Jitendra Sriram, MD & Head of Research, HSBC India does not see too much of a downside in major indices, but cautions that the chances of the midcap universe getting hit is far more.
FII inflows over the last couple of years have been much more polarized towards the top end of the market, he told CNBC-TV18 in an interview. Though developed markets are being preferred over emerging markets because two of the world’s largest equity markets, US and Japan, are both showing some acceleration in growth and new inflow has slowed, but still FII flows are not in any kind of an exodus mode, Sriram told CNBC-TV18.
Within the EM space, India is still finding some favour, he says. Sriram does not plan to tinker with the year-end Sensex target of 20,700. He believes whatever the Fed removes from the system, the Bank of Japan will infuse. So the sum total of all the three Central Banks will probably still be a mild plus into 2014.
Below is the verbatim transcript of Jitendra Sriram’s interview on CNBC-TV18
Q: All hell seems to have broken loose in the last few days, how have you read the last 10-days correction and do you think fundamentals warrant a bigger downside from here?
A: From an earnings momentum perspective, I am not seeing so much of a negativism in the market. In the sense what we are seeing is that earnings at least seem to be plateauing out, there are segments in the market which now have reasonable weightage, IT, healthcare all these areas and to be fair, the market is looking like a barbell.
In a sense there is a segment of the market which probably trades above 25 price to earnings ratio (P/E) which is doing reasonably okay and then you have a segment of the market which is probably grinding at the 2008 lows which are probably trading at 10 P/E, but I suspect that if you look at the flows from FIIs in the last couple of years it has been much more polarized towards the top end of the market. That has not been too vulnerable.
Given that the top 20 names, account for virtually 70 percent of the weightage in the Nifty, I think you may not see too much of a downside in major indices. Yes, the midcap universe is getting hit. Just to put colour to it, if I look at leverage ratios, the mid-cap BSE 500 ex-Nifty has a leverage of roughly about 130 percent odd whereas the same data for Nifty will show you a leverage ratio of about 70 percent. So the point is all these RBI moves will hit the mid-cap universe far more hard in maybe what is already a polarized market.
Q: Just wanted to throw some more light on what is happening with the foreign institutional investors (FIIs) money at this point because we have not seen any large scale pullout like you mentioned, is that because there is a sectoral churn that we are seeing with the FII money or are we on the brink of some sort of an exodus by FIIs?
A: I would say that yes, first thing is that the pace has slowed down. The new inflow has slowed, but I don’t think we are still in any kind of an exodus mode. Put it also in perspective, yes, developed markets (DMs) are preferable to emerging markets (EMs). So there is clearly a move towards DM over EM because the two of the world’s largest equity markets, US and Japan, are both probably showing some acceleration in growth.
The second thing which is happening is that within EM, India is still finding some favour among a lot which is facing a lot of headwind. China slowing down has impacted a lot of countries that have a lot of trade linkages with them like Korea and Taiwan. Within the BRIC space, India still looks reasonably okay within Brazil, Russia and China again. So to that extent, I am not seeing that kind of an exodus scenario, but yes pace has slowed down and trouble is India’s current account deficit (CAD) which is a structural problem requires USD 300-340 million of capital flows every day and flows are nowhere close to that today.
Q: You have had a 21,700 year-end target for the Sensex given the waterfall decline that we have seen in the last 10 days and the fact that the macros whatever you say are getting worse, would you want to change that target at all at some point?
A: Our target is 20,700 and that is about 7-8 percent till the year-end and frankly we don’t see too much reason to tinker around that target. The reason being that if I look at the major central banks in the world, yes, the Fed will taper, potentially we are arguing that maybe you should see the phase commencing from December and probably carry on for a year where the pace of purchases slips from USD 85 billion per month to a much lower number afterwards.
If you add all the three Central Banks, our houseview is that whatever the Fed removes or reduces from the system, we believe that the Bank of Japan will be infusing into the system. So the sum total of all the three Central Banks will probably still be a mild plus into 2014. So we are not so fuzzed about capital flows.
Colour could change, it could be more foreign direct investment (FDI) rather than FII given that you have seen Japanese interest coming in projects like Delhi Mumbai Industrial Corridor (DMIC), Dedicated Freight Corridor (DFC), various other infrastructure oriented projects. So the colour of money could change, may not be more portfolio driven, but I don’t think it is going to be too much of a worry on the flows perspective.
Q: The problem is flat is not good or not enough for us. If FIIs were to buy a couple of USD 100 million every month, that does not leave us anywhere. The rupee will continue to depreciate. Do you think at some point, some of these long-term holders would have to sit up and say, if the currency is going to take away 10 percent from our portfolio, in a market where there is no macro growth or little earnings growth, do we need to be present in this market now?
A: I agree with you to the extent that India does need upwards of USD 300 million of capital flows each day and anything short of that is going to be a pain point. At the same time, you look at the FDI numbers, there is an issue in a sense that where we were averaging somewhere in the region of USD 30 billion per annum that number has also slowed down.
Measures have been taken recently to up FDI levels in various sectors, but these are not quick-fix things, it will take time to see that money come to fruition. So the basic thing that India needs to sort out in the near-term will again be on whether it can temper imports. Gold has been in some action, the other big item of imports is white goods, some kind of import duty tinkering will need to be done there to address the current account imbalance.
I would think that our money is vulnerable from FII perspective and clearly the questions that you ask are going to be very pertinent for our traders who are essentially fixed income investors under the guise of equity. So they would be vulnerable to any kind of uptick in hedging cost or uptick in some kind of cost of financing.
So that money will pull out but if I look at longer-term investors, the key call they will take is okay, is this probably till a May phenomenon once we have a new government, you could see growth recover, maybe at a slower pace than what is currently forecast or what is being put out by the government’s stats, but I would expect that people will wait and watch for that period, they will not probably take a quick decision on this one.
Q: If you map the last 15 days of the market, apart from the IT stocks that have been quite resilient, there are a couple of other heavyweights that have not succumbed to selling pressure just yet, names like Reliance Industries Ltd (RIL), HDFC, something like ICICI Bank even ITC for that matter, are any of these names under threat of a breakdown?
A: It does not seem so because people are also desperate for places to hide and those places to hide are getting fewer and fewer. So to that extent yes, it goes back to that same context of the barbell that I was saying and market is getting very polarized towards the top few names. I suspect you might see the frontline technology get a little bit of a boost today also with Cognizant results where they upped their guidance. So to that extent, you might see some of the frontline names seeing some positive tailwinds from those results.