On the backdrop of their Exchange Traded Fund (ETF) conclave starting tomorrow, Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services told CNBC-TV18 that he expects market to remain narrow and earnings growth to be in the range of 7-9% in FY14. First quarter earnings of FY14 is expected to be dull with only few companies reporting good numbers, he said.
Agrawala said, the ETF conclave hosted by them is aimed at popularising ETFs for buying stocks since that is not yet as popular as ETF gold buying. He expects pension funds and large passive investors from all over the world to look at allocation into India through ETF route.
Furthermore he expects gold demand to rise again.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: The big worry these last few days is what has happened with the rupee this morning as well, extremely weak. How much of an irritant do you think it is going to be for some of these potential investors into India and where do you see the rupee headed?
A: Rupee is moving in 5 rupee-band that is from 52 to 55 and now 55 to 60. It is a very large band. Now we are hearing some pains on the import side including from people going on foreign travel. We are also seeing some export attraction, like today, Ford said that India might become one of the large export base for Ford SUVs.
At this level of the rupee, we are seeing some impact on export as well as imports side but the May trade deficit number was quite staggering; around USD 20 billion. So the rupee weakness is not yet over. My sense is that may be it will halt for some time when marriages do not happen for next three-four months; but again gold demand will come back, so our problem is not over. Rupee will remain weak and it may go to 61-62 but I don't think the last word is spoken on that.
Q: What sense do you expect to get from the ETF conference in terms of global flows because for the first time there is a bit of a question mark on that given what is going on in the West in terms of liquidity creation?
A: This conference is about popularizing ETFs in India which is particularly ETF for buying stocks. Per se the stock market is not that popular. ETF Gold has become very popular for the gold purchases in India and it is the biggest segment of ETF right now.
Globally, last year almost USD 100 billion flew into worldwide ETFs and we know that in India itself lot of ETF money came in by Foreign Institutional Investors (FIIs). So the expectation is still positive particularly from pension funds and the large passive investors from all over the world into India because they are trying to correct the allocations into India. So it is expected that this ETF route would broadly continue.
Q: What do you make of this dichotomy? Every analyst over the last few months has been saying that this is not a macro top down market. The only way you can make money is by stock selection, in an otherwise range bound market. Yet the investment style globally for many fund managers or investors is moving towards passive vehicles like ETF rather than actively managed funds. How do you align these two contrasting kind of trends?
A: The first decade was meant for hedge fund managers. Somewhere in turn-up of the century, they all came from all kinds of themes and they thought that they will be able to give positive run in good market as well as bad market. Then the world realized that there is no hedging, and everybody is on the same trade and everybody got sunk. So the whole promise by most of the hedge funds didn’t turn out to be right.
Now, people are going back to asking whether we should go back to active or whether we should go to at least passive investment vehicles where one does not have to depend on any fund manager per se. A significant amount of money, particularly large sovereign funds, pension funds they are saying let us get the beta right and may be on top of it some alpha through active managers, and may be even some well-recognised funds.
Therefore we are seeing this shift from lot of hedge fund money to passive investment vehicle i and that will continue. There will be significant role for the active managers also which is right now looking to be little reduced.
Q: A lot of the influential global emerging market ETFs like Vanguard and iShares are actually back to levels we saw in August-September 2012. What is your own observation on what the experience has been with regards to ETF outflows here? Are people facing redemption pressures already for markets like India? Are they taking a tactical call and just increasing cash levels? How are they approaching the market from here?
A: Unfortunately we are not in touch with lot of these global ETF investors in India. It is prerogative of lot of the global brokerage firms who bring this money. So my interaction with ETF investors is very limited.
Q: How would you rate the core performance in terms of earnings for this market? Ultimately earnings will have to bear through for the market to attract any significant or consistent flows. Are you happy with what you saw in the quarter gone by, how are you feeling about FY14?
A: The quarter gone by was very weak as expected. For next year, the estimate is of 10-12 percent kind of growth. However even if we get about 7-8 percent earnings growth, and we go from Rs 1200 EPS (Sensex) to Rs 1300, which would be on expected lines. We are looking at high single digit that is 7-9 percent growth for next year.
There is no excitement from earnings and the earnings growth is converging into fewer and fewer stocks and that is why market is becoming narrower. So at some point of time as we go into the New Year or new credit policy, and whenever the economy starts growing, the earnings growth will become much broader. And till earnings growth become much broader, I don't think you will see broader recovery in the market.
Q: Do you see the potential for any major up move in the market before elections in 2014 or do you think it will continue like this being volatile and range bound may be even for the better part of another year?
A: There are two developments which are positive in character and one negative which is rupee. I think bulk of the rupee problem in my sense is done, may be Rs 2-3 more could be in offing.
Coming to the two major positives; one is that we have started very good monsoon and if it continues, it will have its own good effect in terms of lower inflation and better productivity of food grains and everything.
Second, is that the political development is going to be very big at this point of time. My sense is by September-October one will know which way the wind is blowing. If the vote is going to be decisive one way or the other - that is anybody who is going to be voted 270 seats, irrespective of whichever party, we are going to get very strong market on the eve of the swearing-in.
But, I don't think the markets are going to wait for the move till the vote is over, so maybe five-six months from now, my sense is it is going to be a big event.