Expect midcaps to rally more from current levels: Tarun Kataria

India’s benchmark indices have witnessed a strong rally since the beginning of the year on consistent FII flows. Tarun Kataria, CEO, Religare Capital Markets told NDTV Profit that the market will continue to rally further if these flows continue to come in.

“The current market rally is likely to be sustainable. However, the market may see some pressure if the RBI delays the rate cut,” he added.

Kataria expects midcap stocks to rally more from the current levels.

Below is the complete interview. Also watch the accompanying video.

 The year so far comes as a breath of fresh air. People are finding it difficult to operate...
 

Well, nothing like it to start to a new calendar year that gets you going. The news on most of the large geographies around the world was more constructive. The Q4 numbers coming out of the US are looking a little bit more sustainable. Accelerated job growth in the US is a great outcome. It has continued to drive consumer spending in the US, which constitutes of the two-third of the US GDP. 

So, everything looks constructive, even the housing market has well passed its bottom. So, the US market is looking interesting. If we look at some of the numbers coming out of Europe, surprisingly, some of the PMI numbers in France and Germany seemed to have bottomed given what has happened to the currency. India has also started looking different from a perspective of FII inflows.

How strong is the US recovery? How much attention should be paid to these weekly job reports?
 

Historically, job creation tends to lag where the equity markets go. The equity markets are 12-18 months forward indicators of earnings certainly. In the US, the job losses have stopped and hence, you will see the consumer spending rising. Once it starts to rise, then in that case, the reinvestment process should start. Also, the job creation will start to accelerate and this will happen in the coming months.

Even European markets have moved up right?
 

Yes. All markets around the world have headed back up north this year and a lot of this is driven by global liquidity. If you look at what six large Central Banks have done over last three years, they brought back $10 trillion of bonds in their respective geographies. Now this money is sloshing around the global financial system. 

Emerging markets are looking interesting; some of big US markets look interesting. So, there is bit of a liquidity push upwards to the equity markets. 

But I suspect you have both happening here, liquidity as well as macro numbers are looking a lot different than they looked six months ago. So, I would like to believe that this is sustainable. There will be hiccups along the way but we are looking a lot different than we how we looked some time ago.
 

Does the market look like that it would run all the way?
 

I think there are three parts to this. FII flows into all emerging economies, including India, have driven the market higher or lower. 

We have started to see a bunch of flows coming to India and if that continues, then this market continues to run. The other thing that is driving the market is that the interest rates that will start to see a cut. There will be an aggressive cut perhaps that takes the market higher. What happens in the elections will also allow the government to initiate the process of reform. So there are three things which are driving the market higher. 

If there is a small rate cut then that's great. The risk is when they don't cut rates or delay it a bit, that may put a pressure on the markets.
 

So we need to see strong action from the RBI?
 

I’m talking about the 200 basis point (2 per cent) rate cut during the next fiscal. I think that would be very aggressive. In fact, a cut of 100-150 basis points (1-1.5 per cent) in the next 12 months is possible. However, there is no sustainable decline in inflation, for example how you have seen in China. During the last six months, consumption has remained unabated, it has been very strong. Industrial production has come down dramatically over the last six months and that's inflationary. 

For the RBI to cut in March and realise in July that there is a mismatch in the inflation and the cut, then it can’t look very good. So, RBI will be very cautious and hence, I suggest that the market needs to think about it a little bit.

 So how do you play this?
 

Expect midcaps to rally more from current levels. My top midcap picks include YES Bank, Crompton Greaves and Marico.