Earnings may not be as weak as mkts expect: PN Vijay

Portfolio Manager PN Vijay the question now to be asked is how much of the downswing is hurting India. The earnings this quarter will definitely be weak compared to the past, but not as weak as the markets expect. Vijay thinks the economy is lesser and lesser sensitive to interest rates now, but if the results are bad, markets will really struggle.

Excerpts from CNBC-TV18's exclusive interview with PN Vijay:

Q: Do you think you can play for some pullbacks in the near-term after the brutal May and June that we have seen?

A: Yes, May and June have been brutal indeed and last six months have been pretty bad. First it started with earnings correction, valuations were too expensive and then we got all this talk of inflation and oil prices so the markets have been in a downslide. The question is how much of that is hurting corporate India. Some segments of the economy are still very strong in terms of consumer spending, but then the rate sensitives are feeling the pressure. So the question is how all this is going to get down to corporate bottomlines.

My own sense is that it will be definitely weak compared to the past but not as weak as the market expects it, because if you look at the broad range of stocks we have in the country, very few of them are really rate sensitives. The economy has become a service sector economy, 55% is service sector. So we have an economy which is less and less sensitive to interest rates, but it is a difficult call to make. One thing that one could say is if results are bad then the market will really struggle.

Q: What is your take on what is going on with the interest rates sensitives, the bond yield has gone up to 9.15%, there is a monetary policy at the end of this month. Do you buy value in banks right now or still stay away because of these headwinds?

A: Rate sensitives is where one is really tempted to do bottom fishing but probably hold back a bit more because the loan portfolios are still strong and the Net Interest Margin (NIMs) are holding. On the other hand, we have no idea about the internal management policies on their investments. We might have some tremendous heterogeneity in bank performance and when so much of the market is looking so valuable on a long time frame, it may be better just to see this quarter's result and then jump into banks. 

Q: How would the markets approach politics this week, you think? Is it in the price that the market now believes the government will amble along and not be pulled down till the date of the elections next year or do you think there might be a bit of a relief rally on the back of it if the resolution actually worked out?

A: I think the view in Mumbai and in Delhi is slightly different but there is still a lot of pessimism about politics in the market that this government could be in trouble. In Delhi, one hears that the Congress has sewn up a very neat deal with the Janata Dal (Secular) (JD(S)) and the Samajwadi Party (SP) and others. As a person who has his legs in both sides, I would probably say that the next one year is good for the economy because the SP is a total policyless party in the sense that they would go along with anything that the Congress convinces them of unlike the Left, which is very dogmatic about things like FDI or retail of some of these big ticket reforms. So for a change, the Prime Minister (PM) maybe able to breathe easily and do some of his pet things which he always wanted to do.

Q: Has sentiment turned around a little bit as well by the end of last week for the HNI crowd?

A: HNI crowd went into a deep apathy, they just did not expect May and June to be so bad. But they have not really withdrawn their money, they are just sitting there and are a worried lot. They instinctively know that things are not that bad in India as people make it out to be, but they do not have the gumption to put in more money. That will come up sometime but the good news is that they are not marching out of the market. 

Q: What’s your sense of the market overall for the next quarter or so, do you think there will be major surprises on the way up or way down or do you think we will manage to hold on to some a trading range?

A: My view is that the markets have taken it on the shin in the last few weeks and there is not much downside from these levels, unless we get something very ugly on oil. Going forward, if we get a handle on inflation and oil which will take some time, we may be setting ourselves for an okay type of moving forward. But one has to be very cautious and one has to remember that new winners are going to be quite different form the old one’s. Surely on the economy I am lot more confident than some of the others, because I see this as a service and agricultural story this year and too much of an emphasis is being put on the Wholesale Price Index (WPI), which is a manufacturing index, inflation etc. I think when we get some very good GDP numbers, we may get something nice on the markets.

Q: You have actually been positive on sugar for a while, would you continue to buy it right now?

A: Yes, talking to the businessmen in the industry last year, the sugar magnets were forever worrying about the Allahabad judgment and the new Uttar Pradesh government etc. Now there is a little bit bounce because they can see the shortage. One just has to go out and see how many crops have moved out to wheat after government increased the procurement price for wheat above 1,000. We are looking at an even supply-demand in ’08-’09 and probably a deficit in ‘09 and 2010 which is fantastic news for beaten down commodities. So sugar is a good call and I am not surprised that it has been bouncing up a bit in the last few weeks.

Q: How would you position yourself in IT before the Infosys numbers come out on Friday? Do you think they will hold out good news?

A: I think so. There is still some upside left in IT for two to three reasons. One is that they always had a premium over the indices, which they have lost, they will get it back soon. The second is that the rupee-dollar has definitely worked in a favour especially Infosys, which did not hedge out too much of its dollar inflows. Thirdly, people are looking for some safety. They have been hit too hard by the gyrations in some of the economy stocks and these underowned sectors like IT would get that. Ten years ago people who wanted to go away from risk would go to IT, but now strangely enough IT is almost being clubbed with FMCG as a low risk space. So that type of investor will also come in. Because of all these three to four conditions, I think IT would be a good sector to go overweight in next few months.

Disclosures:

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.