect a small hike in interest rates by the US Federal Reserve in December and have hence factored this into prices," he says. Edited excerpts:

What are your key takeaways from the RBI's Monetary Policy review today?

The RBI has held on to its interest rate stance in the wake of a slight firmness in inflation and in anticipation of the effect of the Pay Commission report on aggregate demand. The impending change in the interest rate stance of the US Fed in mid-December is certainly a key monitorable.

Based on the RBI commentary it appears that there may not be much of a chance for further interest rate cuts till at least the next federal budget and an effective transmission mechanism for RBI's interest rate signals is put in place.

The markets have been range bound for quite some time now. Do you see an immediate upside for the markets? What are the likely triggers?

The markets had run up by as much as 50% since February 2014 when it looked likely that Mr. Modi would be the next Prime Minister of the country. It is entirely normal for markets to run ahead of reasonable expectations and when it became clear that the economic recovery would take some time, the market started retracting by around 10 to 15% from its peak.

The international situation too does not seem to be too conducive for foreign inflows, even though India is certainly one of the best bets in the emerging market basket. Though there are some signs of an impending economic recovery in India, for such a recovery to show up in corporate earnings it would take at least till the middle of 2016.

Though markets are forward looking, I do not see much of an upside to the market till at least a quarter before the actual recovery and the market may continue to trade in a range with probably a negative bias based on emerging new information.

How do you expect the markets to play out during the winter session of Parliament? Can the Nifty break 7,500 on the downside and what are the likely triggers?

The winter session would be closely watched by the market for any progress in pending legislation, especially the Goods and Services Tax (GST) and Bankruptcy bills. If the session fails to make much progress in legislation or if an effectively non- implementable GST Bill gets passed, the market would be quite disappointed and a break below 7,500 cannot be ruled out.

On stock preferences, the midcaps have consistently been outperforming the large caps. Will the rally sustain and what are your recommendations?

Specific stocks in the midcap basket might continue to do well based on their business fundamentals but on the whole, the sort of midcap out-performance we have seen since February 2014 I suspect, would be unsustainable unless the broader market itself starts showing signs of pronounced bullishness.

Is investing in metal companies, whose prices have crashed owing to the global economic slowdown, a good bet at current levels?

Given the state of the world and especially the problems in China, it does not look likely that the fortunes of the metal companies are changing for the better any time soon. There is certainly no hurry to get into metal stocks right now.

What are your recommendations for consumer discretionary stocks especially on the backdrop of 7th Pay Commission recommendations?

If the overall economy starts looking up on the back of the large public sector investments the Government is currently contemplating, it is likely that the consumer discretionary stocks will do well with the additional fillip provided by the possible implementation of the 7th Pay Commission. However, there may not be much of a case for a broad re-rating of the sector from the current rather stretched levels, but the stocks may respond to increasing strength in earnings growth.

If the US Fed indeed raises the interest rates in December, what will be the possible impact on our markets? Have the markets already factored in the rate hike?

The markets do expect a small hike in interest rates by the US Federal Reserve in December and have hence factored this into prices. Nevertheless, when the hike does happen there would be some negative impact on stock prices for possibly 24 to 48 hours, at best.