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Ajay Bagga, CEO, Lotus Asset Management, said the markets are likely to trade volatile in the short-term with more risks on the downside. “As global cues improve, you could see pretty good returns coming back in the Indian markets.”

He feels investors should wait and watch, see how the growth trend in global economies plays out and if there is a sharper reduction in growth before investing.

Excerpts from CNBC-TV18's exclusive interview with Ajay Bagga:

Q: Does it seem like this is more or less going to be a rangebound month for us, the start has been pretty sticky in May?

A: Our fund managers have been saying for quite some time that in the short-term we are seeing a rangebound market with volatility because the volumes are very low and any spike in volumes is contributing to volatility. Global cues are leading to a lot of volatility. Now, we are seeing a market which seems to be consolidating, but we are really not very much convinced about this market still. In the short-term, it is going to be a volatile market with more risk on the downside, but we are quite optimistic on a one-year horizon. As global cues improve, you could see pretty good returns coming back in the Indian markets.

Q: Domestic mutual funds are probably holding cash levels of about 10% to as high as 15%. Is that the sense you get as well that there are still extremely high cash levels among the domestic guys?

A: If you see the last four months flows, in January there were net inflows of about Rs 16,000 crore, February about Rs 4,000 crore, and March about Rs 6,500 crore, April has been a net negative month. After a very long time we have seen equity outflows actually from mutual funds. So, very small gross inflows of about Rs 4,000 crore and gross outflows of Rs 4,500 crore to give a net outflow of about 500 crore in April.

What we have seen from portfolios is that very few new funds, which were launched in January-February, are sitting on cash. Most others are in their normal cycle of 6-10% not more than that. I do not think there is too much cash waiting on the sidelines. Maybe on Rs 210,000-220,000 crore equity corpus, maybe about Rs 20,000 crore could be in cash but not much more than that, which is fairly about 10% more than normal and not very much more than normal.

So, not too much hope on that side unless the retail inflows really start kicking in, which again really follows market levels. They do not cause market levels, and normally do follow market levels.

Q: How would you approach the energy space given that crude is at all-time high levels? There is of course a direct impact on oil marketing companies, but couple of indirect elements in companies that used crude derivatives, and offshore companies. How are you going to be approaching that entire pocket?

A: What has been most frustrating for fund managers is that demand destruction has really not happened on the commodities side despite the huge appreciation in prices. Most models, if you had looked at three months back, would have shuddered at USD 120-122 per barrel oil. We have absorbed it and still see demand not even consolidating, leave aside reducing.

That puts out most analysis on the energy sector. People were expecting that as growth slows down, there would be destruction in commodity cycles and we would see price softening. Oil and gas companies in India would have naturally benefited as the subsidy burden of input cost came down. They were really poised to take off and that play has really not happened.

In that kind of a scenario, it is best to wait and watch, see how the growth trend in global economies plays out if there is a sharper reduction in growth. One could still see a global commodities slowdown at least in the medium-term, which would benefit these companies. In the short-term, things are not looking too good.

Q: What about technology, Rs 41 has come as much of a surprise against the dollar? Would you start over weighting this sector in your portfolio or do you think a lot of the run is out of the way now or has been juiced already?

A: It has become tough. Rs 41.19 was a very strong level seen on the rupee-dollar, which got touched today, and a lot of people were anticipating that there would be a claw back, given the statements from the two Fed presidents yesterday that inflation is a bigger concern. But these were the two dissenters really that has caused the dollar price appreciation across currencies.

We are still underweight on technology and think there is some amount of time that needs to be given to this sector before some clarity emerges. Our funds view has been negative on technology and we stick with that despite whatever temporary relief is coming with the rupee-dollar rate on the revenues side. But we are still negative on the models and think it is not time to really buy into technology still.

Q: How would you approach the interest rate sensitive given that the RBI has made its stance clear on interest rates at least for the near-term banks and autos in particular?

A: Banks is a pass through sector. They are able to price according to the macro interest rates. So, we are extremely positive on banks even today. Most banking projections are for 20% credit growth.

On the other two interest rate sensitives; automobiles and real estate both are price takers. They are not able to really have that kind of elasticity in their underlying demands. We have seen that slowing down though April numbers were good for passenger vehicles growing 18% and two-wheelers 15%.

Two-wheelers will benefit from rural demand growth with the winter crop having been good. Most of the demand for two-wheelers is from the rural semi-urban areas, but a large chunk or nearly 4/5th were financed and at this stage the financing is lacking post the RBI moves on the recoveries and the collection codes.

So, what two-wheelers are facing is decreasing margins as well as a lack of financing which is having an overhang on the demand. So, we are negative on both automobiles as well as real estate in this scenario.

Q: How high are the chances that the market surprises everyone and shows a bit of strength? Do you think there is a chance we can pull April strength into May?

A: The biggest factor would be if you see a return of foreign inflows. India has still not seen a strong bounce in terms of foreign inflows. That will be the biggest cue.

So, at some point when people do feel that Indian valuations have reached a level where it justifies an investment in any of the emerging markets; that’s going to be the cue.

Retail will merely follow the trend and will not create the trend. Domestic Indian institutions are too small to create the trend. So, it will have to be foreign cues and foreign money coming in. If that happens in May, then one could see an upsurge. The probability of that right now is pretty low.

Q: Which is one sector that you are most bullish on at this point in time?

A: I think FMCG stays the most overweight for us along with banking. Banking is a longer-term investment strategy.

Disclosures: It is safe to assume that my clients and I may have an interest in the stocks or sectors discussed.

Source: Moneycontrol.com