RBI move sharper than expected: HSBC AMC

Mihir Vora of HSBC Asset Management feels that the markets had expected the RBI move of a rate hike. But they had not anticipated both - the repo rate hike and CRR hike; this was sharper than expected, he feels. Vora expects the markets to correct today. He believes that correction may form some sort of intermediate support now.

Excerpts from CNBC-TV18's exclusive interview with Mihir Vora:

Q: What kind of a reaction do you expect and what it is looking like for the rest of 2008 for equities now?

A: Obviously it is not too good news for the stock market; we should see an initial bout of correction or reaction in the market. But I would say this particular event has been discounted to quite some extent over the last ten days or so. We have seen banking stocks being battered down quite badly so, some kind of a expectation was already built in; what was not built in may be was a CRR and a repo rate hike, so to that extent it is little sharper than expected, infact I would say, a little more negative than expected.

So obviously we will see the markets correcting today, but I would say given the velocity at which the market has fallen over the last few days, we should be seeing some kind of a support levels for the markets because as you know mutual funds and other market participants do have a lot of cash still lying on the sidelines. So I would say this correction should form some kind of a intermediate support.

Q: For the first few months of this year, the expectation was that we would ride it out till the half-way point and then things would start turning around, the macros would improve and there would be a genuinely better equity performance. Do you think that entire theory needs to be relooked?

A: Yes because what has happened during the last six months is that the rise in commodities has been much sharper and higher than what any of us or any of the market participants had been expecting. Oil is the most obvious one, apart from inflation on the food side, on the metal side, iron ore is globally going up, shipping rates are globally going up that has been much beyond anyone’s expectations.

People were expecting that with higher prices there would be a slowdown, but demand just does not seem to be slowing down. So to that extent, I would say that the overall macro for India as a whole has deteriorated in the last six months and the recovery or the uptrend has been postponed by a couple of quarters at least.

Q: How do you play the banks right now, are you in the camp that believes the value needs to be bought or are you apprehensive of fundamentals and you are not a bull on that story?

A: I would still stick to the private sector banks in an environment where margin management is becoming very important. We have seen some of the PSU banks being quite erratic as far as net interest margins (NIM) are concerned on a QoQ basis. On the other side we have seen a lot of the private sector banks being pretty good in their NIM management. So given a choice we would still stick to the private sector banks.

Today one can see a significant reaction in banking stocks because of the overnight developments, but I would say that at some point of time, we need to go out and buy the sector; I do not think that is a sector, which can be ignored for a growing market like India. It is just a question of time and I think we might be pretty close to the bottom as far as valuations are concerned in a lot of these stocks.

Q: As an equity market participant, would you be worried that this kind of monetary policy action might be followed up by a strong fiscal policy action as well, for example price controls or talk of price controls?

A: We have already seen quite a lot of talk on the price front on the cement sector, on the steel sector and lot of other sectors. To that extent we have seen those sectors getting derated and downgraded in the market. So I do not think on the fiscal side there is too much to be expected.

Even on the monetary side, with these kind of sharp actions, I think the growth will come off because I think the whole idea is to now focus on the demand side equally. So far we were letting it go by saying it is more of a supply side thing, but now it is clear that the demand side is going to get managed. Apart from the tax cuts, import duty cuts, I would say that the kind of actions that we have seen over the last three to four months are a lot and I would rather wait for the economy to start behaving and demand side start coming off before expecting any other sharp measures.

Q: How do you see things shaping up for the whole real estate space?

A: Real estate stocks will not do well in a rising interest rate scenario, because on the cost side for the developers as well as on the demand side for the homeowners, both areas are impacted by rising interest rates. So we would tend to continue to be underweight. We have been underweight for almost a year now on the real estate sector and that’s the sector we would continue to be underweight on.

Q: The other space hammered is infrastructure; interest rate concerns abound there, would you be a buyer there or do you think those stocks need to correct more?

A: Apart from the interest rates, what is also hurting the stocks is the same risk factor that we just discussed, which is high commodity prices. We have seen some amount of pressure because of steel and plastics and cement etc on these stocks. We are also seeing that a lot of the companies, which had valuations based on sum of the parts or BOT projects, are getting hammered. In a rising interest rate scenario, the valuations of BOT projects also tend to come down as interest rates move up.

So these stocks, which are the darlings of the market till last year, are getting derated because of three reasons - one is higher interest rates, second is commodity prices and third is the lowering valuations of the BOT projects that they have. So for pure plays in which there are no underlying sum of the part valuations, in some of the stocks the correction is more or less done.

Stocks where the order book is growing, are still getting hammered down by 40-60%. So I would say in those stocks the correction is pretty much done. In some of the stocks where there are BOT valuations maybe a little more downside, but not too much beyond this.

Q: In an environment like this, if you had your own portfolio what kind of cash levels would you hold onto and what would be your topmost sector by way of exposure?

A: As a fund we are still holding onto a significant amount of cash - about 15-20% across funds. Instead of focusing on how much of the portfolio is invested, we are trying to focus on newer ideas or sectors where there is some amount of performance on the positive side, because of either changing fundamentals or because of a shift to defensive.

To that extent we have increased exposure to the IT sector, which we were very underweight on until last year. We have increased our weight to some of the telecom stocks and some pharmaceutical and a significant amount of FMCG. In terms of sector exposure, we have been increasing the defensive bets in the portfolio.

So it is not really a question of how much you are invested because last year a large chunk of the movement of the Sensex was because of 8-9 stocks and if you are there in those stocks your performance was pretty much guaranteed and if you were not there then you would tend to underperform. So it is really becoming more sectors in stock specific rather than trying to figure out how much to be invested in. 

Disclosure:

It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed.