The Sensex has rallied nearly 15 per cent in the first few weeks of this year. Most analysts attribute the rally to nearly $2 billion foreign in-flows into equities because there has been no change in economic fundamentals. That assumption was strengthened by the disappointing industrial output data for the month of December.
However, Punita Kumar Sinha, Managing Partner of Pacific Paradigm Advisors says liquidity and fundamentals should not be seen separately. A slowdown in growth should not worry investors because that will be accompanied by a softening of rates, which would benefit equities.
Edited excerpts.
Outlook on markets:
The risk-reward is more in favour of equities. This is because,
1) Potential softening of interest rate cycle: Growth is weakening across the world. Liquidity will remain plentiful and rates would come down
2) More and more countries are moving in direction of fiscal consolidation. Greece has managed to do that despite riots and mass protests. That might set the precedent for other countries to adopt austerity measures needed.
How long will the rally last?
In today's world, it is very hard to think very long term because lots of factors come into play and it's not linear. But over the next many months, risk reward will favour equities if some other big negative doesn't come in to play.
What is driving the markets - fundamentals or liquidity?
If you believe liquidity will be plentiful, that will result in economy picking up. So, I don't think there are two different camps in that sense. There is a risk-on trade. People had sold off equities last year, they were nervous. There was a lot of selling in the US for tax purposes. But in January people thought they should not miss out on the rally. A part of the flows are just a reversal of what flowed out last year.
What is the big worry?
The rally may drive commodity prices higher. Rising commodity prices will be a challenge for companies and their profitability. At some point of time, earnings will also be affected negatively, when you will need to see if this is sustainable or not.
Where is the liquidity going?
There valuations mismatch between defensives and cyclical stocks was dramatic. The risk on trade means nobody would add defensives. People still not sure if this is a tactical rally or a long term rally. A lot of allocation is coming from ETF investors and more short term investors.
What would it take for the up move to continue?
A series of announcements like those in Greece have to be replicated in other European countries. In India, we need to see falling interest rates. People are not concerned with low PMI, IIP etc. because with low growth comes a cut in interest rates. For India, two other events could create risks:
1) UP elections and 2) the budget
If UP elections goes to create more political stability, it will be great. Budget is less of a risk and we might see a move towards fiscal consolidation.
Is it right to assume that the RBI will cut and cut aggressively?
Inflation has not yet reached levels that require interest rate to be cut aggressively. Though, growth is lower than targetted but inflation is the more important factor to watch. I don't think the RBI will cut aggressively. It is the change in outlook towards interest rates that is possible.
Quality stocks have underperformed?
That happens when you have risk on trade. Low quality stocks typically outperform in any rally after severe correction. If you believe risk-rewards are in favour of liquidity, sectors like rate sensitives, power and infra will outperform.
The Sensex has rallied nearly 15 per cent in the first few weeks of this year. Most analysts attribute the rally to nearly $2 billion foreign in-flows into equities because there has been no change in economic fundamentals. That assumption was strengthened by the disappointing industrial output data for the month of December.
However, Punita Kumar Sinha, Managing Partner of Pacific Paradigm Advisors says liquidity and fundamentals should not be seen separately. A slowdown in growth should not worry investors because that will be accompanied by a softening of rates, which would benefit equities.
Edited excerpts.
Outlook on markets:
The risk-reward is more in favour of equities. This is because,
1) Potential softening of interest rate cycle: Growth is weakening across the world. Liquidity will remain plentiful and rates would come down
2) More and more countries are moving in direction of fiscal consolidation. Greece has managed to do that despite riots and mass protests. That might set the precedent for other countries to adopt austerity measures needed.
How long will the rally last?
In today's world, it is very hard to think very long term because lots of factors come into play and it's not linear. But over the next many months, risk reward will favour equities if some other big negative doesn't come in to play.
What is driving the markets - fundamentals or liquidity?
If you believe liquidity will be plentiful, that will result in economy picking up. So, I don't think there are two different camps in that sense. There is a risk-on trade. People had sold off equities last year, they were nervous. There was a lot of selling in the US for tax purposes. But in January people thought they should not miss out on the rally. A part of the flows are just a reversal of what flowed out last year.
What is the big worry?
The rally may drive commodity prices higher. Rising commodity prices will be a challenge for companies and their profitability. At some point of time, earnings will also be affected negatively, when you will need to see if this is sustainable or not.
Where is the liquidity going?
There valuations mismatch between defensives and cyclical stocks was dramatic. The risk on trade means nobody would add defensives. People still not sure if this is a tactical rally or a long term rally. A lot of allocation is coming from ETF investors and more short term investors.
What would it take for the up move to continue?
A series of announcements like those in Greece have to be replicated in other European countries. In India, we need to see falling interest rates. People are not concerned with low PMI, IIP etc. because with low growth comes a cut in interest rates. For India, two other events could create risks:
1) UP elections and 2) the budget
If UP elections goes to create more political stability, it will be great. Budget is less of a risk and we might see a move towards fiscal consolidation.
Is it right to assume that the RBI will cut and cut aggressively?
Inflation has not yet reached levels that require interest rate to be cut aggressively. Though, growth is lower than targetted but inflation is the more important factor to watch. I don't think the RBI will cut aggressively. It is the change in outlook towards interest rates that is possible.
Quality stocks have underperformed?
That happens when you have risk on trade. Low quality stocks typically outperform in any rally after severe correction. If you believe risk-rewards are in favour of liquidity, sectors like rate sensitives, power and infra will outperform.
The Sensex has rallied nearly 15 per cent in the first few weeks of this year. Most analysts attribute the rally to nearly $2 billion foreign in-flows into equities because there has been no change in economic fundamentals. That assumption was strengthened by the disappointing industrial output data for the month of December.
However, Punita Kumar Sinha, Managing Partner of Pacific Paradigm Advisors says liquidity and fundamentals should not be seen separately. A slowdown in growth should not worry investors because that will be accompanied by a softening of rates, which would benefit equities.
Edited excerpts.
Outlook on markets:
The risk-reward is more in favour of equities. This is because,
1) Potential softening of interest rate cycle: Growth is weakening across the world. Liquidity will remain plentiful and rates would come down
2) More and more countries are moving in direction of fiscal consolidation. Greece has managed to do that despite riots and mass protests. That might set the precedent for other countries to adopt austerity measures needed.
How long will the rally last?
In today's world, it is very hard to think very long term because lots of factors come into play and it's not linear. But over the next many months, risk reward will favour equities if some other big negative doesn't come in to play.
What is driving the markets - fundamentals or liquidity?
If you believe liquidity will be plentiful, that will result in economy picking up. So, I don't think there are two different camps in that sense. There is a risk-on trade. People had sold off equities last year, they were nervous. There was a lot of selling in the US for tax purposes. But in January people thought they should not miss out on the rally. A part of the flows are just a reversal of what flowed out last year.
What is the big worry?
The rally may drive commodity prices higher. Rising commodity prices will be a challenge for companies and their profitability. At some point of time, earnings will also be affected negatively, when you will need to see if this is sustainable or not.
Where is the liquidity going?
There valuations mismatch between defensives and cyclical stocks was dramatic. The risk on trade means nobody would add defensives. People still not sure if this is a tactical rally or a long term rally. A lot of allocation is coming from ETF investors and more short term investors.
What would it take for the up move to continue?
A series of announcements like those in Greece have to be replicated in other European countries. In India, we need to see falling interest rates. People are not concerned with low PMI, IIP etc. because with low growth comes a cut in interest rates. For India, two other events could create risks:
1) UP elections and 2) the budget
If UP elections goes to create more political stability, it will be great. Budget is less of a risk and we might see a move towards fiscal consolidation.
Is it right to assume that the RBI will cut and cut aggressively?
Inflation has not yet reached levels that require interest rate to be cut aggressively. Though, growth is lower than targetted but inflation is the more important factor to watch. I don't think the RBI will cut aggressively. It is the change in outlook towards interest rates that is possible.
Quality stocks have underperformed?
That happens when you have risk on trade. Low quality stocks typically outperform in any rally after severe correction. If you believe risk-rewards are in favour of liquidity, sectors like rate sensitives, power and infra will outperform.
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