Earning downgrades to impact sentiment in near-term:DSP ML

Andrew Holland of DSP Merrill Lynch has a view that the market trend is likely to remain volatile. He  sees some relief rally globally after Fed's recent measures and feels that earnings downgrades will impact sentiment in the near-term. India and China will stand out as some of the fastest growing economies and investors will re-look at global growth and India will stand out, he feels. He was speaking to CNBC-TV18.

Excerpts from the exclusive interview with Andrew Holland:

Q: India and China have been reduced to being rank underperformers, will that continue or will we bounce back?

A: I think we will remain volatile. Let’s put into context, though India was one of the best performing markets last year, it is not unusual for investors in these kinds of times in the last few months to take some profits off the table. They are under pressure worldwide to protect capital.

So, if you just take last year’s gains, there has been particularly spectacular profits to be taken. Only USD 50 billion over the past four or five years compared to only USD 3 billion of outflow.

So, it is not like they are abandoning the market. But obviously it has put pressure in a very difficult environment on some of the emerging markets that have shown very strong growth last year.

Q: You have become a bit more circumspect now about the next couple of months?

A: No, I think last time I was hopeful that we would see some actions in the Fed and I think what happened with Bear Stearns is really that the Fed is kind of drawing the line in the sand to say that the financial part of the problems that they were going to hold this steady, and that is what we have seen. I think my concern now, going forward is that as you go to the normal kind of downturn recession that you like to call it, I still think that earnings have to be brought down globally. That is the impact we are going to see probably after this quarter’s results.

So, that could have a knock-on effect on global markets. But what I am kind of optimistic about is that the financial problems are kind of behind us to some extent now.

Q: What signals are you picking up from global market movements over the last fortnight or so? The US is not cracking; it has given us a nice pullback. Other emerging markets have been pretty okay, much better than India and China. Is there a sense that there could be an intermediate relief rally kind of situation building up?

A: I think we are seeing that already in the developed markets after the Fed really took that action with Bear Stearns. I think that gave a lot of confidence back to investors and the fact that companies could raise money in that sector. If I kind of look through what are the things that is going to happen, we are going to see earnings downgrades, which could have a dampening effect on sentiment in the short-term. But what that will lead to is decoupling from an economic and from an earnings viewpoint and maybe we are two-three months away from that kind of thinking. I am sure some investors would be looking at already, partly because once the US shows in terms of where it is going to be in terms of GDP, India or China will continue to standout as the very high growth areas.

I think all of that has been kind of put to the side because of the financial problems and risk being taken off the table. Now if you look at some of the better performing emerging markets, then maybe the resource led economies such as Russia and Brazil with oil, and that is what has been propelling their markets in terms of performance.

For India, I think we have got some of our own problems, which we know about and talked about extensively in terms of inflation, and obviously some muted kind of expectations from some of the bigger sectors like IT. That is really what has been troubling the Indian market. But as we go through maybe the next three months, I think investors will relook at the whole growth scenario and India will continue to standout.

Q: Near-term, do you see the risk of more money being pulled out of India though?

A: It could be, because of global liquidity. But I think we are there or thereabouts. But there might be some kind of moving off the table. But I think most of it has been done. My only concern in the very short-term is that earnings forecast worldwide are probably too high. But as we see with the US market now, some investors are looking ahead and saying, 'okay the US will be the first out of recession and therefore we should be putting more of our money towards developed markets and the US in particular', and that is why you probably are going to see a rebound in the dollar at some stage.

Q: What is your call on this market then, have we seen a bottom, are we within 10% of a bottom or too early to say?

A: It depends on how severe the earnings downgrades are globally. And I think that could have another leg down for global markets. But will we retest the lows? Could do, just on a sentiment basis. But I think thereafter that is where everyone would start to distinguish the higher growth markets than the slowing or recession markets. That is what is going to happen in the next three months.

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