"I am forecasting something about 11-12 percent corporate earnings growth for Nifty, Sensex," says Jitendra Sriram, managing director, HSBC India on his expectations from the market in FY14. Sriram says social spending will have an impact on the market as there will be an uptick in the spending.
"We will see a spending restart. That is why, maybe Q4 or in a worst case scenario, Q1 will probably be the low point. However, after that I would definitely expect some kind of uptick in economy," adds Sriram.
Sriram is banking on two major macro events to drive the equity market. These are- the advance tax collection and the RBI monetary policy due on March 19.
Sriram believes there is a disconnect in the outcome expectation from the monetary policy. He says while the equity market is clamouring for an easing, the fixed income market isn’t factoring in any rate easing. He adds, that a potential 25 bps easing will not surprise anyone. However, if there is no easing then, the market may react adversely due to the anticipation built up for the RBI cutting interest rates.
Also read: RBI rate cuts to depend on inflation scene: Rangarajan
Below is the edited transcript of Sriram's interview to CNBC-TV18.
Q: We have had a very smart pullback. What do you think is the next trigger for the market?
A: Given the global backdrop, we had a good amount of run in the market. Among the two events that could probably dictate the course here on are the IT advance tax collections that will potentially start hitting the market in the next couple of days. The relevant part of it is that I don't think the market has yet discounted the 4.5 percent print that we had for December. So, if there is an encore of those kind of numbers coming through in the March quarter, one could be setting himself up for a little disappointment.
The second event is going to be the monetary policy coming soon thereafter. Clearly, there is a disconnect here in the sense that equity market is clearly clamoring for some kind of rate easing, however, fixed income market doesn’t seem to be budgeting any kind of rate easing. So, it could pretty much be a binary event in that regard.
Q: The experience from the last policy is not great, even though some action did come. Even if a cut comes through from the monetary policy, but the dialogue or the content is hawkish, how do you expect the market to move?
A: Even if I look at a potential 25 bps easing coming through from the monetary authority, I still don’t think that equity market is going to be surprised by that. So, it will be par for the course in that regard. The problem is, if incase there is nothing coming fore then the market should react adversely because there is some anticipation built up in the last week or 10 days for some kind of rate action. The Ministry of Finance commentary on the need for rate easing has added to this.
Q: Domestically, we heard that part of the midcap carnage was because redemptions were kicking in with ferocity this time around and a lot of unit-linked insurance plans ( Ulips) as well came up for maturity. What is happening with the domestic crowd? Is there still a lot of redemption pressure?
A: Yes, I think so. Atleast the numbers seem to suggest that. However, the trend that we have picked up is that off late, atleast there is some kind of an easing. A lot of the money that came in the fag end of the bull market years of 2007 and early 2008 probably is getting tired given that nearly five years have passed and their returns on the market has been virtually zero. So, to that extent, that money is probably going past the door. Also, some of the Ulip money which came in during that time is also going past the door. However, I suspect that atleast the short-end of the money is now getting over and the long end of the money, only those who had the patience to wait for five years, will now stay put. I pick up that atleast in the last one-two months, there is lesser redemption coming now.
Q: Do you think Q4 will be as bad as Q3? Or do you expect to see any glimmer of hope that earnings may be troughing out?
A: If I look at Q3 earnings as a starting point, the market was expecting somewhere about 8 percent growth for the Nifty prior to the result season starting. The actual delivery was about a 3 percent growth. So, clearly there has been disappointment in Q3 numbers which also correlates with a below-expectation kind of gross domestic product (GDP) growth.
Now, when we move into Q4, the market is already pricing in somewhat in the region of 8-10 percent kind of earnings growth coming forth for Q4. Obviously, there is a chance for some kind of a disappointment coming in because of all the fuel price hikes, State Electricity Board (SEB) tariff increases plus institutional diesel prices going up. This potentially could be at the margin negative for corporate earnings.
Although, from an economy perspective, I agree that we are seeing some troughing out phase now. Whether it happens in Q4 or in early part of Q1, one can’t say. However, I do expect recovery to come from here. However, these current earnings could definitely show a potential description for disappointment. A lot of garment expenditure has been clamped down in order to make way for our fiscal numbers to balance for FY13. This will also impact spending to some degree and will have its impact coming through in Q4.
Q: So, what will the FY14 earnings picture look like? Do you think that release of the government expenditure is enough to take earnings back up to double digit growth for FY14 or you cannot say that with certainty yet?
A: We are atleast forecasting somewhere in the region of about 11-12 percent corporate earnings growth for the major indices like Nifty or Sensex. The kind of constraint which was witnessed in the last two quarters of spending is going to sustain.
What is important to note is that it is a pre-election year. So, there will be some uptick in social spending as well. If one is working towards the summer elections next year, the spending needs to happen almost by June onwards till about October-November. So, the benefit of it can be seen in the real economy. We will see a spending restart. That is why maybe Q4 or in a worst case scenario, Q1 will probably be the low point. However, after that I would definitely expect some kind of uptick in economy.
Q: There was a fairly sharp rebound on the Bank Nifty. You are underweight on PSU banks but how are you approaching the rest of the private banks or some of the non-bank financial companies (NBFCs).
A: I am clearly more defensive in the banking space in the sense that we prefer the private end of the spectrum much more than the public end. I continue to reiterate our underweight public sector bank call and I think that this lag effect of deteriorating asset quality will continue to be a cause of concern there. Secondly, there is obviously going to be some risk of populist measures pre-election starting to potentially have a negative sentiment on the banking space as well. Especially so on the public sector names. So, our top pick in the sector is actually ICICI Bank but underweight PSU call is what we are sticking with.
Q: Any thoughts on a stock like Larsen and Toubro (L&T) from capital goods where quarterly numbers were okay but incrementally news about projects and the World Bank news this morning seems negative?
A: We have put out a note on this issue. We don’t think it is going to be a material impact because the order that was being talked about was just about a couple of million rupees. At the same time, we do not expect any major tendering on World Bank’s projects coming through the next six months. Although, given the kind of macros slowdown in the capital goods sector, we are neutral on the name.