High crude, commodity prices big worry for mkts : SBI MF

Excerpts from CNBC-TV18’s exclusive interview with Sanjay Sinha:

Q: What is your prognosis for what we might see over the next few weeks? Is it more range bound moves or is there a chance for some weakness or a cut now?

A: Some rangebound movement in the markets is seen because markets normally react to events or triggers. We have had the bulk of them behind us with the major part of Q4 results already being announced and those have come up either on par with expectations or in some cases have exceeded expectations also.

The next set of numbers that we are hoping to get are from the capital goods companies. Except for the one which got announced at the beginning of the quarter, the others will be now coming towards the end of May. So they will provide probably the tail end in terms of the news flow as far as corporate performance is concerned.

Other than that, you have a lot of other stimulus in the local markets, which would probably have a major impact in the direction of the market. Some of the factors on the local side like the inflation numbers trend, how do they continue, even politics might have a role to play on the same. There is nothing very significant in them to believe that we would see a movement on a very significant nature on either side.

At the same time, most of the global markets had stabilized; still we got hit by crude at more than USD 129 per barrel. They also seem to be now recovering from the shocks of January. So the global news flow should also be fairly stable. The biggest thing that will impact to the direction of the markets in the next few weeks or maybe the next few months would be the direction of the commodity prices especially crude and ferrous metals. If they continue to be very strong, the ability of the markets to go up would be relatively less but if they for some reason or the other do start coming off then we have some good times to see going forward.

Q: You spoke about earnings season. Do you think the second half of the earnings season will be as good or as stable as the first half because there is a general feeling in the market that companies which report later don’t always report the best numbers? Are you apprehensive of what is still to come from earnings season or confident?

A: The apprehension is seen in the prices of the stocks. The capital goods stocks were the darlings of the market in 2007 with the capital goods Index going up by more than 115% in the calendar year 2007. The year-to-date performance of this Index is probably one of the worst performing. It is down more than 35% and vis-à-vis the market fall of only 14.5. So there is a lot of pessimism in terms of expectation from what the capital goods companies would deliver. So, therefore I would say that this stance is cautious.

Q: Can you build a case for a serious upmove?  By serious I mean more than a 10% upmove from where we are currently for our market over the next three-four months?

A: Today the biggest worry for the market is linked to the high crude and commodity prices. Some central assumptions are to be taken and we probably take a view of which way the markets are going to go. If these prices continue at the current levels then we are in for a rangebound market. If they go up from the current levels and then we have some reasons to worry that there could be a significant correction even from the current levels.

The last view and which maybe the view, which may probably pan out maybe not if I give you say a conservative estimate; may be by November-December of the calendar year 2008.

In case of an optimistic view maybe it will happen by June-July-August or so. If that assumption is to happen - that these prices will begin to soften, that is when we will see a rally it could be in the nature of about 10% also. But it will depend on the commodity prices because today if you see the overhangs on the market - the biggest overhang on the market is inflation influenced more by the supply side if these commodity prices do not soften even the sustenance of the corporate performance is under threat. It is because while we have seen some impact on the margins of these companies in the last quarterly results maybe the bigger impact will come in the next few quarters when they may not be able to pass on the entire inflation to their clients.