It has been a volatile start to the stock market in 2014 with the Sensex and the Nifty moving close to their life-time highs. But there will be uncertainty till the Lok Sabha election results are out, says Anish Damanaia, Head–Institutional Equities, IDFC Securities.

He advises investors to take exposures to sectors that would not be impacted by the polls.

Excerpts from the interview:

What is your outlook on the trajectory of the market this calendar?

This year, the market may take different directions between the two halves of the year, that is, one before the election results and the other after the results. Hence, the range of the market could be very wide between the two halves.

The Nifty has advanced 19 per cent from its lows on account of three key reasons:

The RBI Governor has taken several steps to steady the currency and has taken a pragmatic view on interest rates, which has been liked by the markets.

Success of the pro-growth BJP (political party) in the recent state elections caused the markets to believe that this party stood a very bright chance of forming a Government at the Centre in the forthcoming general elections. Therefore, a belief that the Indian growth story would change for the better from Q4FY15 was factored in.

Relative underperformance of the Indian market among its peer group and the underweight position of most FIIs towards India. With this 19 per cent move upwards, India is among the best performing market within its emerging market peers.

The recent emergence of the Aam Aadmi Party (AAP) has raised questions on the progress of the BJP. Further, recent steps by this new party in Delhi, where it has formed the Government, is viewed by many market pundits as socialist (bad for fiscal).

The fear that this party can dent the progress of the BJP (as it has done in the recent Delhi State elections) has added an extra element of risk, which was missing till now.

The rally of the market from a level of 5,600 Nifty (currently 6,180) may get dented significantly.

This is how the first half looks at this point in time. The second half will depend on the results.

If the NDA manages to hold on to its recent gains and improve on it and form a Government, the direction of the market would be sharply positive.

Which sectors or themes should investors bet on?

We are recommending investors to position themselves in those bets which do not rely on the outcomes of the election results and the Fed taper. Export-driven sectors (IT and pharma predominantly), import substitute stocks (Reliance and Cairn), stocks with growth improving / healthy RoE, ROCE and strong cash generation (consumers, autos and telecoms) are sectors which we are overweight on. We are underweight on banking, capital goods, infra and cement.

Are you expecting any surprises in the December quarter numbers?

We are not expecting any big surprises in this quarter.

We expect Q3FY14 Nifty earnings growth to be 11.4 per cent (earnings growth at 13.9 per cent, excluding Financials).

Earnings growth in businesses with significant overseas revenue streams (IT, pharmaceuticals and select auto stocks) is expected to offset the weak performance of domestic businesses (Power, Cement, Real Estate and domestic Auto).

How do you see FII flows panning out in 2014, given the impending elections and the QE taper?

Our chat with many FIIs over the past few days, especially with those who manage global and regional portfolios, shows that they would want to build in some additional risk premium to their portfolio and cut some exposure to India. India has been among the better performing emerging markets in the last six months.

With India’s real economic growth on par or worse than other emerging markets, why do you think FIIs would want to invest in Indian stocks?

There are three countries in election mode in the emerging market space – Thailand, Indonesia and India.

Further, India’s current account deficit has fallen sharply, currency has stabilised and the impact of QE taper is neutralised to a great extent.

The recent currency depreciation is aiding the export-related sectors and import substitute products.

With the Government taking several steps to spur investments, an expectation has been created that the investment cycle will pick up soon.

While we do not think it will happen soon enough, this expectation could help FII flows into the country.

Should this not materialise, there is ample scope for disappointment.

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