India likely to see Santa rally which may taper off by Fed-end: Ajay Bagga

There is a strong possibility that you get a kind of a Santa Claus rally, even in the Indian markets and then it tapers off by Feb-end as the elections are announced, says Ajay Bagga, Market Expert. Edited excerpts.

How do you see India placed at this point in time as there are a couple of triggers ahead for us, especially the election? With respect to the global setup, China specifically, given the mysterious pneumonia outbreak, do you believe that it could be a concern for India as well? We are a neighbouring country. What is the growth outlook for China that you are holding at this point?
China can slow down further from this year. We are expecting about 3.8%-3.9% GDP growth next year for China. The property sector issue is still huge. Yesterday, the government came out with a very delayed plan. They are again depending on the banks to shore up the property sector which would not work out. The banks have their own issues and for banks to do unsecured lending to a troubled property sector is really pushing all walls of credibility. Of course, these are state-owned banks. Once the orders come in, some amount of cosmetic lending will happen. But the markets became sceptical within a day. So Friday, we saw some selling in the Chinese property sector as well, and the indices were also soft. Overall, will India benefit? Yes, we have seen some flows. But what happens is the strong dollar, the Fed peak, normally we see that emerging market outflows, turn into inflows. So India should be a beneficiary. We have not seen that in the last three months; we have lost $4 billion in terms of FII outflows. We see that continuing through May because of the national elections.

The good news is that the DIIs and the retail Indian investors are picking up that slack very strongly with the SIP numbers in mutual funds and the institutional flows from EPFO and insurance. So that would not be a source of worry for the Indian index. But we have underperformed global markets for the last three months, especially in November, where the MSCI global indices have done very well, India has been somewhat of a laggard to that. So there will be a catch-up. Now, will that play out over the next three months leading into February? I think that there is a strong possibility that you get a kind of a Santa Claus rally, even in the Indian markets and then it tapers off by Feb-end as the elections are announced. March-April will be the elections. May will be the formation of the new government. A lot of volatility is expected around that. So once the state elections are announced a week from now, I think the Indian markets will really take off again and breach some good levels. And then around February, we could see a taper coming in once more.

We have the OPEC meet next week and it has been delayed and this is coming at a time when the oil prices are sinking. What do you think about the oil prices going forward? Is there room for more correction?
I do not think so. Prince Abdulaziz, the Saudi foreign minister, last week had warned about the shorting of the oil prices. Even now, it is at a record level, the short interest in the Brent Futures market. What caused the further fall in the oil prices over the last three days was the postponement of the OPEC Plus meeting because the African producers are not agreeing to the Saudi proposal for holding on to production cuts. They want their new capacity to be ratified as the UAE has got ratification for its new capacity. There is excess supply because of the slowdown in Europe.

We are seeing some amount of excess supply and next year, first quarter, we are expecting some more surplus. So oil prices should stay range bound. The option with the Saudis to reduce production always stays but they are already suffering from reducing nearly one billion barrels per day, the voluntary cut that they have taken. Their budget is in deficit and just today they have borrowed about $11 billion in a syndicated loan from various banks to take care of this fiscal deficit. So there is pressure on the Saudi fiscal, but they are very clear that they want to reduce the production. The Russians will vote with the Saudis but the Africans are not playing ball. So I would say November 30th, you will probably see status quo which has got discounted and post that you could see a marginal bid up in the oil price. But I do not see a sharp fall that is not happening. There is no economic slowdown which will lead to a sharp fall. Rather, it is a mildly surplus market and it will stay so for the next three months.

Which sectors look interesting to you at this point in time because we have seen a couple of underperformers performing like insurance was a sector that garnered the investor’s interest. Other than that, pharma, IT, metals have been showing decent moves. So any sector that is on your radar right now?
Speciality chemicals are coming back. There was a lot of dumping by the Chinese, but globally now we are seeing a recovery happening. So the theme for the first quarter could be chemicals and within that speciality chemicals could outperform which is worth a look. Sugar prices are going up globally. I think we will get some interest in the sugar sector. The third could be cement. The government has spent 60% of its infrastructure budget already and more will go through. There is talk that in this winter session, the supplemental grants will ask for more infrastructure spending and on the back of that, cement could go up. And then there is defence. The big order expectations on both fighter jets as well as the aircraft carrier, I think has again injected fresh interest in the manufacturing companies for that, most of which are in the public sector domain. I think defence is also looking good.
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