R Venkatraman, Managing Director of India Infoline Ltd is of the belief that if election results are good and give way to a stable Government which takes pro-active measures to kick-start the economy then we are in the beginning of a big bull market. However, given the risk of building positions based on this expectation, he advises retail investors not to get swayed by extreme pessimism or optimism. Excerpts from an interview:

What explains the recent upswing in markets with benchmark indices hitting all-time highs? Is it just pre-poll optimism driving the markets?

The key reason is the sentiment that a stable Government will be formed at the Centre following the elections. But the bigger reason is that slowly all the broad macro-economic parameters are turning positive. Current account deficit figures are improving, inflation is coming under control implying interest rates will come down and with the new Government the capex cycle too will revive. So, this is not just a “hope rally”, but is one based on improvement in fundamentals.

Where is the present rally headed? How sustainable is this rally?

Markets look at events to react and now the election event is happening. So, there is an upswing but after elections once the dust settles down, the key economic fundamentals will gain centre-stage again for dictating the market direction.

So, is there an inherent risk that these levels will not sustain for long?

I think it is important to wait and watch which form and structure the new Government is going to take and who will be the next finance minister before taking any call on this. Right now nobody knows who is going to be the Prime Minister. But one thing is very clear; that the entire economy is going through a “reset”. New election, new Government and everything is getting reset as people are tired and fatigued and finally now have something positive to look forward to.

How are marketmen gearing up for this reset?

Given the elections, people are optimistic betting on number of seats. Golden Sachs too has upgraded the Nifty’s target price to 7,600. Suppose markets panic and hit a lower circuit on the day of the election I would not recommend that we should panic and not take a cold look at everything. There is an underlying current in the market and there is a momentum which has got in because of the so called expectation or what we call “Namo Trade”. After Namo Trade is over we have to take a fresh look at everything.

In such a backdrop of built up positions on expectations, what advise would you give to the retail investors?

We cater to two types of traders. One is the momentum trader who is a smart investor and can trade and exit very fast; and the second is the retail investor who I would advise not to get carried away by extreme optimism or pessimism. He should continue to invest in a regular and steady manner. He should realise that the Indian economy and inflation are growing at about 5-6 per cent and if you apply premium for corporate outperformance, then you will make 15-16 per cent return on stocks over a period of time and that’s what they should play for.

Retail investors should buy a basket of large- and mid-cap companies, perhaps combining some of the Nifty and Sensex constituents to make money. No one is smart enough to exactly time the markets according to sectoral churn, but if retail investors follow the buy-and-hold strategy on good companies they will always make money.

With a huge build-up in FII buying positions, how is the Indian market looking now from a foreign investor’s perspective?

From the foreign investor;s perspective, India is a good market to be in. This is too huge a market for anyone to ignore. But we do not know how much of their money coming in is hot money and how much of it is long-term money.

Has the present rally percolated to small- and mid-caps too?

In the last six months mid- and small caps have rallied sharply but they are still way below the 2008 peak. Once the benchmark indices go up then it should translate better into rise in small- and mid-cap indices. We foresee an 18-20 per cent upside in the benchmarks in the the next 12 months.

Which sectoral themes would be in favour now in the market?

For a thematic play, I think beaten down stocks should be looked at. I think it is time to get overweight on deep cyclicals-linked to infra spending. For the long term, I think FMCG will continue to do well.

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