As not much is expected from the European Union summit, it will instill confidence in the market if it manages to deliver. The summit is expected to result in a stimulus package of some 130 billion euros in infrastructure bonds, regional aid funds and European Investment Bank loans.
Amidst low hopes, Nitin Rakesh MD & CEO, Motilal Oswal AMC is a bit optimistic that Indian market may rally 5-7% if EU summit delivers. He feels that that probably there is some level of support coming in from global macro with crude falling like ninepins.
"Despite all the negative news flow, from across the world overnight Monday, we did pretty well yesterday. I think it seems like that the market is refusing to actually fall below 5100-5050 mark. So that’s clearly one good sign. Maybe we are seeing valuation support," he adds in an interview to CNBC-TV18.
Rakesh is hoping for a 15% YoY earnings growth in the first quarter of FY13.
However, there are some concerns that are keeping foreign investors away from India. He points that among the emerging markets, India is the least preferred one due to the policy inaction by the government.
"Even if EMs come back into flavor I think we will have to actually have to compete very, very strongly for capital based on where we can differentiate ourselves, where we can make a difference from the point of view of giving that confidence to people that this really indeed is a growing emerging market," he reiterates.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: Are we going to see this range bound situation continuing for a while or do you think the triggers in July could lift the market into a higher range?
A: I think the market is in a fairly lackluster phase right now. There is so much news flow from outside of India, there is lot of news flow from Delhi and earnings season is around the corner, so I think it’s going to be interesting to see which way the momentum breaks through.
From a technical perspective it seems like there is a lot of support at these levels. Despite all the negative news flow that we had from across the world, we did pretty well yesterday. It seems like that the market is refusing to actually fall below 5100-5050 mark, so that’s clearly one good sign. Maybe we are seeing valuation support, maybe we are seeing some support coming in from global macro with crude falling like ninepins.
But having said that, we haven’t yet seen any triggers for the market to rally sharply. So I think it’s right now a testing phase from a patience perspective.
Q: Does this relative resilience read as a sign that the market may rally sharper as well if it gets some good news? For instance, if things go off reasonably positively at the EU summit, would you say it’s a 5600-5800 kind of event?
A: I think that will be a little bit of a stretch right now based on where we are. We still need to see a lot more happening from Delhi. It’s clearly been a complete holiday on policy front; it seems like the summer holidays have extended all the way into June and maybe going into July. So I don’t think that we are setting up a base for that kind of a move.
But I think 5-7% is possible assuming that we get good news out of the EU summit. It seems like the only thing they can agree on is to disagree, so it’s a tough call right now on that front.
Q: Most of the money adjustments are playing out in the Futures and Options market right now, no one’s making any cash commitments. Is this caution ahead of the global event or people generally averse to getting into India right now?
A: We had an interesting call with one very large asset allocators earlier this week. Their perspective was that India is one of the least preferred emerging markets right now; probably not because of the macro situation, but more because I think their view on India seems to be driven by what they feel is policy inaction. The currency also spooked a lot of them based on what they have seen in the last six months.
So I think while the first phase of currency depreciation that happened last year was all EM pack was depreciating, we did a little more. I think this time around, despite crude correcting, despite commodities correcting, despite interest rate cycle being behind us, it’s really put the fear of God in lot of the foreign investors who are large asset allocators into India from a long-term perspective.
So at this point in time I don’t see a gush of liquidity coming in. Even if EMs come back into flavor, I think we will have to actually have to compete very, very strongly for capital based on where we can differentiate ourselves, where we can make a difference from the point of view of giving that confidence to people that this really indeed is a growing emerging market.
Q: For the second half of the year what’s the more likely scenario – will be have alternate bouts of optimism and pessimism that we have been seeing since December last year or do you think we could find a trend, even if it’s a weak uptrend, with a little less volatility?
A: I think I would go with the latter given that we have seen a fairly long consolidation phase, given that we will see a little bit of earnings support that basically transfers into valuation support. I think it’s likely that we will probably stay in a mild positive zone.
Looking for sharp moves like 50-60% rallies in a year’s time is probably hard to imagine right now, unless things change so drastically and we have a gush of positive news coming out of almost every corner. Barring that kind of an event happening, I think it’s probably going to be a slow steady type of an environment. So focus much more on how the domestic situation is improving and how the earnings momentum comes back at some point.
Q: What do you expect to hear from the earning season itself, which the market will start focusing on in another 10-15 days? Do you think it will be a good one or do you think it will be a pedestrian one?
A: I think it’s actually very misleading if you look at the overall or aggregate earnings picture. Yes, we will see 14-15% growth in earnings, maybe a little higher than 15% year on year growth, maybe around the same level in revenue growth. But I think it’s going to be very lumpy earnings season, because we will have some sectors that will do really well. Especially in rupee terms, things like pharma, IT they will obviously report some great numbers because of the currency depreciation coming into play. Then you will have some other sectors that will be very, very muted. Metals will do okay it seems because the input prices will reflect in the earnings.
So I think it’s a very lumpy kind of earnings season where you will see very stark differences between sectors and within the sectors companies as well. So I don’t think it’s going to be great cause for cheer or concern. I think it would probably be something that the market already expects.
The issue really is how the global commodity cycle that’s playing out right now that continues to play into the earning season for the rest of the year. What happens to, for example bank earnings, especially the larger set of PSU banks? So those are two or three things that one needs to kind of watch out for from the earning cycle season that starts in a couple of weeks.
Q: Switching back to the macros, where would you place the monsoons and the progress there in order of importance for the market, because that hasn’t been very encouraging through this month?
A: I think at some level there is an expectation built in that we are going to have a slightly muted monsoon. The question really is how muted it is and which part of the country gets that muted rainfall. If you manage to get it in the right regions then I think that’s much less of a worry for the market.
So far obviously we are in the 30% odd deficit area. Based on what we hear from the MET experts, it looks like that we will probably get to cover most of the sowing fields fairly well. So the impact on food production should be minimal. Even in a year like 2010, when we had a so called failed monsoon, we actually saw agricultural growth in the range of about 30-40 basis points. So I think we should take heart from that.
I don’t think at this point in time it’s causing a major concern to the market, but obviously if things don’t turn out well or get worse from here in terms of the progress of monsoon I think it may become a cause for concern.
Q: Your thoughts on this SEP move and do you think it can lift stocks related to that sector?
A: I think there will obviously be some short-term impact on the positive, but we need to see whether there is follow-through action in other cities, how that impacts the whole segment as such and if we can also hope to see some more movement coming out of Delhi on other infra projects. I think the recent announcement about tracking infrastructure projects and having the project development companies to actually report to the government on the progress and bottlenecks is a good positive because that will at least put some tracking and monitoring in place by the PM’s office.
So I think we are starting to see a little bit of activity on monitoring and the PM’s obviously been hands on with power and infra over the last three months. With the finance portfolio moving in there, I think we will most likely see some more follow-through action on a lot of these things that the market wants to see.
Q: Have you switched around exposure or preference in the oil and gas basket? This month has seen a different set of performers, oil marketing companies of course, but even to an extent ONGC and GAIL.
A: Not in our portfolios. We have continued to focus on actually just one exposure which is Cairn Energy and that was a switch for a Reliance maybe nine months ago. Other than that we have not really gone back into the OMCs because we still believe that the variables are stacked against that pack given the inaction on the part of the government in things like diesel and gas.
So I think we will wait and watch and see if there is any credible move towards some actual deregulation on that front before we take a call on those companies.