With the market pinning hopes on Dr Manmohan Singh as the new finance minister for major reforms, Gautam Trivedi of Religare Capital believes that the current rally may be sustainable.
Giving his view on policy action by the RBI later this month, Trivedi said he will be frankly surprised if the central were to cut rates on July 31. However, he anticipates another 50 bps cut this fiscal.
In his opinion, the market is set for 10-15% downside if the monsoon does not favour and the government fails to deliver on reforms.
"There is clearly another 10-15% downside to the market if the monsoon continues to not work out and if the news of that spreads that will definitely set in some degree of a panic in the market. The market has rallied a fair bit even year-to-date as I mentioned earlier. So I think expectations are high from the government to deliver something. If that doesn’t come through, the market will be disappointed."
Below is the edited transcript of the interview. Also wacth the accompanying video.
Q: Do you think this rally is sustainable going forward?
A: I think it’s sustainable to a point. There has been lot of expectations built in. The market at this point is clearly looking at Delhi for future direction. But if I look back at this calendar year so far, India has pretty much been the best performing market in Asia. It’s up 8% in dollar terms year-to-date.
Also, the other three BRICs nations have done actually pretty well even though retail investors and mutual funds have been net sellers in the market. So I think net-net, compared to the rest of Asia and pretty much rest of the world, we have done pretty well.
Q: What is the market pricing in in terms of expectations of policy? Do you think some of the liquidity that’s come in over last three-four weeks is pre-empting that or is coming in independently?
A: A lot of the liquidity that’s come in the last three or four weeks has been pre-empting that. I think the talks of Pranab Mukherjee being a potential presidential candidate has been talked about for the last over a month. Hence, I think a lot of people do believe that he is going to finally be able to make it. Given that and with the fact that the Prime Minister, who has been a former Finance Minister is taking on the portfolio people are expecting a lot out of him. So I think expectations are clearly quite high at this point.
Q: How does this underlay with your core expectations in terms of earnings growth? Do you think the worst in terms of earnings markdowns is behind the market?
A: Earnings downgrades will actually continue because the economy clearly is contracting. Obviously, a monsoon that doesn’t so far seemed to have worked out also doesn’t help. So given both these factors, I think earnings downgrades will continue at least into another quarter before we actually see any signs of revival of the economy or earnings expectations.
Q: How much of a support do you expect from monetary policy for the stock market? Are you guys expecting any major moves from the Reserve Bank or given inflation it’s unlikely for the next couple of months?
A: We think it’s unlikely for the next couple of months. I think a monsoon which hasn’t worked out yet will add to the inflation. We will be frankly surprised if the RBI were to cut rates on July 31, but having said that we do believe this fiscal there is another 50 bps still to go.
Q: What’s the upside-downside according to you to this market if you just map it with the Nifty?
A: There is clearly another 10-15% downside to the market if the monsoon continues to not work out and if the news of that spreads that will definitely set in some degree of a panic in the market. The market has rallied a fair bit even year-to-date as I mentioned earlier. So I think expectations are high from the government to deliver something.
If that doesn’t come through, the market will be disappointed. But at this juncture, I want to bring two specific issues which most foreign institutional investors, most FIIs that I speak to, have in mind; one is the fiscal deficit, no surprise there. But if the government shows any concerted effort to try and cut it down that would be taken very positively.
Second is a return of capex from the private sector. That is also a major hurdle why a lot of investors at this point have been shying away from the market. Until the sentiment, which in turn, will impact capex as well from the private sector does not improve, I would be careful about putting fresh money to the market at these levels.
Q: What feedback are you getting from institutional clients on the currency? Has it stopped worrying them given that the fall has been sharp and protracted over a period of time or is it still very much within the consideration set of their India worries?
A: FIIs have been fairly patient and tolerant as far as the Indian market is concerned. They tolerated basically multiple issues, scams of course, the plunging currency, poor macro, unresponsive government and so forth. So to give them credit, I think they have been patient, but the fact is at this point their view is the currency seems to have priced in most of the pain that we have on the macro side.
We personally believe that a slowing economy actually will be positive ironically for the currency because the imports will effectively slowdown. It will help the rupee appreciate back to 52-53 is where we think the rupee should settle at. But having said that I think it will remain volatile. We believe it will be range bound between 52 and 56.
Q: You actually expect to see less participation from key sectors like financials and IT services. What makes you cautious on IT and is it a stock specific issue as in that you are negative on Infosys but positive the others or are you just avoiding the whole lot?
A: We are not avoiding the whole lot. I kind of agree with you that Infosys is one stock given valuations at 14 times forward earnings; it’s pretty attractively priced under normal circumstances. Of course, you have got a pre-election year in the US, there will be lot of rhetoric as always the case. So I think the sentiment overall right now in spite of where the currency is, is not positive for the IT sector.
Having said that, expectations, in general, for Infosys are extremely low. The other thing to keep in mind for Infosys specifically is that it’s never ever traded below HCL Tech. For a brief period it dipped, they are now pretty much at the same valuation. So I think that’s something to keep in mind as well. If somebody is looking at the IT sector from a longer term perspective, Infosys is a stock I would recommend accumulating.
Q: How about financials? Is that an asset problem you have with the space and what do you prefer in that lot?
A: Within the financials, I think there are multiple concerns, a slowing economy, the fact that increase in loan book going towards working capital versus project finance that clearly is a cause of worry. But having said that, I think a lot of the bad news is starting to get priced in.
If you look at Axis Bank, it has made a good move in the past few days. A lot of people believe that lot of the power sector issues associated with Axis Bank are pretty much now priced in the stocks at 1.6 times, so we like that stock.
It’s usually traded at about 2.2 times, that’s been its five year historical average. The other stock we like a lot is State Bank of India and among the midcaps we like Yes Bank. We think that in particular stands out.
Q: What about infrastructure? Are you bullish on that space? Do you have any big contrarian calls there?
A: I think third year in a row, infrastructure, real estate continue to have no interest whether it is domestic investors, insurance companies or for that matter FIIs. Unfortunately, there is nothing that’s attractive enough to look at some of these stocks which are down as much as 18-19%. I would recommend staying away from them.
Q: You spoke about the fact that mutual funds have been consistent sellers, insurance companies too over the last few days. What is behind the kind of skepticism that we are seeing in the local investors, retail or institutional as opposed to the global players who have been very resilient?
A: That’s a good question. With respect to the retail investors, and it’s not necessarily just the last few days, I think it’s just year-to-date, they have got two issues. One, I think they are very close to the action. The negative news is in your face on a daily basis so I think that’s obviously spooked them and
Second and more importantly, when you have got alternative investment opportunities, for example, fixed income which until recently was giving as much as 10% pre-tax or some of the FMPs which were giving post-tax returns of 9-9.5%. Until that does not come down, until you don’t see interest rates coming off, getting retail participation back in the market will be a challenge.
Religare is one of the largest retail brokers in the country, 2,000 branches and 600 cities in towns and the feedback that we get from them on a weekly basis the last several months has clearly not been positive. It’s been hard for them to get retail investors to invest in the market.
Q: Is there a way to quantify the reform premium going into the market right now? If there is disappointment post the presidential elections on reforms not moving - how much downside risk do you think that presents for the market?
A: I think the one problem we have had this year is a series of deadlines or deadlines which not necessarily the government has given, but a lot of times the market ended up making deadlines. For example, at the budget, people expected something to come out of this budget, nothing significant came out with the exception of GAAR, which is largely negative.
Then, we had the UP elections, we had the previous FM saying that on Monday you will see some big announcements - that didn’t happen. Now we have 19th of July - the presidential elections. So, I think there are series of timelines which have been announced and frankly followed by disappointments.
After July 19, assuming Mr. Mukherjee does make it to the Rashtrapati Bhavan, if we don’t see any major reforms, I think the market has a good 10-15% downside because a lot of that has been priced in. People are obviously expecting a lot from the PM as the new FM so I think that is something which is Delhi will have to address.