Jul 22, 2013 05:13 PM IST | Source: CNBC-TV18

See no more damage to banks; cap goods to suffer: Kotak Bk

C Jayaram, Joint MD of Kotak Mahindra Bank believes that markets are unlikely to move dramatically over the next few weeks and will trade in a narrow range. He advises investors to go bottom fishing for specific stocks, but very cautiously.

Banking sector is unlikely to see further damage after the carnage experienced over last two weeks, capital goods companies will continue to languish due to delayed government decisions, C Jayaram, Joint MD of Kotak Mahindra Bank told CNBC-TV18 today.

He added that markets are unlikely to move dramatically over the next few weeks and will trade in a narrow range. He advises investors to go bottom fishing for specific stocks, but very cautiously.

According to him global cues and elections will provide the next big trigger for markets but he sees fair amount pain still underlying in the economy. Jayaram stressed that it was unlikely that corporate earnings upgrade will happen over next two-three quarters.

He sees no further spike in consumer stocks like ITC and Hindustan Unilever because of rich valuation. The possibility of rate cuts driving the growth is also now completely damaged and hence Jayaram feels that global cues like supposed rollback of quantitative easing would be the biggest driver for the markets going ahead. 

"It is unlikely that markets will move very dramatically in the next couple of weeks.I think in near future the market will be more determine by what happens in the global market," Jayaram said.

Below is the verbatim transcript of the interview
Q: Despite the weak performance from the banking space, the Nifty has been very resilient and at that 6,050 level, what is the call that you are taking on the Nifty in the near-term to medium-term?

A: Our belief is that the broad markets are likely to trade in a reasonably narrow range while obviously there was a fairly severe impact of what measures the Reserve Bank of India (RBI) came up with last week in terms of the broad markets and more specifically sort of banking and financial services stocks. We believe that post that signals have been a little mixed from the RBI and the government in terms of what is likely to happen to interest rates both in the short-term and in the medium-term. To that extent, it is unlikely that there will be any further serious damage to that sector. Hence, overall it is unlikely that markets will move very dramatically in the next couple of weeks.

Q: Even the resilience that we have seen in the markets has been in a very narrow space maybe 10-20 stocks. How long can this differentiation continue you think? It is only the ITCs and the HULs and technology stocks that have carried the weight of the Nifty thus far, do you think that there is an upper limit to it or do you think you would still see the market betting on those for the foreseeable future because of the dangers of cyclical stocks?

A: At a broad level, the market seems fairly valued. It is unlikely that some of the stocks that you talked about HULs etc can move up any further because valuations are very rich on some of those stocks.

On the flip side, the earlier story a month or two back of a secular decline in interest rates leading to a pick up in growth also has got damaged to a fair extent particularly on the back of what has happened to the currency and what the RBI did last week. It would be fair to say that in the near future, market would probably be more determined by what happens in global markets with respect to what is the perceived sort of pace at which quantitative easing (QE) easing would happen. Those would be the cues on which the markets would move over the next few weeks as against any domestic cues.

Q: What is plaguing Bharat Heavy Electricals Ltd (BHEL)? It has lost close to about 13-14 percent in a span of just about two days, what are the concerns on BHEL and do you see more downside in something like BHEL?

A: It is clear that in spite of the fact that many of these stocks revolving around the infrastructure sector has got beaten down. There is still no real confidence around the sector because things that could propel this into a different orbit such as interest rate reduction hasn’t happened. The other is sort of policy steps in the context of some of these project implementations, which have been delayed sort of coming on track. I do not think much of that has happened. So I would suspect that the sector would continue to probably languish for a period of time.

Q: How would you rate the market chances from now till December 31, what are the percentage chances that they will remain within this 5,600-6,100 mark, what are the chances that they break the upper bounce and what are the chances they break the lower bounce?

A: To me the only real trigger between now and December is the politics and the elections. For a moment, if we assume that elections will be held as per the normal course in May 2014, I honestly cannot see too many triggers between now and December at least domestically, for the markets to breakout decisively either way. So I would go back to my original argument, which is that if in this period, the next three-four months, there has to be some decisive moment either way, it will be necessarily on the back of global cues.

Q: Do you see any improvement in terms of growth, which quarter will you see earnings upgrade from now on? We are only seeing downgrades every quarter.

A: I am referring to the broad market and not to specific stocks. At a broad level, I would suspect that over the next two-three quarters as well you are unlikely to see any broader market earnings upgrades because clearly there has been some bottoming out over the last one-two quarters but there is a fair amount of pain still in the economy. And it is spreading to larger portions because you have seen many of your consumption led companies, consumption stocks coming off at least in the top lines over the last quarter or so. So some of this pain is likely to continue over the next couple of quarters. I do not think you are likely to see any quick turnaround in earnings upgrades.

Q: For an investor what is the advise, do not get even stock specific or bottom-up at this juncture because the chances of even losing principal are high or do you think those chances still remain?

A: It is certainly a good time to be very stock specific. From an investor perspective, he has to be very careful because clearly he has seen a fair amount of losses in large parts of his portfolio including fixed income recently. So I urge investors to be cautious but at the same time, from an equity perspective, if you are going bottom-up specific stocks, this could be fine opportunity because clearly there are many stocks out there, which are trading at all time lows not necessarily justified by the fundamentals. So it is a good time to perhaps go bottomfishing but one has to be very careful when one is doing this.

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