See strength in mkts; worst may be behind: StanChart MF

Q: Currency has been quite dramatic as well. There is hurried-scurried move towards the 43 to a dollar mark. Are you surprised by what’s happened in the money market and has that changed your call on some sectors in the equity market?

A: I think the move on rupee is been vicious; in the same manner the market didn’t quite see it going down 39.25 to a dollar. I think the move back up from 39 to a dollar-odd to almost 43 to a dollar today was also quite unexpected. Fundamentally speaking the fact that there is not too much of inflows coming in and on the other side fairly large oil demand is pushing the rupee up.

I think the problem within the money market is the fact that inflation is at 7.8% odd but actually the numbers are probably closer to 8.5% and given that the bias is for the monetary policy to be tight. The balancing act there is how to control inflation but given the fact that the growth numbers are not looking as exciting any more the balance between growth and inflation is what one is contending.

So I don’t think one can be too bearish on interest rates at this point in time because on side incremental inflation is beginning to come off albeit oil being where it is but remember there isn’t too much of pass through of that and growth which is weakening. So one cannot be too bearish on interest rates but on the other side inflationary expectation and the current RBI policy cannot get you too bullish on interest rate either.      

Q: How would you approach something like a Cairn amongst the entire energy basket?

A: If you look at the private sector guys, it is a pure play on where crude is going. But even within the public sector space I think clearly the problem is quite large at this point in time, they are all trading well below - they are all classic value stocks. I think the incremental problem is not going to get resolved by issuance of oil bonds etc. So I think it is a reasonably good bet to play for some policy action on especially the public sector guys because on the margin they cannot survive at the way things have been going on over the last couple of years. So something needs to be done and I think that is something that one can clearly play for.

Q: Which of these sectors, which have got beaten quite a bit, does it make sense to take a contrarion trade in right now; cement, banks or real estate?

A: Among those three, if I were to put my money, it would be banks and cement in that order. I think in banks, there has been a fair amount of negative news, inflation, the noise about the credit cycle is also beginning to increase the case in point about farm loans yesterday. But I think much of that is in the price. Most of the public sector banks are trading at about one-time book; so to that extent, fairly beaten down and worth looking at. Similarly the cement side as well - perhaps cement prices could get capped but even if they do get capped, the EBITDA numbers that you are looking at are still very attractive, many of them are trading now at below replacement cost. So I think cement and banking financials are two sectors that one could look at.

Q: For the next month or two, what kind of a range do you see the market in from here?

A: I think a fairly tight range, the global cues are going to ensure that this market does not fall off too much and local macro-issues are going to really ensure that this market is not going to go up too much either.

So it is going to be a fairly tight range, maybe 5%-7% on either side.

Q: How do you approach the capital goods space? Some of those numbers are yet to come and we have seen weakness in stocks like JP Associates, BHEL over the last few sessions. Are you a buyer in that space or circumspect?

A: I think we are in the circumspect camp. What is happening is that hitherto, capital goods stocks were being valued on a multiple of order books and growth of order books. I think we are back to looking at boring things like profits and stuffs like and within that space, we are seeing that there is raw material pressure, there is pressure on margins etc and in the early ‘90s and thereabouts we have seen the ability of order books to vanish; we have seen that happen I am not for a moment saying that that’s something that could happen this time. But I think there is an element of skepticism at this point in terms of the order books etc. So we are little circumspect within the capital goods space at this point in time. 

Q: What about the whole metal pack. How have you read the interest alternating first for steel and then for the base metal universe and anything that you will start buying there?

A: I think we hold a whole basket within the metal space both ferrous and non-ferrous. I think there is interest within that space both from a fundamental perspective whether it is copper or steel; I think there is story there. We are also seeing given the weakness of dollar and the concomitant impact on commodities especially the hard commodities and crude I think it’s a good place to be at this point in time.

Disclosure:

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

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