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Expect dismal earnings in India over next yr: Mirae Asset

2008-05-03 09:02:38 Source : Bazaar/CNBC-TV18
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Robert James Horrocks, Head Of Research of Mirae Asset Financial Group expects a longer protracted slowdown in the US. The markets haven't seen the full impact of recent slowdown on earnings, he said. The fall in commodity prices is due to the rebound in the US Dollar and the slowing economy, Horrocks told CNBC-TV18. He expects disappointing earnings over the next one year in India.

Excerpts from CNBC-TV18�s exclusive interview with Robert James Horrocks:

Q: The US market has been a picture of strength these last few weeks and now people are already beginning to look beyond recessionary conditions, are you convinced that we have seen the worst there globally?

A: Personally no, I am not convinced. I think people are certainly looking beyond the recession into what sort of recovery it is - that is the right thing to be doing. However I think a lot of people are factoring in a very fast, brisk recovery from recession in the US and I think this is unlikely because the consumer is still over indebted as prices are still falling. I do not think there will be a very fast recovery and also if there is a fast recovery, then that is not actually unambiguously positive for markets because with the current inflationary scenario, we would probably mean a very rapid raise in interest rates.

So it is not altogether a great sort of backdrop for asset markets. I personally think we are going to go through a much longer, more protracted slowdown in the US and that means that the markets are going to have these rallies and I expect them to fed out that for a while and then we will see some sort of pullback.

Now I am not excessively negative on the markets. But I do caution against people going back to the same kind of a attitude that we had in 2007 and 2006. I think if people expect to return to the go-go years that we had then I think they will be disappointed.

Q: Are you in the camp then that believes the second half of this year is going to see a recovery data wise and performance wise for markets?

A: I think we will see a little bit of recovery in the markets ahead of any data that comes out. But data is probably likely to be disappointing because the markets are running away with themselves a little bit. I also think that we have not seen the full impact on earnings of the recent slowdowns. The reason for that is I do not think we have seen the low point to the US economic activity; we certainly have not seen the low point of economic activity in Europe and in Asia too. Now margins are very thin in this part of the world for most sectors and we have got rise in raw material costs and we also have rising labour costs. If you add those two together, I think there is an atmosphere that is ripe with the potential for earnings disappointment, particularly if the market goes on a rally in the short-term.

Q: What do you think will top this global equity rally on its tracks if that is your view, do you think it will be earnings disappointments, it will be a bad set of macro data inflation, what?

A: I think it could be a bit of both. Earnings disappointment is the most likely from my point of view. I think unless the inflationary problems starts to reaccelerate again, that is probably not going to be where the disappointment comes from. But any bad employment numbers from the US, any worsening confidence numbers from Europe and manufacturing numbers from Europe would be signs of a slowdown and it is still working its way through the global economy and those have the potential to disappoint as well.

Q: Things are turned a little bit this week around for the commodity space - crude is down 5.5%, gold has been easing off how have you read this ballooning in commodity prices?

A: The fall in the commodities prices is partly linked to the recent rebound in the dollar as well as the underlying slowing at the economy. I think we were driven to bubble type levels in the short-term. There was a lot of hedge fund speculation, there was a lot of funds raised to invest in this area of the economy and I would not be surprised to see this pullback continue. It will not be soon enough to save a lot of the earnings reports that we have been talking about. But it does not negate our view that commodities are still in a positive long-term trend. The only problem is that the commodities prices can be very volatile and you can see short-term reactions of 30%; 30%-40% would not be unusual. So I just caution against trading them too much.

Q: We have also gone through virtually the most part of our earnings season in India, what are your key takeaways and how are you calling this market after the pullback?

A: I think the market itself - India has sort of embedded itself in the psychology of investors in the Asian markets; it used to be a peripheral market. It no longer raises right at the core of anybody�s strategy in Asia or gets played off against China. A lot of the times, which is the best market China or India; best to India�s favour because I have some good things to say in contrast to China. We can say it has got good capitalist management, it has very high returns on equity to its companies, it is a private economy with well-embedded market institutions. So there is always going to be part of a central strategy. I think overall, I would expect earnings probably to be a little bit disappointing over the next twelve months and therefore I do not expect the market to take off at this point. If you have got a three-five year view you can consider picking up some stocks I think in some isolated stocks you are starting to see value.

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