Nilesh Shah, MD and CEO, Envision Capital believes the earnings support has not yet come in and so going ahead it will be important to see whether the liquidity, which has been driving the market now, dries up first or the earnings take off and create another wave of an upmove in this market place.
Speaking to CNBC-TV18, Shah recommends caution as the market is likely to remain range bound until Budget. He expects a time wise correction over the next three-six months.
Going ahead, Shah does not see the Reserve Bank of India cutting rates in the next three months but is hopeful of a rate cut in the Q1 of FY16.
Meanwhile, he suggests avoiding investment in gold but likes equities and fixed income at this point in time.
"Rallies in gold should be used to completely exit and that allocation should be moved into financial assets which is equities and fixed income," he concludes.
Below is verbatim transcript of the interview:
Q: It has been a fabulous run for our market but at 28,000 on the Sensex what is the recommendation to investors?
A: The market has exhibited a fair bit of momentum and has scaled to new highs. The source of the up move has been the liquidity flows that have been coming into the market both from international investors as well as domestic investors and that is clearly been fuelling this rally.
But on the other hand the earnings support has not yet come in and so the market is very interestingly poised and one has to see going forward what happens first, whether the liquidity dries up first or the earnings take off and create another wave of an upmove in this market place.
Over the next one to two quarters it is going to be really a tug of war between liquidity and earnings growth and at this stage given that it is still going to take a few more quarters for the earnings growth to come in and for margins to improve one has to be a bit cautious at this stage.
You could still be positive about the outlook from a one to two year perspective but clearly from a one to two quarter perspective one has to be careful and cautious given where the markets are.
Q: Do you see the market giving up some of its recent gains or in a market which is fed by such strong liquidity it may just do some kind of time wise consolidation before the next trigger comes up?
A: Pretty much the second case which is that you could see the market do a time wise consolidation. If you really look at the last several years as you head into the calendar year end, there is again on one school of thought which believes that there is going to be profit booking around the corner but as we step into the new calendar year the allocations for the new calendar year as well as expectations out of the Budget provides the tailwind for this market.
You could clearly see this market move up maybe another 3-5 percent and then pull back about 2-3 percent, you would see a range bound market between now and the Budget where the Nifty could still try to kind of go higher but at different points of time could get scaled back because of the threat or vulnerability of a risk off trade in the global markets.
Therefore, it will be a very interesting period where on one hand you could clearly see hopes of new allocation coming in and hopes of reforms coming in before the Budget or at the time of the Budget. On the other hand the global concerns could come in. They could get even magnified and play themselves out well.
On the whole, over the next three to six months, you would see a more time wise consolidation playing out rather than very deep cuts in the market place.
Q: Do you see interest rate cuts in India becoming or emerging as a trigger or some kind of tailwind for the market any time in the next three months because for the last many quarters we have only spoken about it but it has never been a real trigger. Do you see that changing in the next three months?
A: It is very unlikely that there are going to be rate cuts in the next three months. Given where the way inflation is headed there is a case for a rate cut, but I am not too sure about the timing. A more possible situation is going to be over the next six months or so or maybe the start of the next financial year. So, rather than between now and the Budget, it could be more somewhere around the Q1 of the next financial year and that is not so much data driven but if you really look at what the central bank has been saying is that they want to basically ensure that the inflation trajectory is decisively down.
I don't think they are looking out for some temporary softening in the inflation but more of where there is a structural decline in the inflation rates and where the January 2016 target of 6 percent is very visible and very strongly visible.
I would put a high probability of rate cuts in the next three months but put a higher probability of rate cut maybe over the next two quarters or so. When that happens, it will be a huge positive because when the rate cut cycle starts it will not be a rate cut of 25-50 basis points, it is going to be a very aggressive rate cuts cycle.
Therefore, it might get delayed a bit but when it happens it is going to be far more decisive and a lot higher than what the street expects and that is going to be a very important trigger and a catalyst for not just the market but even for corporate earnings and that is going to be an important driver for kick starting the investment cycle.
If you really take a slightly longer term horizon of maybe next 12 months, two things look reasonably certain. One is the start of a rate cut cycle and two is the start of better growth rates in terms of gross domestic product (GDP).
Q: What should the asset allocation strategy be for the next 8-12 months? We have seen a big fall in gold already, is it that kind of bull run where you move your money out of gold and into assets like equities?
A: Absolutely, leaving aside what could happen over the next few weeks or next few months because gold has declined and equities have rallied. So, you could see actual pull backs in both the asset classes but clearly over the next 12-18 months gold is something which has to be completely avoided.
I don't think any incremental allocation should be made to gold. If at all there is any bit of rally in gold prices that should be used as an opportunity to completely exit out of gold and of any other hard assets and it is time to completely move into financial assets.
The discussion should not be hard assets and financial assets but where in financial assets should an investor be in and the options are just two. On one hand you have equities and on the other hand you have fixed income. Fixed income looks interesting because if interest rates are headed down then long-term bond portfolio should do well over a 12-18 months cycle.
In equities there seems to be a situation of secular upmove where you could be in for some double digit returns over a two to three year time frame. Therefore, rallies in gold should be used to completely exit and that allocation should be moved into financial assets which is equities and fixed income.
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