In a chat with ET Now, Rakesh Arora, Market Expert, says as soon as the global situation improves and the risk on trade is back, money flow into India would happen again.



Edited excerpts:



We are now the fifth largest economy but the economy is facing its own struggles as well. Do you think the demonetisation process could hit growth and may derail this growth prospect and climbing the charts for us?



Clearly demonetisation is having an impact in the short run but most investors are likely to overlook that to me India is going through third phase of reforms in the first phase started in 1992 when India was partially deregulated and delicensed and then we had a big round of reforms in 2002 around the Asian financial crisis where lot of sectors were opened for a private investment. Now we are moving into the third phase of reforms and after each phase of reforms Indian economy has jumped up between 100 and 200 bps on a sustainable basis. So, I would expect that India would see consistent 8% to 9% GDP growth once the dust settles down. It is a great opportunity which is offered by the market when there is near term nervousness but medium and long term outlooks look really optimistic.



But the fact is that FIIs have been pulling out while there is that DII momentum because of the SIP money coming in or LIC buying etc. We have seen a December selling by the FIIs up until now to the tune of about almost Rs 1600 odd crore. What would it take for the foreign money to come back ? Would it have to be earnings recovery which they need to witness on ground or would they prefer to see how this demonetisation process pans out, before they make a comeback?



It is an emerging market phenomena and not just limited to India and I do not think it is anything to do with demonetisation alone. So clearly this trend will reverse when the global factors align especially for the emerging markets. Now it has been two year in a row that we are seeing a negative outflows from FIIs and when you look at their positioning, India still remains a little bit of an overweight in their portfolio. So I do not think India is off radar for them and as soon as the global situation improves and the risk on trade is back, money flow into India would happen again. It is just a question of time rather than whether it will happen or not. Having discussed recently in your show that India is the fifth largest economy, I do not think you can ignore it for long.



Which is true. The question will always be about how soon can these reverse now? While it is difficult to predict what are your client conversations telling you because you will be talking to a lot of your foreign clients, are they hesitant, are they reluctant or are they just unclear currently?



Two-three phenomenas which are happening right now. One is that we are in December when most of the funds are closing their books. So they are hardly taking any new positions. Number two, the Fed rate hike and the trajectory projected was slightly more hawkish than what people were anticipating earlier. These two phenomena have derailed the little bit of bright spot that we started to see early in December. There were a few days where FII inflows have started to pick up but I think January onwards. fresh allocation will come in and we also have budget coming up on 1st Feb. These are the two catalyst where I think FII inflows can actually turnaround and become positive.





Let us talk about a couple of large spaces and they are having divergent moves right now. Banks are facing the brunt of selling arguably private banks are not far behind and IT, the second heaviest sector is making a bit of a comeback in December. The case seems to be a lot more constructive. What are you doing here with both of these as they constitute close to 35%-40% of the index. What are your thoughts?



It is a good opportunity to look at private sector banks which after becoming very expensive, have now corrected 10-15%. I would tend to think that it is the right time to start accumulating some of those good quality private sector banks and similarly it is too difficult to give a call on PSU banks right now because demonetisation impact might prolong. But private sector banks clearly are pretty safe and they are going very aggressively on this digitisation and capturing market share. I think that is a place where one should be and avoid PSUs and NBFCs for some more time.



What according to you could be the composition of the market in the next three months because up until now. one is seeing that defensive tilt actually play out. IT has been a standalone winner, metals have been a good performer year to date for that matter and then sporadically pharma has shone if there was no bad news from the USFDA. Some of those stocks have been holding out. Where do you think the leadership is going to remain in the next quarter to come?



For next one quarter, I do not think things are going to change materially. It is still going to be the global cyclicals which are going to lead from the forefront but my recommendation would be to start looking at booking profits in some of those names by Feb-March. So global commodity stocks which are doing extremely well, should peak out by Feb-March because we are expecting some bit of disruption on the demand side from middle of calendar year 2017 as China goes through its elections. During that time, things will slacken down for the metal stocks and they have also had a good rally.



In another two-three months, they might continue to outperform but it would be time to book profits as that is the other big trend which we are seeing. While interest rates are likely to go up globally, in India we are expecting a softening. So utilities could be one place which looked really reasonably priced, the utility companies are trading at 10 PE or one year forward. So this is one space which can really do very well in the next three months. Apart from this, people will wait and watch and see what is the impact on demonetisation but consumption stocks after a strong correction are also starting to look good and some accumulation can start to happen at current levels.



Cement is a space that is close to your heart. Is the correction in the sector severe enough and is it pricing in all the negative impact or do you think there could be more in store?



The valuations had gone to an absurd level for some of those large cap companies and this correction was overdue. We are expecting 15% to 20% lower demand in December and probably even 1st quarter would be little bit of a washout. So, for all other consumption companies, cement has a good medium to long term outlook and this correction can be used to accumulate. I am not saying go all out and buy right now but probably after this 20-25% fall that we have seen in the frontliners. one can start to accumulate and maybe there is another 10% to go.



Metal stocks have been rank outperformers in the calendar year 2016. Now, we hear a lot of arguments. Do you believe some of this fizzle could die down because everybody is correlating Trump’s comments on infra spend to a continued uptick in metal prices over calendar year 2017 and therefore earnings looks to be stable. Is that a good enough assumption?



India is 5% of global demand. So India growing better than others is not likely to move the needle at all for commodity companies and commodities demand per se. China is the key and as I was mentioning that we are expecting disruption in China in terms of demand. The government there has been trying to prop up demand through investments pre their very important elections coming up in middle of calendar year. So I think we have support in the next two to three months but things are tightening up, already property prices have been starting to stabilise and tend to go down and government might cut down on their investment as they come nearer to the elections. All that is going to weigh on commodity prices. Remember there is enough capacity available and if the demand starts to slacken the whole inventory cycle starts to go in a reverse direction so I would be wary of holding commodity stocks beyond Feb-March because I think there could be some period of disruption.