Rally driven by liquidity, rather than fundamentals: Gopal Bhattacharya

Interview with managing director and global markets head, Societe Generale, India

The markets gained ground in March after the government stuck to its fiscal deficit targets in the Budget and on hopes of a rate cut by the Reserve Bank of India in its monetary policy review on April 5. Gopal Bhattacharya, managing director and global markets head, Societe Generale, India, tells Puneet Wadhwa that given the nature of the rally, the markets remain vulnerable to negative news flow. Edited excerpts:

March has been a good month for equity markets. How long do you see this upbeat mood?

There seems to be some balance and sanity returning to global markets but we might be swinging more to the other side. There could be more optimism than what is warranted by fundamentals. The S&P 500 is trading close to the peak of 2015 but once the effect of the ultra-low level of interest rates are factored in, corporate performance seems average. Though global pessimism seen at the turn of the year was overdone, there is not much in terms of corporate performance to celebrate as yet.

A lot of the current up-move has been driven by liquidity and some bargain buying, rather than a firm conviction drawn on underlying fundamentals. In these conditions, the markets will remain vulnerable to negative news flow. In addition, there will be more discrimination in investment actions and more segregation among markets. So, more divergence in performance may be expected between geographies.

How is India placed among other emerging markets (EMs)?

Relatively well - not from the perspective of corporate performance (at least not yet) or valuation (not expensive but not a bargain either) - but from the perspective of several external factors such as a supportive interest rate cycle and the upside potential from cumulative effects of various reforms undertaken by the government, along with various other agencies. Whether foreign investors will make the distinction between India and other EMs remains to be seen. However, this can happen as some of the reforms take concrete shape and there is clearer articulation of the reform strategies being adopted.

What are the key global and domestic factors that can spoil the party for Indian equity markets?

The main ones will centre around the US, China, commodity prices and the potential for the UK's exit from the European Union. Overall, I think the chances of negative surprises might be decreasing but still has enough potential to trigger sell-offs. I think we have potential for 10-15 per cent gain from the current levels on the Nifty 50 index.

Does India stand less correlated to the challenges the other EMs face and, hence, provides a useful diversification from a global investor's perspective?

Yes, India should be less correlated but then again, during times of panic, all these ideas go out of the window. But, from the long-term perspective, India could be moving onto a more positive trajectory. Again, I think it would be unrealistic to believe this will happen very soon; these things take time.

What are your expectations from the March quarter results?

We might see marginally better numbers but a firm recovery seems still some distance away.

Is it a good time to invest?

Given the long-term positive view I hold for the Indian market, it would be difficult for me to not suggest long positions. But, investors will need to be patient and to be careful both in terms of capital allocation decisions and investment methodology.

What is your view on public sector banks? Are they a contrarian bet from a year's perspective?

My personal view is that there is a lot of policy action around this sector and around these stocks, and one needs to be very careful. Overall, I feel that perhaps in two years from now, the distance between the leaders and laggards will increase.

What are your expectations from RBI's monetary policy review?

Overall, the conditions appear supportive for a rate cut in the review on April 5. Food inflation has been under control and the government has taken some risks and stuck to a fiscal consolidation path - perhaps even more than what might have been required. Small savings rates have already been reduced. We expect a 25 basis point cut in the coming meeting, rather than a 50 bps move, given the almost 20 per cent rally in the Indian oil basket and consequent inflation risks later. For the remaining part of the financial year, we expect another 25-50 bps rate cut.