Mkts' seen bottom; bull run unlikely now: ABN AMRO AMC

KC Reddy, CIO, ABN AMRO AMC feels that the market is still cautious and there is a lot of cash on the sidelines. He believes the markets have already tested their bottom last month however, he said that a full-scale bull market is unlikely.

Excerpts from CNBC-TV18's exclusive interview with KC Reddy:

Q: What’s your thought on the current market now after the pullback that you have seen from the lows of 3800 Nifty?

A: The short term direction appears to be towards the upside, given the runs that we have had from the lows; there is a bit of profit taking and anxiety on the US market side yesterday, so people are cautious. But it appears that this is more of a bit of a profit taking and there is still a lot of cash on the sidelines. The risk aversion is still fairly high; the cash levels with most funds globally and in India are fairly large, so the selling pressure is unlikely to be fairly high.

Q: Do you think we have put a meaningful bottom in place or is this looking like a bear market rally to you?

A: I think instead of talking about a bear market rally, I think I believe that the world has come to a cross roads and it’s a significant change in the paradigm and we have been used to a very good global growth for the last four to five years, the industrial economy particularly boomed. Everybody is worried about the US economy but over the last two to three months we have seen more evidence of a slowdown in the Europe and incrementally there are some worrying signs on China as we head into Olympics.

So it’s more likely that the global economy will slow further in the second half and in the next year and conversely, this could also mean that the most significant concern for most investors, inflation and rates might be close to peaking in the next two to three months and going into next year the concern is growth globally and not inflation. I think the market might have seen some kind of a bottom last month and given that some Indian companies will be exposed to the global cycle is not going to be as easy as you would predict, but the big support factor in our opinion would come from the lower inflation rates.

At the same time, people are unduly worried in our opinion about the downside as well, so if we talk about a resumption of the bear market area making further lows is unlikely as well.

Q: The other part of the problem is that the fear we are heading towards an earnings reception for a protracted period, would you be concerned about that scenario from an Indian equity market perspective?

A: Absolutely not, I have had long beliefs that global slowdown is not necessarily negative for India and Indian asset classes and vice versa. In fact, I would be quite worried that we see a recovery in the US and we all go back to the global growth scenario. It actually is a negative for India because yes there are certain sectors especially the industrial and commodity companies which will be affected. But most of the growth drivers for India are pretty much domestic in nature and we all talked about structure, need to create employments, etc.

So the problem for us is we need a lower cost of capital to fund our own growth and the last six months have been more of an issue of the cost of capital than the global growth. Therefore, a scenario where the global growth slows down is the balance of the positive for the Indian economy and the market.

Q: In the pullback,we have seen in the past few days, it's actually the beaten down sectors that have performed, the rate sensitives like banks and to an extent real estate, a lot of capital goods and infrastructure, tactically at this point what are you leaning towards by way of positions or exposure to?

A: Going into the next year, if our view that the inflation and the rates would subside, the government is going to see lower rates provided inflation comes down. The reason we like rate sensitives, banks, infrastructure or even some reality, there are two things, one is that we believe the macro environment for these companies would improve and most of the companies for these demands is domestic in nature and unlikely to be affected by global happenings, especially if China slows down. And thirdly, the valuations in these factors are significantly low by historical standards and we are looking at some of the banks before the leg up in the last two to three weeks trading at a 3:5 price earning multiple under one price to book. These are already factoring in a 40-50% decline in the earnings next year, so when we looked at the whole assessment, it's unlikely that the banks would see a decline in the earnings faster than that, so they are already factoring in a bad scenario.

Also quite a lot of brokerage houses are negative, most investors are underweight, the hedge funds globally are short. So we are trying to give it a contrarian or support of long valuations in some of these stocks. We don’t like companies that still trade expensive whether banks or infrastructure and this is where actually people might see the earnings growth even if it slows down. Whereas, the globally sensitive sectors while they might have shown a significant growth so far and momentum has been in their favor, which might actually be affected the other way around, we continue to believe that we should buy these sectors on the current direction.

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