The equity market may see front-loaded gains of about 10-15% this year, says Suresh Mahadevan, MD and head of Indian Equities, UBS Securities. In an interview with Devangi Gandhi, he says the second half, however, may see a correction ? and subsequent volatility ? with increased political noise ahead of the 2014 elections.

What are your expectations on the interest rate cycle and the imminent credit policy?

We expect interest rates to come off at least by 100 bps this calendar year. It is hard to pinpoint when the rate cut cycle could start, but given the RBI?s comments on paying attention to slowing growth while containing inflation, it would not be surprising for the first cuts to start at the upcoming credit policy, with a 25 bps of cut in the repo rate.

Your outlook on the market…

With economic growth bottoming and the inflation trajectory peaking, as well as the possibility that the RBI will lower rates, India is an attractive bet. The ?risk-on? trade on the back of ample liquidity when the government is keenly pushing for reforms has attracted healthy foreign capital into the market. Given that the benchmark is good sentiment indicator, it is quite possible for the market to post gains of between 10% and 15% during the year, some portion of which could be front-loaded. We are expecting around 18% of Sensex earnings growth in 2013-14.

The scale of FII flows will be dependent on domestic as well as global factors that drive ?risk-on? sentiment. Globally, growth remains erratic; so, even if domestically we don?t get enthused by a 6- 6.5% GDP growth, on a relative basis, we would still look attractive.

How do you see the Union Budget and the build-up towards 2014 elections affecting the reform pace?

While politics is going to be a crucial factor, I don?t think the market has unreasonable expectations from a valuation perspective. My sense is that the government is likely to sustain its reform push even through announcements in the Budget that could lead to front -loaded gains in the first half of the year. In the second half, if there is any political noise, with events like realignment of political parties ahead of the election, then there could be a correction followed by some volatility.

Which sectors do you recommend at this point? Do you also see interest rate sensitives leading the rally?

Broadly, while we are overweight on interest rate-sensitives like banks, infra and real estate, we are underweight on auto. There are various reasons for our preferences. For example, in the case of infra companies, we believe the economic recovery will drive performance, while, in case of banks, besides the turnaround in the interest rate cycle, the valuation gap between PSU and public sector banks may guide the former?s performance. We also like telecom for the change in regulation and competition factors and media looks attractive on the theme of digitisation. We are underweight on consumers and pharma as we believe they have ran up significantly. We also like select mid-cap stocks that are good bottom-up picks.

How long do you think it would take for the revival of the capex cycle?

There are three important factors, which will determine an improvement in the capex cycle ? capital flow, private investments and government participation besides lower interest rates. India is a capital-deficient country; so, to that extent, global risk appetite is important and the FII flows in the recent months point to a healthy trend. The private sector, which plays a bigger role in such capital deployment, invests not only on merit but also on sentiment, and is taking note of the slow but steady improvement in the latter. Even the government is required to work on approvals, land acquisitions, coal-linkage clearances and it has taken steps in this direction. All these point to a revival in the capex cycle in the medium term.