The March quarter earnings did not see much change over the performances of previous quarters, and since overall situation appears grim, Bank of America Merrill Lynch (BoAML) pegs FY14 earnings growth at 8 percent. Speaking to CNBC-TV18, Jyotivardhan Jaipuria of BoAML said India is slightly better placed than other emerging market economies although it is a fact that a recovery in the economy is going to be sluggish and capex will get increasingly scarce. Until elections are over, one should not expect major spurt in capex cycle, he said. At the moment, BoAML is overweight on rate sensitive and rupee sensitive sectors like autos, banks, telecom and pharma.
For all the above reasons, it turns out the market will remain in a trading range and an uptrend will depend on real improvement in economy and earnings growth. The rupee remains a big concern and will continue to be a headwind, going forward. Although the currency crisis is an emerging market phenomenon, the current account deficit makes our situation worse, he said.
He does not see much downside in rupee from current levels and hoped that in three-months time, the import checks imposed by the government improves current account deficit (CAD), which in turn should help rupee firm up. In terms of fund allocation, India remains an overweight country as foreign funds are still bullish on India. Jaipuria does not see quantitative easing happening this year and believes the Fed this time (June 19) will send a clearer message on intended delaying in pulling out QE.
Below is the edited transcript of Jyotivardhan Jaipuria's interview with CNBC-TV18
Q: How much longer will the market remain in this trading range? It has been quite a few months and the market is just yo-yoing in this 500-600 points Nifty range.
A: This is going to be a trading range and we will end with a slight positive return. It will be in a trading range because the economy continues to do badly and since economy is sluggish, earnings are going to be sluggish. So that prevents upside on the market.
On the downside, people are hoping that this is the bottom. We are hoping that things will start improving and we are having some rate cuts which are helping protect to the downside. Till we see more visible signs that both the economy and earnings are recovering, the market is going to be in a trading range.
Q: Do you continue to see the rupee being a big headwind for the equity market as well for the next few months?
A: The recent move seen in the rupee is more an emerging market (EM) phenomena. It has been true that most EM currencies have taken a knock, but otherwise this is one of our biggest concerns for the year that the current account deficit (CAD) still continues to be very high.
Our reserves are not very strong in terms of number of months of imports; we are running at like 7 month import cover which is the lowest we have had since 1995. So to that extent fundamentally the rupee is going to be a concern going forward also.
Q: Up until this recent correction India was actually an overweight for a lot of people tracking this space. What is your fund manager survey throwing up in terms of how people have changed fund allocations around to equity as well as to debt because a bit part of the problem is this outflow from the debt side from us?
A: In terms of fund allocation, people are still overweight India, maybe neutralish to slightly overweight India. I do not think people have changed much because India has got lots of problems, but so as most of the world, so to that extent people are struggling with where there are no problems today. The equity money has not been coming to EMs, it has been going to the US and Japan for most of this year. So people are struggling with EMs and India still is one of the overweight countries for most people.
Q: Some economists have begun to delay or postpone the potential recovery in the economy to late FY14. How would you extrapolate that into what you expect to see on the earnings calendar? Last we spoke you were not expecting it to be special, but how prolonged do you think this weakness is going to be on earnings?
A: My view on earnings has been and it continues to be that earnings are still very optimistic the way analysts have them. We have consensus running at 14 percent growth for FY14. I am looking at it being more like 8 percent, so we have not really changed our view. One of the reasons is that the recovery in the economy is going to be slow and sluggish; it is not going to be a sharp recovery.
We will not see too much of capex coming through. We are entering into this season which is very close to the elections now, so for a lot of people who are thinking of big projects, their mentality would be, lets wait till we have a sense of what the new government is like before we start into the new capex cycle. So to that extent over the next six-nine months we are not really going to see a major spurt coming through in capex.
Q: What is a good way to position in this kind of a scenario? If your expectation plays out and you get a range bound market with the market drifting in a 10 percent kind of a broad trading range what is the best way for investors to be positioning themselves in this phase?
A: We have been having a mix of defensives and rate sensitives. Our theme has been buy rupee sensitive and rate sensitive plays for the year. Within the rate sensitives, we have not really gone to infrastructure names, but we are trying to position more on consumer discretionary side.
So, we are overweight on autos, banks, telecom and pharma, which is really a rupee sensitive play, a bit more defensive and better quality. These are the four sectors on which we have overweight rating. It is a mix of defensives and rate sensitives.
Q: What do you hear from your clients on the sensitivity to what the Fed says in determining flows into EMs? How do you think this whole story will play out?
A: Our US economists are saying that the Fed is unlikely to do much in terms of changing the Quantitative Easing (QE) before the end of the year. Their view is probably it is like a 2014 calendar event rather than a 2013 event. At the same time, this time the Fed will try to convey their message a little more clearly.
Last time they were hinting that they are going to pullback the QE in a hurry. This time they will try to be a little clearer than saying that there is no real immediate necessity to pullback a QE, of course it will be very data dependent. They expect the Fed to sound quite dovish at the press conference day after. So it will probably try and soothe the markets a bit.
Q: Do you sense any change in perception of India though given the earnings disappointment you were talking about and the kind of macro figures we have had recently? Are people still willing to put money on India in the EM context?
A: The good thing for India this time is that most countries are facing some problem or the other, same way there are political issues in some countries, there are growth issues in probably most of the countries in EMs. So to that extent India is looking relatively better. The frustration people have is this was the time for India.
Globally people think commodity prices are not going to go up, they are going to come down and in that context India looks like a good trade that okay if commodities come down you want to be in countries which are commodity users. So the frustration people have is at a time when India could have really stood out in the world it is not standing out because we are having internal problems. Growth is not taking off. Capex has slowed considerably, but at the same time lot of people end up wanting to be neutralish to slightly overweight India just because of a lack of choice.
Q: Some people are talking about policy positives though, especially with regards to infrastructure and clearance of projects etc. You have seen what the numbers had to show. How would you approach industrials as a space?
A: The government is taking some steps, the Cabinet Committee on Investment (CCI) has been clearing projects, so things are moving at a much faster than they were a couple of years ago or even last year. So to that extent there is a positive change happening there. But at the same time we are now very, very close to elections.
To expect the real big capex surge to start at this stage is going to be very difficult. The other thing we have to remember is lot of these companies which do capex are sitting on high debt levels. So, for them to go and start another round of capex, banks to be able to fund them will take some time. It needs some stress to go out of the system before we see a big spell of capex starting through. To that extent, we have not been very positive on the industrial space at the moment.
Q: Is politics beginning to worry some of your clients? Some of the recent moves which have happened like the Janata Dal-United (JD-U) getting out of the National Democratic Alliance (NDA) seem to be making it difficult for the two big parties to get to a reasonable majority number. Is there still a fear looming of a fairly fractured verdict which flies in the face of this reconstruction and capex cycle post election results?
A: For lot of people politics is something which has been always very difficult to call whether it is in India or in most EMs. It is one of the overhangs and that is the reason everybody feels comfortable with my view that if the markets are going to be range bound we are not going to see it fly off till the elections are out of the way.
If we look at history and go back to the last couple of elections we have had, markets have had big moves on the day of the election result. They were up 20 percent the previous time and down 20 percent effectively more or less in 2004. So to that extent for people elections are going to be one overhang.
We do not know which way it is going, but at the moment it is looking like the chances of non-Congress and non-BJP parties doing well seemed to be quite high based on opinion polls. So people are watching it, but at the moment it is still an event which seems to be far away. It is 9-12 months away. Things change quite a bit in politics as you come near elections. So people are hoping some good things work out finally.
Q: What is the biggest risk to this market in your eyes where the market does not remain in this trading range, but actually breaks down?
A: I would think it is still CAD and rupee. The hope has been that CAD would come down. That is what triggered the rally in April when oil prices and gold prices started falling - that okay this is one big overhang which most investors, Reserve Bank of India (RBI) and the government is worried about and that seems to be easing, so we will have much better numbers looking forward.
But that does not seem to be happening. We have just bought so much amount of gold when the prices came down that the CAD numbers are still looking quite bad. People accept growth is not going to be strong. That is like a given. If the CAD can be fixed or that number seems like it is coming down then it will give RBI more room to cut rates. It will ease some fears people have on currency.
Q: Do you expect the other two characteristics of the market to remain which is that it has been a very narrow set of stocks that have actually rallied in any potential pullback and that valuations have been extremely bipolar across sectors?
A: Both of those are like the function of a change in the environment. The day the earnings and economy start to pick up, a lot of this is going to change. Typically if we see history in India and across the world midcaps do not perform well till the economy starts to improve and the markets start to rally. So midcaps never lead any rallies. First the large caps rally and then if the environment continues to improve then the midcaps rally.
Same way if we see the defensives versus the industrial names it is now up to the industrials to start doing well and that is when their whole valuation differential will start compressing. Most people expect that the defensives are expensive, they are not very cheap, but at the moment there is no pull factor that okay the industrials are looking very good, so I want to go and buy them.
Q: Do you have an internal target for the currency? Is that up for question in terms of how much more depreciation it could see by the end of the year?
A: We are hoping that from these levels we do not see too much of a depreciation by the end of the year. The hope is that we have a current account which starts to reduce because oil prices have come down a bit and gold imports start to come down.
The government has clamped down on gold quite a bit through all the credit measures that they have imposed. So we are hoping that to get some results. As we move forward, three months down the line we see CAD starting to look better and that has too put some benefits on the rupee and the rupee remains in a narrow range around these levels.