Adverse global cues have been pulling Indian equities towards consolidation. In fact, according to Sridhar Sivaram, ED at Morgan Stanley Investment Managers, the market is already in consolidation phase. He sees it trading in a tight range around 18,000 levels for the next three to six month as he doesn't see improvement in the macro front till then. "Lack of reforms is a worry for the market. And, on back of that we may end the year flat."
Moreover, he sees some slowdown in consumption and infrastructure sectors. He is also underweight on the consumer discretionary space and neutral on consumer staples. On retails, he says investors have moved to commodities, especially gold and silver. "Retail volumes on the equity side have dwindled as investors are currently on the sidelines," he explained.
Being overweight on pharma and IT space, Sivaram says, "We may see value emerging in the industrials. We also see money coming into debt funds."
Below is the verbatim transcript of the interview. Also watch the accompanying video.
Q: The market has been range bound for the last many weeks. How much longer do you see things continuing?
A: It’s a consolidation phase for the market. The market will not do too much until and unless the macro for the country improves. We don’t see that improving at least in the next three-six months. If inflation starts to tick down, then there is a possibility that RBI would pause.
The market would trade in a range for at least three-six months. Towards the end of this year, we could see some movement depending on how the macros behave by then. We would get more sense on the numbers towards the second half.
Q: What kind of numbers are you expecting to see? Is it going to be time correction or is there room for sharper price correction in this market?
A: I would be in that camp where around 18,000 plus or minus 5% market is range bound. Once we see some sort of positive signals from the macro side which also is a precursor of how the micro for respective companies would behave. Be it on the infra side or the consumption side, we have been seeing slowdown because of high inflation and high interest rates. So, the market would start to look ahead and build momentum from there.
Q: This year, only defensives have done well and the high beta sectors have languished. Tactically, how are you positioned now?
A: They are broadly defensive bear. Our over weights are slightly outward looking at this stage which is overweight on pharmaceuticals and IT which is broadly immune to domestic negative news. They are underweight on the consumer discretionary and are neutral on the staples segment. They are underweight on industrial that we are closely monitoring.
Some of these stocks have got beaten down substantially and there might be some value emerging out there. If the macro improves, we could see some of these sectors moving ahead. We have been trying to evaluate how much is already priced in and what is the worst case possibility.
Q: The retail participation is extremely low in the equity market. Are you getting a sense that in another asset classes like in commodities (gold and silver), the participation is picking up?
A: They are pretty much on the sideline. We see money coming into the debt fund. FMPs saw some interesting data that the volumes on the commodity side have gone up substantially in MCX exchanges.
It seems like the retail and some of the speculative elements have moved to the commodity side, especially on gold and silver. The retail volumes on the equity side have dwindled which is a reflection of how the volumes for the market are behaving.
Until the macro improves, it is very difficult to se the micro or the companies starting to do extremely well. To that extent, we are in that tight range right now. It’s the same even for the retail investors. They are currently on the sideline.
Q: The problems largely are global for the last few sessions. Do you see a bit leg down in global equities?
A: It’s very difficult to say what the worst case scenario is because we don’t know if there is some crisis in Europe and things could go bad. If status quo remains and there isn't too much of you know major negatives, then plus-minus 5% or at least minus 5% from here the markets could settle. There could be a time correction. Once that time correction is over and things start to improve, we could see a rally.
Last year till about May, the markets were down 10%. The markets improved last year in the second half and we ended the year by 15%. We saw a rally of almost 20% last year towards the second half. I’m not expecting that sort of a rally this year as it happened because of QE2 last year.
Currently, we are minus 10% for the year. It is highly possible that if things improve, we could close the year flat which could help looking at the next year in 2010 and see how things are playing out there.
Q: Market men have been living in the hope of some reform all through the year. Are you worried about the lack of reforms in India now?
A: It is a worry but, those are the difficulties of a coalition government which is reflecting in the market. Until and unless we see some drastic measures form the government in terms of reforms, the market will not cheer immediately which is a concern.
Most global investors looking at India closely would be worried that there has been policy inaction for almost six-eight months now. We get some indication that this could change in the near future.
The government is now quite seriously looking at building some consensus from the opposition parties to push through some of the reforms, on the FDI, insurance or some policy measure on the oil and energy side. If these things play out over the next six months, that would be a sentiment booster for the markets.
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