In an interview to CNBC-TV18’s Sonia Shenoy and Anuj Singhal, Punita Kumar Sinha of Pacific Paradigm Advisors gave her reading of the current market conditions and road ahead for investors.
Sonia: It has been an interesting week. The market has consolidated. We have seen some selling pressure come into banks etc, but would you still be extremely gung-ho on the market? Would you use this as a buying opportunity?
A: You have to be very careful about your timing and your timeframe. Long-term, India and a lot of emerging markets and economies are probably in the right cycle where a lot of the negatives are sort of getting behind us and things will start to turn. In India, if you look at liquidity, it is currently still tight. Growth is still weak and inflation is still high. Perhaps in the short-term there could be an El-Nino affect as well.
On the short-term, there are still a few risk factors. But longer-term, the cycle is poised to turn. From a long-term investor perspective, India looks like a good place to be in. Particularly from a foreign investor perspective, India looks still relatively attractive compared to many other markets.
Anuj: The other interesting bit this week was that we saw some comeback in IT, pharma and FMCG. So some defensive fervor was back in the market and some cyclicals corrected. Is that just a bit of a near-term correction and would cyclicals again start to outperform at some point or do you think some money would now go to defensives?
A: It is very hard to say what happens in the short-term. However, if you look at what is coming ahead of us over the next several months, we do have a few uncertainties and risk factors ahead of us. A lot of data is coming out, not just from India, but globally this week and that may be mixed.
We are entering the summer months, which typically tend to be quiet from global investors perspective. We are seeing liquidity tight. We are seeing inflation still high. It is very hard to see how Reserve Bank of India would lower or do much with rates. I don’t think they will lower rates. So, nothing has changed short-term. However, there is a lot of expectation that the new government will actually do a lot of reforms and improve things.
The only sort of positive event or catalyst that is looming ahead of us is the Budget. That could be positive or negative depending on how they approach it. So, far the interviews that the finance minister has given, talks about market friendly measures that they would look at. So, that might provide some kind of a catalyst but that is still about six weeks away.
The real issue of growth and fiscal deficit that still needs to be addressed and it is early days to know how growth will be addressed. The cycle is anyway turning and a lot of automatic clearances are happening and a lot of projects that were stuck are beginning to get cleared. The question really is: what else will be done?
My only fear is that I think given that the emphasis will be on growth, may be fiscal consolidation may not happen as fast as people would expect. So, net-net there are not a lot of short-term catalysts but longer-term things are still looking good for India.
Sonia: In the week gone by if you analyse the capital goods earnings that came out most of them were either good or better than what the street was expecting, be it L&T, BHEL, Crompton or Voltas. Do you think from an earnings perspective the sector is turning and is this a good time to still be putting money into capital goods?
A: The capital goods sector as you actually asked me— should you still be in cyclicals or should you be in defensives? I still think that the cyclicals, and these capital goods are part of the cyclicals, on a longer-term perspective is a good place to be in.
However, they have run up so much that there is probably some healthy profit-taking happening and perhaps from a longer-term perspective one could use this as an opportunity to still may be add positions.
However, you have to time your entry carefully given how much they have run up.
Coming to your question on defensives, I think you have a somewhat of a balanced portfolio tilted towards cyclicals but you can’t really be out of quality names given some of the shorter-term risks.
Anuj: What about the global situation because over the last two months we haven’t discussed that all. Every discussion was around election now that’s out of the way how are things looking globally and in terms of global investors view of India has that changed over last two or three months?
A: Yes, the global investor’s view of India has changed over the last two to three months. The strong majority that the BJP has gained in the election has made people feel that there is a stable government and therefore people are beginning to look at India. India has already been one of the best performing markets this year, so that is a signal and lot of money has come from FIIs.
If you look at other economies, US has already done well; valuations are not particularly attractive but it is such a strong economy overall that there is plenty of people who will continue to invest in that market. Europe is still weak and there will be more stimulus coming.
Emerging markets as a whole have not been in favour. China has disappointed in particular. However, we are beginning to see people shifting into value trades versus growth stock and that is actually helping emerging markets. Within emerging markets given that no other country has had such a spate of good news like India. India is in the sweet spot and lots of investors are looking at it. A lot of investors are already over weighted but a lot of new investors might come into India.
Sonia: I don’t know if you track some these sectors closely but in the week gone by we saw a lot of the money go into some of these railway companies, defence companies and it seem like the government is actually looking to sort of improve the problems there, find some sort of solutions there, would you put money in these sectors?
A: Railway is an interesting sector because in previous bull markets also, railway stocks have come in and out of favour and somehow they have never really lived up to the expectation. The railway spending has never really filtered to the companies themselves in a significant manner. They are very smallcap for the most part and illiquid. If you look at the projects which are stuck, first of all most of the projects, which are stuck, I read some where 70 percent of them are private sector and then amongst the public sector lot of it is railways.
So, lot of the projects that might get cleared could actually benefit the railway segment given that’s where a lot of projects are stuck. If the focus is on execution as we expect this government to do then the railway sector could benefit. Which companies within that one has to look at carefully but I do think that perhaps some allocation to that sector may be a good idea but with a cautionary view that in the past economic cycle and in the past bull markets they have come into favour and then got out of favour.
Anuj: From here on what kind of market rally can we expect not over two or three months period but over one or two year period. What kind of returns can investors expect now?
A: I still think midcaps and smallcaps will do better if growth picks because typically that’s the cycle that these do well in and growth is really what the government will focus on and not so much of fiscal consolidation from whatever we have heard from them so far. Midcaps could still give you good returns. I can’t give you a number because there are so many different stocks and investors can make good money in this next cycle but you have to be careful on timing.
Overall, market is such a broad sort of index and it has so many sectors that this is the time to stock-specific really not just focusing on index per se. The index will probably just perform inline with the index earnings. You really have to pick stocks in this environment.