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Moneycontrol India :: News :: Mkts to stay rangebound; upmove in near-term unlikely: HSBC :: :: MARKET OUTLOOK :: Ajay Loganadan

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Mkts to stay rangebound; upmove in near-term unlikely: HSBC

2008-05-22 12:02:54 Source : Midcap Radar/CNBC-TV18
(Interview Transcript)

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Ajay Loganadan, Head Private Banking Investment Advisory, HSBC expects the markets to remain rangebound in the near-term or even longer. He said that the US slowdown, the inflation and the soaring oil prices are bound to weigh the market down. He sees a cloud of uncertainty in the market for the rest of the month.

Excerpts from CNBC-TV18�s exclusive interview with Ajay Loganadan

Q: Do you expect this range to hold for a while for our market?

A: Yes. If you look at what has happened over the last few months, we have seen lots of bouts of volatility. We have actually seen a pretty good bounceback from the lower levels over the last month or so. For the rest of the month there is such a large cloud of uncertainty, be it at the international level or the domestic level with regards to inflation and the upcoming elections. The market should remain rangebound over the near-term or even longer than over the next week or so. It would be very difficult to take a call on the market over the near-term as the slowdown in the US, the inflation and the oil prices rocketing to USD 129/bbl is bound to weigh down the markets. It is going to be very difficult for the market to see too much of an upmove.

Q: What kind of a broad range do you see it is stuck in then for the period that you are indicating?

A: If you look at the Sensex I think a high of 17,500-18,000 in the near-term. We have seen bouts of selling coming in at higher levels over the last couple of days. It is difficult to take a call on the lower side and it will depend on the news flow, it is going to depend on global news flow more than anything else. The FII flows over the last couple of months had been extremely muted, this month too the numbers have been very muted. In this environment of uncertainty it is just going to depend on the significance and the extent of the bad news that we get, either at a global or local level.

If you look at at a domestic level, the Q4 numbers have been reasonably good. Of the 1800 companies that have reported so far we have seen a topline growth of 23% and a bottomline growth of about 19.5%-20%. That is reasonably good considering the high base effect.

There is a definite slowdown in margins, this is probably due to the impact of higher interest rates. There is also the problem of inflation causing raw material prices going up and thereby pressurising the margins. This may continue for the next few quarters and we may see some form of earnings downgrades, which could keep the markets muted and rangebound.

Q: What do you expect from the companies, which have not reported yet because everyday we are now getting four-five sets of earnings and this will drag on till the end of June when the audited numbers come in, do you expect this kind of overall earnings picture that you alluded to pretty much hold for the second half of this earnings calendar?

A: The IT companies results have been largely out of the way and it should hold. We might see the margins coming down to the 18%-19%. If we look back at the sequential 16 quarters of very good results seen in India, a 17%-18% growth at a bottomline level is strong and a 23% topline growth as well is reasonably good. I think we can expect these numbers to kind of maintain through this earning season.

Q: How will money move if the market remains this rangebound?

A: The FII outflows have been 2.7 billion so far this year. We have seen negative numbers there for this year-to-date, this is largely because the global risk aversion is not just in India but is in markets across the globe where there is this environment of risk aversion and P/E contractions. Until that eases, we might require two-three more quarters before we see any kind of good news coming out of the US. I think people are also waiting for a clearer picture on the subprime number, so far about 343 billion has been written off but there is a big question mark as to how large that number is. Until we see some of those concerns receding, I do not think we are going to see very large flows into emerging markets and India included.

Inflation at 7.83% is way above the RBI or the Finance Ministry comfort level. There is likely to be a repo rate hike sometime in the July to September quarter and possibly a further CRR hike as well. People are going to be cautious, be it institutional investors at a foreign level or domestic investors.

Q: What is your take on this whole commodities complex not oil, the hard commodities, would you buy metals now?

A: We are neutral on the commodities space because of the kind of pricing pressures with regards to the export duty and government putting a hold on pricing. If you look at the global scenario if there is a slowdown then the metal prices could come under pressure. The same holds good even for cement domestically where companies are not able to price themselves and that is going to impact the margins going forward.

Q: Barring some of the PSUs, we have seen quite a few of the Nifty constituents already report their numbers, any changes that you have made by way of a sector with what you have seen in the quarterly earnings this time?

A: As far as the quarterly earnings is concerned, energy is one sector that we are neutral on primarily because we believe that the fundamentals are good and the valuations are reasonable. But again there are government policies that could impact these companies. Also with crude being as volatile as it is, this is another sector that we remain neutral on.

When the market was at 21,000 we were neutral on capital goods but post the correction at these levels-some of the numbers have not been great. We cannot forget the fact that the order books of a lot of the capital goods and industrial companies in the industrial space remain very strong. Given that environment I think we are going to see infrastructure growth in this country. This is a sector that we have gone overweight on off late and remain bullish on Capital goods going forward.

Q: Why is it you are expecting repo rate CRR action? 25 and 50 is what HSBC has penciled in, how would you approach the entire rate sensitive pack right now?

A: One has to be cautious on the rate sensitive pack, be it autos, which could also be impacted with a rate hike. Real estate is another sector which we believe, as far as from a valuation perspective, are actually overweight but over the near term there are concerns and while those concerns remain, the entire industry sensitive pack should be one that could probably be an underperformer over the near term or at least be range bound for some time.

Q: Which of these three commodities would you consider buying or have already? Tea, sugar and fertilizers?

A : I couldn�t comment on any of these commodities.If you look at tea from a stand point of consumer stables, we do like that space, its defensive. The entire consumption themes are going to play out during the course of this year, be it consumer discretionary, media, retail and even telecommunications. These are sectors that one could look at and there remains value if you look at the growth prospects for these sectors over the next couple of years.