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Experts feel trust vote won’t impact mkts much
Published on Mon, Jul 21, 2008 at 22:36 , Updated at Tue, Jul 22, 2008 at 22:41
Source : CNBC-TV18
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 Manishi Raychaudhuri, ED, UBS Securities, said the current bear market rally is not sustainable, as adverse headwinds are still present.He doesn't see the trust vote making a huge difference, as elections are only a few months away in any case. “The outcome of the trust vote will only lead to a near-term move. It will only make a short-term difference. We don't expect the government to make any reforms in the last few months. Only the nuclear deal going through will have an effect on select companies.” Raychaudhuri expects double-digit inflation to continue till year-end. “High inflation won't abate unless oil prices come down.” He expects RBI to keep tightening rates and CRR. On FIIs, Raychaudhuri said they are cautious about emerging equities as an asset class. “The Indian market is facing problem of a depreciating currency. We won't see sustainable FII inflows till oil prices come down. Some FII interest is back on a stock-specific basis.”
He feels investors need to watch oil prices, and the US economic situation. "Global fundamentals will dictate the market." According to Bharat, high inflation is here to stay in double-digits at least till 2008-end. "Evidence suggests inflation is higher than official numbers. The demand for oil is still robust, so any correction may be short-lived. Only a change in West Asian geopolitics will bring down oil prices." He feels the trust vote will be crucial, but elections are still imminent. "The trust vote will not fundamentally change anything. We will not see reforms or policy shifts from the government in coming months. The markets will go back to looking at fundamentals after the trust vote" There is no choice for RBI but to raise interest rates, he said. On FIIs, Bharat said they haven't heard of renewed interest from FIIs. "Most are looking at bottom-up investing. There is a focus on bargain hunting, but it is still very selective. Their overall mood on equities is negative. A hard landing in the US will affect emerging markets."
Excerpts from CNBC-TV18’s exclusive interview with Manishi Raychaudhuri and KR Bharat: Q: Is this just a relief rally or do you expect much more from here? Bharat: This is very much a relief rally. There’s been a lot of short covering on account of a variety of factors ‑ oil prices coming down, inflation numbers not being as bad as people thought they would be, and the expectation that the government might survive next week ‑ all of this has caused shorts to cover. Fundamentally nothing has changed. This is merely a relief rally. This is more a sell-on-rally market rather than a buy-on-dip market. Q: Some of these bear market rallies can be very strong. Do you expect that this one could be a 20-25% kind of rally, or do you think it will fizzle out sooner than that? Bharat: It depends on what transpires over the next few weeks. Not so much the elections as the fundamental factors. What happens to oil prices, and the overall economic situations in the US are factors that will determine whether this rally will last longer than what most people expect. I don’t see a 20-25% rally happening. It is going to be more short-lived than that. The reasons being that all these factors that have contributed to the fall in the market are pretty much intact. High inflation is here to stay, so forget about 20 bps here or there. We are in a double-digit inflation environment and that’s not likely to change. Just as we are having a bear market rally here, oil has seen a bull market fall. People are taking profits and there has been a bit of a pause. But fundamentally nothing has changed. If there is a change in the geopolitical situation in West Asia, it could cause oil prices to come off and make things better. But I don’t see that happening. The demand-supply situation for oil hasn’t changed at all. There is not a single country in the world that has tried to curb its demand. The supply doesn’t seem to be increasing either. So, even if there is a further fall in oil it probably won’t go below USD 120 per barrel, which is a number that India still cannot afford. The political uncertainty today will ease a little bit if the government survives the trust vote. Elections will be held either eight or four months from today. Even if the government survives this trust vote, it does not mean the government will last another two-years. Unlike what a lot of people say, one will not see reforms in the last six months of the government’s life. If anything one will see populist measures. If there was pressure from the Left in the earlier incarnation there will be pressure from somebody else in the new incarnation. I don’t see any reforms happening until elections are held, regardless of whether it is 4-8-months from now. The global environment shows no signs of letting up. So, fundamentally nothing has changed. It is a bear market rally and it could be sharp because markets tend to react. They will rise as violently as they have fallen or vice versa. Volatility will continue to be high but that’s about it. I reiterate that this is a sort of bear market pullback.
Q: Is this just a relief rally in a bear market that we are seeing from those lows of 12,500 or do you sense any possibility of a change in trends here? Raychaudhuri: This is possibly a bear market rally. Valuations have become just too cheap. Short positions have been built up in quite a few stocks and sectors. I don’t think this is the beginning of a sustained bullish trend because the economic headwinds and all the other associated risk factors that we have been seeing are still pretty much intact. So, I would still call it a bear market rally. Q: If the government survives the vote of confidence, would it be just a one-day relief that leads to a knee-jerk positive reaction or do you think it can change the course of the market in a more durable fashion? Raychaudhuri: On a sustainable basis, this particular trust vote does not make a huge difference. If the government falls, we will possibly have elections in November-December. If it doesn’t then we will have it around April-May. So, there is hardly a 4-5 month difference between the two events. Under these circumstances, it is too much to expect significant economic reforms in the last few months of the government’s term. These things don’t really happen that way. Under these circumstances, the government’s survival or failure would not make a huge difference to the market. It can make a short-term difference. But it is not likely to be sustainable. Q: The rate sensitives have got excited again on the hope that inflation is peaking off. So, interest rates may not rise as much as people thought earlier. Would you be sanguine on that front or would you sell the rally in rate sensitives? Bharat: I wouldn’t be sanguine at all. I somehow feel that we only see what we want to see. Sometimes we just don’t see the writing on the wall. Anecdotal evidence would suggest that inflation is much higher than the official numbers that are coming out. We are going to be living in double-digit inflation scenario at least until the end of this calendar year. Under the circumstances, central banks have no choice but to increase interest rates. People are getting excited and interest rate sensitive stocks are going up. One should sell into the rally without a doubt. Q: Have you tempered your apprehensions about how much rates could go up after looking at the current inflation number? How would you approach the interest rate sensitives now? Raychaudhuri: We haven’t really tempered our interest rate expectations. This double-digit inflation scenario could continue at least till the end of the year. Even after that, the decline would be purely on the back of high base effect. Until and unless global commodities, particularly oil goes down on a sustainable basis, it is difficult to take a call on that. This high inflation scenario is not likely to abate in the near-term. Under these circumstances, there would be interest rate increases by the central bank. There would be tightening by way of benchmark rate as well as CRR increases. I don’t think it is time to move into the interest rate sensitives in a big way.
Q: What do you hear on the grapevine with flows? We have seen USD 7 billion go out this year. There has been just one small positive tick. Bharat: I have been hearing about some positive flows after a long time. Some companies say there has been renewed interest from FIIs trying to figure out and forecast as to where earnings are going. People are being extremely picky. Everybody is now bottom-up. Very few people are looking at this market top-down. People are picking stocks that have been beaten down very badly and where earnings forecasts have not been adjusted downwards. There is some amount of bargain hunting that is happening. But it is very few and far between. The overall mood across the globe is negative. People perceive that we are looking at a hard landing in the US, which in turn will affect emerging markets across Asia, and to a lesser extent India. But we have our own share of problems. Q: What do you hear from your colleagues in the US? Are they saying that this is not the end of the pain for global markets and therefore not for risk aversion either? Raychaudhuri: The US situation is seeing some renewed problems. Most economists and analysts say this is by no means the end of the problem. There is likely to be prolonged pain from the US. There is a second round of problems in the US, which is consumer retrenchment. We haven’t seen that yet. We have just seen banks write-off their investment books. We see some degree of manpower reduction by banks. Property prices have come down. Consumer retrenchment is the second leg of this whole problem and we haven’t seen that yet. FIIs are likely to remain cautious about equities as an asset class. What we see in emerging markets today is a reflection of that. Whenever equities go relatively out of fashion, the riskier asset classes like emerging market equities face the brunt of the problem. That is exactly what we have seen in the last six months. Indian markets are facing the problem of a depreciating currency. No foreign investor would like to hold his assets in a currency that is depreciating. Unless we see oil prices and commodities correcting, I don’t think we will see FII inflows returning to India in a very sustainable manner. There were some short positions being built up. Some sectors and stocks have been beaten down to very low valuation levels. On a stock specific basis, there is some FII interest that has indeed come back. We are seeing some very select FII inflows in those sectors and stocks but nothing in a sustainable way.
Q: What are your thoughts on IT because earnings from topline companies are out? Why is the market so disappointed? Raychaudhuri: IT stocks always tend to outperform before the results and tend to correct after the results. There is a degree of buy on rumour and sell on news. The market is also disappointed by the fact that Infosys raised its guidance in rupee denomination but not the dollar guidance, which has basically told that markets that the tech major is still being cautious. There is enough reason for that because ultimately about 30-40% of revenues of these companies come from the US banking, finance, securities, and insurance, or BFSI, space. That space still clearly has some problems going forward. At the same time, IT is currently one of the only sectors that is still showing about 20-25% earnings growth and has currency headwinds in its favour. So, it is still prudent to remain overweight on IT. In our model portfolio, we are overweight on IT with exposure to frontline IT companies. Q: Is it looking like the classic bear market, which first crushes you on price and gives you a bear market rally and then falls again to below the earlier low and finally spends a long time just being comatose and sideways till the rally starts again, or could this time it be different? Bharat: I don’t see how it would be different. It will pan out pretty much the same way. Valuations are cheap, if one assumes that corporate earnings will be where it was thought to be 6-9 months ago and EPS growth will be on target. They will not be on target just as they are revising the overall GDP growth rates downwards, 8.5% and down to sub-7% levels. Similarly, corporate earnings growth is going to reduce substantially. We have been talking to a lot of companies and input costs are growing extremely rapidly, putting huge squeeze on margins. You are going to see this impact in Q3 or Q4 of this financial year without a doubt across sectors. Some will see less than others. But nobody is forecasting a reduction in steel, oil, or commodity prices across the board. If you look at the manufacturing sector in India, input cost is increasing faster than most managements have bargained for. So, there is a lot of margin pressure. Some sectors will be able to handle it better than others, for example pharma. The stories that I am keep hearing from some companies is that if monsoon do become vigorous, then who is going to save these companies. For instance, the MRP is Rs 12.50 but the cost of manufacturing is Rs 16. We have stopped talking about monsoons. Everyone was saying one month ago that good monsoons would have a decent impact on spiraling inflation. Suddenly, we are not hearing any good news on that as well. I have a feeling that there is a lot of not so good news around the corner, than good news. Unfortunately, rallies should be sold into.
Q: A large part of the market believes that Tuesday’s vote of confidence is the deciding event, which will decide the near-term trend. Do you disagree with that hypothesis? Bharat: It depends on how you define near-term. People have gone short thinking that the government is going to sort of lose the vote of confidence. That spurs short covering either now or when the government actually pulls through. If it does, that is a short-term phenomenon. It is not going to fundamentally change anything at all. It means that this government will be in place until the next scheduled election, which is probably April or May of next year. So, it is another four-months of life for the government, which doesn’t mean anything in terms of reforms or fundamental policy shifts. So, the focus will go back to fundamentals, which remain as bleak as ever. Too much has been made of this event. We will go back to looking at fundamentals once this event is over, one way or another. Q: Do you agree that this is not the big event, which will lend complete direction to the market over the next couple of quarters? It still remains one of the macro factors which the markets have been grappling with? Raychaudhuri: The event of the government falling out or surviving could at most lead to a near-term decline or pop as the case maybe. At a fundamental level nothing much is likely to change. Either we have an election in November-December or in April-May. There is hardly about 4-5 months separating the two general elections. The only thing that could change materially is if the nuclear-deal goes through. That has implications for some of the engineering companies in India, because of the kind of potential power capacities that could be set up. But that’s really a long-term story. So that’s possibly the only difference between these two events. Whatever be the outcome of the trust vote, I don’t think anything seriously changes fundamentally. Q: What is your sense of timing because while all of us have seen bear markets in the past, they don’t tend to get over in six months? There is some hope that this time it might be a shorter one and by the end of the year we may get out of the woods. Are you less optimistic? Bharat: The global economic situation, particularly in the US, isn’t likely to change in the next 6-9 months, nor is oil prices likely to come down. This is to my mind is the most important factor for the Indian economy. Are oil prices likely to crash in the next 6-9 months? No. Inflation is likely to remain in double-digits for the next 6-9 months. Is there likely to be political stability on the horizon until the next general election, depending on when that happens? No. I don’t see any dramatic reform measures happening until after the election, if we get a stable government with a majority. If you look at all these factors, there is going to be pressure on all asset classes including equities. So, this is time to sit on cash, not to get tempted by bear market rallies. I am not advising that people should get out of all their equities. All I am saying is don’t put incremental money into the market. Cash is king, so sit on cash. Nothing dramatic is going to happen in the next 6-9 months. There will be swings. It will be very volatile. There will be lot of temptations along the way, so don’t fall into that trap. |
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