Apr 29, 2012 01:55 PM IST | Source: CNBC-TV18

Hopes of QE3 alive, reforms won't take mkt up: Tandon

Anand Tandon, CEO, JRG Securities explains to CNBC-TV18 that the market is showing resilience thanks to investors‘ attention on the European markets which are waiting with bated breath for another round of funding from the US

Anand Tandon, CEO, JRG Securities explains to CNBC-TV18 that the market is showing a suprising level of resilience on hopes of another round of quantitative easing by the US Fed. Tandon is also skeptical of reforms sending the market up and adds that market believes prices increases are good for the economy 

Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: We have just wrapped up a pretty lousy series in terms of performance. How are you feeling about the market? Is there going to be a deep cut in May or do you think it will just lumber on?

A: There is a possibility for both situations. May traditionally has not been a strong month for the market and is the time to sell. But I think we have already reached a stage where the level of interest in the market is very low and the market seems to be more resilient than the lack of policy decisions seem to suggest.

So overall, investors are again looking at beyond what's happening in the domestic market and I think to a large extent, it will now be determined by two things. One, whether QE3 (quantitative easing) happens in the US and two, if Sarkozy loses in France.

So we are in interesting times again.

Q: There is a little bit of a risk starting to come in from the US markets. The S&P is back at 1,400. Do you think that that could be used as a cue for risk on global trade and at least move to the upper end of our trading range?

A: That's what one is looking at and clearly as I said, to some extent, that's already been factored into the market.

On its own, the market should not be where it is and should have already cracked. Similarly, the euro should have also cracked. But so far, both are showing strong signs of resilience.

I would therefore argue that the basis of that is an expectation that there will be another bout of funding coming from the US Fed given the weaker numbers in the US which will sustain a kind of risk-on-trade which will keep markets like ours a little better than where they are.

So barring that, on the domestic side I don't see anything which can take the market up. I think everybody is kind of holding their breath and waiting for the money to come in.

Q: The private banking sector has performed well across the board. What's your best pick from the lot and do you think that there could be a re-rating on some of the bank stocks like ICICI Bank?

A: The market is right now so narrow that pretty much most of the stocks, at least in the frontline, are priced for whatever news that is there already in the market.

The question rests on continued sustained growth. Therefore private sector banks look a little better than their public sector counterparts largely because of capital. So ICICI should do quite well.

Axis has been a consistent performer and there is no reason to change the outlook on that. So long as interest rates remain reasonably robust or high, there is a possibility that the growth rate in private sector banking will continue to remain fairly decent or at least more than the corresponding market share.

Q: What will be the big cue for the market in the near-term? Will it go back to global markets or is there something coming from the domestic front such as increased government activity or initiatives by the RBI in terms of attacking the rupee?

A: I am confused on the local front because the expectations that the market has are actually negative.  I'm at a loss to explain how the local market seems to think that all price increases will be great for the economy.

Though raising the price of diesel to cut fiscal deficit doesn't augur well for the market, the government has managed to change the debate from curtailing expenditure to raising user charges for everything from airports to power and fertiliser. The government is profligate and has to cut expenditure.


So, an absence of policy action seems good, which means that investors are really looking at the overseas market. If there is policy action, it will be negative for the market which may actually rally for a while and then fall because higher diesel prices have increased inflation.

There are fears that after the Parliament session is over, there will be some government action which will send the market in a short-lived flurry of activity on the upside. But after that, the reality will sink in that the government action has been really bad for the market and the economy.

Q: What is the probability that the markets may have seen the highs for the year in the January-February period?

A: I had argued that for someone who was bold enough to invest in December, the investor would have made close to 30% in returns from the Indian market, which is pretty much at par for a market like India.

Barring liquidity, it is not likely. But as I said, the market right now seems to be factoring in a fairly strong burst of QE3 again. If that were to happen, the market may actually go up further than it ended up in the January-February period.

Q: All the telecom companies are now contesting that the high reserve price recommended by the TRAI. If the reserve price stays, would you take a contrarian view on something like Idea or Bharti which has good upside potential?

A: Absolutely. I think if the prices that they are required to pay become more reasonable that there is reason to be bullish on these stocks at least in the near-term.

Higher licence fees will eventually lead to higher tariffs because the competition has moved out. How can that be good for the economy?

Q: The FMCG sector's earnings are to come out next week. The sector, if not outperformed, has been stable for a while. What are the trends you expect from the sector this time around?

A: I think we will get again a decent set of earning and the sector will remain attractive to investments because it's cheap and grows at a steady rate as compared to the other sectors in the economy today.

Q: What about the auto sector? Is it still Tata Motors versus the rest of the world or do you think there is an opportunity to buy some of the other auto stocks?

A: This has been a bit of an interesting sector because the higher interest rates haven't seemed to have impacted demand at all.

Maruti had its own set of problems because of manufacturing, but seems to have rebounded quite strongly. Mahindra's tractor demand kind of eased off a little bit but again the growth seems to have resumed.

Escorts is having a bit of trouble in the tractors segment, but otherwise the market seems to be doing reasonably well for the auto segment.

However, two-wheelers have not seen any major activity. This in spite of the fact, that at least in theory, there should have been some kind of margin pressure because of the increase in interest rates and higher levels of competitiveness in the two-wheelers as well as four-wheeler segment.

But its still a sector which has given very good results. Inflation has not been able to spread its influence on many of the capital-intensive sectors.

Q: What about the infrastructure sector?

A: I don't think the earnings are going to look up anytime soon for the sector. It was a question of where the change is going to be and if the expectation early in the year was that interest rates would be cut, that drove infra up only because of positive equity value in any infra company.

Now I think the expectation of interest cuts have moderated very dramatically despite the RBI's surprise policy action. Therefore the market has to come back to the ground reality of huge cash flow problems affecting many companies in the sector.

There are reports that infrastructure financing companies are starting to guarantee loans which will lower the cost of interest for asset-owning companies. If that were to happen there might be a bit of an uptake.

But infrastructure will remain a stressed-out sector. The ability to raise money overseas is suspect even though permission has been granted. But the reality is that there are no investors waiting with truckloads of money to give to companies whose earnings are suspect or whose cash flows are not likely to be very clear.

Q: There are some important midcap results to be announced next week. Does anything catch your eye?

A: Obviously companies like Exide are stocks that would remain on a positive. Likewise, midcaps like Punj Lloyd have disappointed too frequently.

So I think that it's still a sector call. At this stage, midcaps are attractive not because of valuation, but on expectations of a surge of liquidity.

I think the market does expect that if liquidity increases, the attention should be on midcaps. However, if you take the US Fed’s statements at face value, it has indicated that the QE3 is not likely to be conducted anytime soon. The market is being optimistic on QE3 and investors should brace for a fall and not particularly look at midcaps at this stage as a strategy.

Q: Coal India has had quite a smart session. Even if you map a two-or -three month trajectory, how do you think it would move from here? Do you expect to see much better levels on Coal India?

A: There has been a change in the Coal India management in the near-term and the stock has grabbed the chance to improve its performance. There is too much focus on what Coal India has to import.

Frankly, Coal India doesn't have to do too much. The PSU can actually increase the extraction of coal by almost five-to-ten times from their existing mines by making some minor adjustments in the capex, which given their balance sheet, is affordable.

Handling the manpower remains a key management challenge. There is no lack of coal available, there is no lack of ability to take it out and no lack of money. It is simply a question of management capability to handle the unions.

From a government point of view, Coal India will become an organisation like the ONGC and will finally find that it has to takeover some of the losses. It is already doing that in some form by subsidising or not selling at market value the coal to NTPC and so on.

Therefore it's already taking a kind of in-built subsidy. As the power sector struggles the subsidy may have become explicit. I think the government effectively hinted at it by explaining that long-term supply agreements are essential but the board has somehow managed to stave it off.

So fundamentally, Coal India, if allowed it to work like any business, should be valued much higher. The fact that it's a government-owned undertaking has made it unpredictable.

Q: So how do you approach the market at this point? Do you go back to last year's phenomenon of working with defensives, look at FMCG and get that kind of return? Do you start looking at fixed income again or do you just treat this as a period where you sit on your hands a bit?

A: I would think that for the next one or two months, till the government borrowing is out of the way, liquidity is likely to remain tight. So the best way is to continue to be in FMCG, pharma, IT or banking and hope to outperform the market.

Once the government borrowing eases after the first four or five months of the current year or there is a huge flood of overseas funds, investors would look at the market a lot more positively and obviously sector allocations would shift to those which are a lot more interest-rate sensitive, because then interest rates would be expected to fall.

The RBI is confused between its role as manager of the government treasury and manager of the public's price expectations. Once government borrowing is out of the way, the money supply becomes a little easier and that's the time when the market will move.

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