Markets to remain range bound over 6 to 8 months: IDFC MF

ET Now: Risk on, risk off. It appears that suddenly the risk on trade has started and foreign institutional investors are revisiting EMs.

Naval Bir Kumar: We have had unpredictable capital flows into India for this calendar year, and if you track FII flows and market movements, they are fairly consistent. So you have got $2 billion of capital flows that have come in post the Greece crisis having subsided in Europe. So risk assets have come back into play, emerging markets have come back into play and India has attracted $2 billion which is what has lifted the market up. I cannot see capital flows being consistent across the year. I believe that for the next 6 to 8 months, you would continue to see erratic flows. So you will see other periods when you will see the markets correct. I frankly believe the markets will remain range-bound over the next 6 to 8 months.

ET Now: What is your stance? Do you think there is a direct linkage between QE2 ending and flows coming into India?

Naval Bir Kumar: There are no direct linkages with QE2 money and India. What QE2 did was that it created liquidity, but the bulk of the liquidity in the US went back to the FED. So the liquidity that India has seen has not come out of QE2, it has come out of the fact that global institutions have significant liquidity. And the flows that you are seeing are not steady like it was in the past, as India has had a bull market like in 2008. I am not sure that QE2 is consistent with market play today.

ET Now: So at IDFC as a theme, what are you bullish on and which are the stocks or ideas your fund managers are currently buying?

Naval Bir Kumar: Our philosophy as a fund house has always been to try to capture a trend or a theme that is evolving in the economy. So two years back, we saw a lot of transfer of wealth from the government sector to the individual sector, one to known waivers, second through NREGA, third through the central pay hikes etc. and much lower interest rates. That is prior to the inflationary concerns building up and hence we shifted away from leveraged intensive sectors to consumption. We will continue to evolve trends as they emerge in the economy and we will try to capture the next trend as we see it emerge but we would not like to play leverage today.

We think that the entire infrastructure cycle has not yet played out. The equity investors have taken a haircut but the fixed income investors are still to take a haircut. There will be restructuring on that space. If you look at the index over the last 3 to 4 years, the index has been fairly range bound, but you have seen a number of stocks which have hit all time highs and number of stocks which have fallen. So the index is clearly not an indicator of the plays that have evolved in the equity market. Some of the consumption stocks have begun to get expensive, but they also are displaying very high growth rates. You are seeing a complete change in consumption trends in India. So I would not say consumption is over. But yes, the new trends and themes will keep emerging.

ET Now: At current levels, why are you still negative on financial stocks?

Naval Bir Kumar: This merit in all of them, but we are not so bullish on banking, looking forward for the next 12 months. To play it through banking was the nicest when credit growth was exceedingly high, projects were still in project status and hence there were no restructuring risks, but that environment is behind us. But yes, some of the FMCG sectors still look good, some pharma plays are nice. There are a number of consumption plays that still look interesting.

ET Now: So why would you not be bullish on the banking space despite the cheap valuations that some of these stocks are available at?

Naval Bir Kumar: When I am saying I am not bullish on banking, I am saying it in the near term. There is sector rotation that tends to happen. So over the last 4 years, banking has grown credit at near 25% CAGR and at some point of time, this is going to result in NPAs building up. And we believe that in the next 12 to 15 months, you may see increased levels of NPAs in the banking sector. You have already seen credit deposit ratios decline. So if you look at the current financial year, you have had credit grow at 50,000 crores while deposits have grown 1,50,000 crores. So you are starting to see some headwinds. So when I am saying I am relatively not that bullish on banking over the next 12 to 18 months, it is a shorter term view. It is not a medium term view. I do not think banks in India are impaired or they will impact growth in the Indian economy. The banking sector is extremely sound, but it has had its time in the sun over the last 4 years. Banking has hit all-time highs post 2008.