Cash Out The Rallies

While real interest rates are negative, it is not going to be easy to make absolute returns in the equity market. Retail investors should think and act like traders/hedge fund-managers and exhibit patience. Wait for a crisis, buy quality stocks and sell at the next rally, says Mehraboon Irani, Principal and Head-PCG, Nirmal Bang Securities

Lets' start by setting targets for the Sensex until next Diwali. 

If we have a stable government in place after the Parliamentary elections in April/May 2014, we should be at a new high on the Sensex. Even a 25000 points on the index can be a possibility in that case. 

What factors do you see acting out a major role in the next Samvat? 

India – specific, the outcome of the Union elections next year is going to be a major trigger. If we have a verdict favoured by market men, it is distinctly possible that the stock markets will march ahead, ignoring most of the macroeconomic concerns. The assembly elections in November and December this year are also crucial and will be a trailer for the upcoming general elections. On the macro front, while the government has adopted some strict measures to work on the Current Account Deficit (CAD) and the RBI has done well (so far), concerns like fiscal deficit and inflation remain. We will need to watch these macro factors before hoping that the investment cycle will kick start (which is the most important parameter to signal an economic revival). 

Besides, global factors will continue to play an important role. What happens to the US debt limit, stimulus tapering, Euro-zone concerns (is the worst over), etc. will also play a role in shaping the markets next year. 

Talking of macros, how do you see them working out next year? 

We have had some major problems on the macro front. Besides the twin deficits (fiscal and CAD), we have had high inflation working negatively on the overall scene. The decline of the Currency is an effect and not the cause. The only way to address these macro-problems is the monetary policy, which has been rather loose for the last couple of years, and where, rightly so, we saw some tightening last month, in the form of a repo hike. As we go ahead, we could see more repo hikes. In short, measures to address the twin deficits and other macro concerns, could see growth becoming (or remaining) a concern. 

While the recently announced reform measures will enable money to flow in and the investment cycle will kick start, remember it is not going to happen in a hurry. Besides all the above, the problem of worsening of NPAs should continue for some more time to come.

Can you point out the sectors that are likely to do well and on which you would place your bets on in the next year? 

I continue to prefer global stories to domestic stories. I would remain overweight on IT and select pharma counters. Also, my advice to investors is to continue to prefer defensives to cyclical and rate sensitive sectors. 

In IT, we like Infosys among the big names and Polaris, FSL, Oracle, Persistent Systems, NIIT Technologies among mid-caps. In the auto pack, my preference is for global names like Tata Motors and Motherson Sumi. In pharma, while I have always favoured Sun Pharma and Lupin, they look grossly expensive at present valuations. My preference in the pharma sector is for Biocon and Sun Pharma Advanced Research (SPARC). Among niche (concept) names, I like Delta Corp and Pressman Advertising. 

What are your suggestions for retail investors keeping in mind the current market scenario? 

With real interest rates so very negative, it is not going to be easy to make absolute returns in the equity market. My advice for retail investors is to think and act like traders/hedge fund- managers and exhibit patience. Wait for a crisis, buy quality stocks and sell at the next rally and make your 10 to 30 per cent returns in quick time. As for the long-term investors, the time will come.