Can look at cap goods; avoid banks, realty: Kotak Sec

The markets have fallen to the lowest levels since august 2007. The inflation shocker sent the indices over the proverbial cliff. Heavy selling continued right into the close of trade. The nifty closed at 4,348 down 157 points, while sensex shut shop at 14,571 down 517 points.   

Shashank Khade, Vice-President Portfolio Management Services, Kotak Securities feels lack of positive news in the market is the reason for poor investor sentiment. Despite this Khade is confident on capital goods which is driven by earnings.

However, Khade is not bullish on sectors like realty as the interest rate is expected to increase further due to high inflation. Softening of demand, correction in realty prices and difficulty in computing Net Asset Value (NAV) for various companies are other areas of concern. He feels that the banking and select non-banking companies too are an interesting sectors to look at .

He avoids banking space now, and look at those banks with high CASA

ratios once the situation improves.

On inflation, he feels that a combination of Cash Reserve Ratio or CRR and repo rate hike will help curtail it.

Excerpts from CNBC-TV18’s exclusive interview with Shashank Khade:

Q: Scary inflation figure. What do you expect to see for the market now?

A: We really haven’t had any respite in terms of any positive news coming in for building a case for equity. The case for investing in equity has kept on getting weaker as we have actually seen in the last one quarter. Rather than pinning down where the bottom for this equity markets is, it is very clear now that it all rests on where the oil price will reach in the next one quarter.

If we don’t see any respite on the oil front then clearly there is a concern. This double-digit inflation which we saw can continue to sustain for long and will continue to strain sentiments as well as the earnings outlook for various companies.

We can have long sustained levels which we are seeing in oil. If we continue to see sustained levels of oil, USD 130 per barrel plus levels, it will keep straining equity markets. As we go along, we will definitely have downgrades in earnings. The input costs pressure will add to further opaqueness in terms of what sort of earnings growth will happen in companies which will have to get discounted further. So the crux of the matter here is the oil price.

Q: How would you approach the rate sensitive space, the banks right now?

A: It’s better to avoid banks for the time being, till the time they settle down in terms of finding a bottom. Because getting the bottom in place is based on what sort of earnings outlook is there for these banks. Unfortunately, in the last two-three months, it’s only deteriorating. The capital market activity has come down substantially. The fee income of most of the private sector banks as well as public sector banks is under threat. Given the way the uncertainties it will be sometime before people step in to start buying into banks because right now the earnings for 2009 are not clear. So it’s difficult to call a bottom for the banking stocks.

Having said that we have already seen 40% depletion in value in the Bankex this calendar year so, we have seen and probably discounted large part of this uncertainty into the banking stocks right now. Any improvement on the environment or for that matter the oil price; it would be time to buy in banks which have high Current Account-Savings Account (CASA) ratios and those are the banks which one needs to bank on.         

Q: How will the RBI tackle the issue at this point?

A: It’s a position which the Reserve Bank of India (RBI) needs to take in terms of controlling inflation. The RBI will have to take stern measures to bring it down to at least a single digit number and it's clear from the environment, it’s going to be sometime before we start seeing a single digit number. So I think it has to be a combination of both Cash Reserve Ratio (CRR) as well as repo rate hike to curtail inflation.

Q: How much downside do you see from here? We are already at 2008 lows, pushing 14,500. Do you think with this last bit of bad news we are opening up another down leg?

A: One needs to think in terms of what could trigger a further fall in this market. If one looks at inflation; double digit inflation we have been discounting for past few days. Of course from 10% to 11% that change we are discounting today. Having discounted this the markets are going to fall, accounting for the same reasons. There have to be a fresh reason to cause a further severe downside in these markets.

On one end there has been a tug-of-war; if one looks in this quarter between FII who sold more than USD 2 billion of stocks and on the other side life insurance companies who were in a buying mode. I do not see mutual funds were in a buyer mode at all. So this tug-of-war was actually brining some sort of balance to this market. If the insurance companies also move away from the buyers side there is going to be more pressure on these markets because of the FII selling which continues.

The crucial question here is that does one see further negatives? My sense is that we have been discounting negatives at a fast rate and frankly speaking I do not see too many negatives beyond this except for a big change which is the earnings downgrade on account of profitability changes or for that matter the cost of capital which would go up substantially for various companies.