Despite weak economic growth indicators, markets have seen a gradual rise since July, owing to a revival in foreign flows. Dilip Bhat, joint managing director, Prabhudas Lilladher, in an interview with Puneet Wadhwa, says in such a scenario, markets remain vulnerable to corrections. Edited excerpts:
Markets seem to be showing signs of fatigue, after the liquidity-driven rally since July. Would the second half of this year be painful for investors?
Of late, foreign institutional investors’ interest has been revived, and this led to a surge in the indices. Hopes of a third round of quantitative easing by the US Federal Reserve, a monetary boost by the European Central Bank and possible reforms seem to be the primary factors complimenting the current rally. If some of these hopes materialise, the Nifty may touch 5,500.
However, macro-economic headwinds remain pretty formidable. Possibly, this would ensure at best, the Nifty would trade at 5,000–5,400 levels for the remainder of the year. Some bear market rallies notwithstanding, the Nifty could head south of 5,000 in the second half of this year.
There have been a few announcements after Finance Minister P Chidambaram took charge. Do you think this is mere pep-talk to boost sentiment? Is there little hope for reforms, given the political compulsions?
It is very clear if we have to arrest any further downslide in the economy, the new finance minister has to take some basic steps. Nobody is more capable than him in not just preventing further deterioration, but possibly, stem the rot and the pave the way for a revival. But on a reality-check basis, very few reforms are possible, given the government is hemmed in by allies and opposition parties. These, if at all, could lead to bear market rallies.
There have been varying estimates of GDP (gross domestic product) growth this financial year, with Moody’s projecting sub-six per cent growth. What could be a more realistic figure, and have the markets factored in this?
The GDP growth, even if it is about 6.5 per cent, would result in very weak earnings growth for companies. While several leading fund managers have been calling the bottom to this market, rationalising that, the markets refuse to succumb to continued bad news. Such anaemic growth parameters, in my opinion, would cap any reasonable upside. In such a scenario, the market remains very vulnerable to serious corrections.
What would you advise someone who wants fresh exposure in equities?
One has to be cautious while choosing stocks. If one wants to invest gradually, I suggest the investment be spread over 12-15 months, if the investment is in the equity segment. Depending on the risk appetite, an investor should invest 20 per cent in debt, and the rest in equities through a systematic investment plan. The markets would continue to be challenging and making money would not be easy.
Do you think there is value in the mid-cap space? If so, what sectors and stocks should be preferred while investing, given the valuations and the outlook?
Mid-caps have always been tricky — illiquid; the first to capitulate when markets fall and the last to move up. So, it has always been difficult to make money. Though it has value, most mid-caps have proved to be classical value traps. We prefer Amar Raja Batteries, Apollo Tyres, Torrent Pharma, Mahindra Finance, Bajaj Finserve, Shree Cement and Voltas. In the frontline space, we prefer Coal India, Ranbaxy, Dr Reddy, Infosys and ICICI Bank.
What are your key takeaways from India Inc’s results for the quarter ended June?
The quarter ended June was a mixed bag. Growth in revenue was muted, margins were under pressure, interest and foreign exchange losses hit companies below the belt and working capital intensity of businesses eroded free cash flow generation. Since GDP growth is still struggling due to poor monsoon and the slowdown, the next few quarters would be tough.
What about the manufacturing sector, given the outlook for key commodities?
In a few cases, commodity prices have softened, with some at two-year lows. This would give some respite to the manufacturing sector. However, as the overall scenario continues to be daunting, the relief may not be enough to change the overall scheme of things.
What do you think of the banking sector, considering concerns on rising non-performing assets (NPAs), the outlook for rate cuts and the valuations of private and public sector bank stocks?
Clearly, the banking and financial space has problems at hand. The inclement economic conditions continue to hit asset quality. Public sector banks have taken this on the chin. Besides ICICI Bank and Axis Bank in the private space, among public sector banks, State Bank of India merits a look.
Do you see the dollar index rising in the near term? What about crude oil prices?
After a severe downslide, there are possibilities of a rupee rally, which may take it to 52-53 levels. But the rupee’s underlying weakness remains, as the economy continues to be weighed down by sub-seven per cent GDP growth, a high fiscal deficit and uncomfortably high inflation.
Crude oil prices are showing bearish signs, as the world economy, including China, is slowing. With overall de-leveraging, oil, too, should succumb, unless a massive liquidity dose in the US and Europe leads to a rise in commodity prices.
