Expect risk trade to come back in 3-4 weeks: PN Vijay

In an interview with CNBC-TV18, portfolio manager PN Vijay, spoke about his reading of the market condition and the road ahead.

Below is an edited transcript of Vijay’s interview on CNBC-TV18. Also watch the attached videos.

Q: Do you think this is just a small pullback session? Do you think the trend is still intact on the downward side or perhaps there is some sort of a near-term base for our markets?

A: Today, we have seen a lot of short covering because the markets are heavily oversold. I have not seen this amount of short selling across all futures in the last two-years. A large portion of this could be bears moving out of the market.

On the other hand, we are in a very tough situation. In the sense that if Hollande flies over, an hour after his swearing in, to Berlin for dinner with Merkel and if they make any positive statement with the word “growth” put into it fairly frequently, there could be a huge short covering of the euro. It has been one of the most shorted in the last few days by currency traders.

So, you could see a sudden move up if there is a perception that Europe is slowing moving away from fiscal compact to a growth compact because that is what is driving markets; everything is incidental. If the risk aversion in Europe comes down a little bit, India will get a fair share of that upside.

Q: Are people interested in value buying at all at this stage?

A: People are not buying value now. You don’t buy FMCG and pharma the way people are buying if they are looking at value. You go out and buy Bank of Baroda and ICICI Bank and Tata Steel if you want value. It is difficult to say because India is such a trader’s market.

There is, of course, a long-term trend based on economic considerations but the volatility due to trader activity and media activity is so high that we have to live with a lot of volatility. So, when you say two months–two months is not a long time for a wealth manager, but it’s a huge time for traders.

My own sense is that it will be less than two months. If the monsoon is okay and Europe gets resolved in some form, these are very nice levels–4900-4850 on the Nifty–to build good portfolios. But the risk trade has to come back and I would imagine the risk trade may come back in about say three-four weeks, once people see some light at the end of the tunnel in Europe and equally importantly a QE3 from Bernanke in the US where also the economy seems to be getting a bit softer.

Q: In the infrastructure lot there are a slew of disappointments that we have seen in terms of earnings. What would you do the infrastructure stocks now? Would you avoid them completely or is there any potential in this sector?

A: One won’t avoid them completely. One has to pick and choose because the valuations are so interesting. The obvious call is Larsen and Toubro. Though the results were not so great, the outlook given by the company was extremely positive and the order execution appeared to be on course. So that stands by itself and I guess everybody would say that.

The other interesting ones are those, which have a toll approach and a revenue approach, rather than developmental approach. IL&FS Transportation is a great stock given the fact that they have some very profitable NHAI contracts and they have tolling etc.

After the chairman is cleared of these charges, IRB Infra, it has been beaten down so much. So infrastructure one is going for those stocks, which are getting NHAI contracts, with a caveat that the debt levels should be low because if the debt levels are low then the orders translate directly into huge profits. There could be a remarkable turnaround in the bottom-line next few quarters. One has to pick and choose.

Q: Do you expect the pressure on asset quality for PSU banks continuing next quarter as well?

A: I don’t expect the asset quality to deteriorate because of two reasons. One, I made a sample of eight PSU banks, which have reported numbers–SBI is the big one left–and there we expect that the P&L should be good.

PNB and Bank of Baroda were bit of howlers. On the other hand Canara Bank, Bank of India came out with some very strong asset quality numbers. So like curate’s egg it’s good in parts. Also, one thing we are forgetting is that they are going into system based NPA recognition.

The system based is much more scientific and while it did hit them in the previous quarters, including the last quarter, the systems based would work in their favour going forward.

I don’t expect the asset quality to deteriorate. I don’t expect any great improvement either. I would say that would seize to be a worry probably in Q2 and Q3 of 2012-13.