Moneycontrol
Aug 05, 2013 04:03 PM IST | Source: CNBC-TV18

Bet on exporters; avoid economy related stocks: BP Singh

Domestic investor will continue to remain cautious and in that context, companies that are focused on the domestic businesses will continue to disappoint whereas the companies which are exposed to exports will continue to do well


Huge capital account deficit (CAD), weakening rupee and a cautious pack of domestic investors have left very little scope for domestic stocks to resurrect, says BP Singh, Executive Director and CIO - Equity, Pramerica Mutual Fund. Amid this despair, export-oriented stocks are expected to provide some relief.  The domestic macro situation continues to deteriorate for want of meaningful investments. Unless the situation improves, entrepreneurs are unlikely to return, feels Singh.


Also Read: Global cues favourable for EMs; Nifty may pullback: Udayan


Singh told CNBC-TV18, Nifty’s earnings are not representative of the market because Nifty is dominated a lot by the export oriented entities. The earning disappointment in the broader market is much more vigorous. However, Nifty earnings are expected to improve due to the rupee fall, he added.


Below is the verbatim transcript of BP Singh’s interview on CNBC-TV18


Q: How is it looking for you looking at the macro and the earnings backdrop? Is it possible that the market seeks lower levels in the months to come?


A: Market could probably marginally go down. However, one will have to divide the market into two parts. You will see that there will be continuous inflow of money into the market, particularly from overseas investors. Though the domestic investor continues to remain cautious and in that context you will see that the companies that are very focused on the domestic businesses will continue to disappoint whereas the companies which are exposed to the exports will continue to do well. However, there will be marginal pullback here and there considering the valuations. Overall the drift down will carry on for particularly the old economy stocks.


Q: What about the earning season, what have you made of earning season so far and what could the earnings growth look like given the slowdown that we have seen in FY14?


A: If you look at the Nifty earning, at this point in time it is not truly representing the entire market because the Nifty is dominated a lot by the export oriented entities. Entities, which are getting benefit because of the currency depreciation that is taking place.


But if you go to the broader market, you will find that the earning disappointment in the broader market is much more vigorous and that is why you noticed that there is more selling on the outside Nifty or when you get into the much more broader indices.


If I focus only on the Nifty then you will notice that the earning improvement has taken place because of the rupee depreciation. If we have a view that the rupee continues to depreciate, which we believe that the rupee probably will weaken then in that context, we find that the earnings for the Nifty will continue to improve. However, we would like to point out that is not true representative of the entire market.


Q: Given the kind of cues that we have both macro and micro, do you think this market is headed back towards those yearly lows of around 5,500 or so or do you think that this range that we are currently drifting in will continue?


A: To look at the market, we will have to divide into two parts. One is the global and other is the local. If you see the last one and a half years, the Indian markets have been driven mainly by foreign inflows.


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Now the news flow from the global side has stabilised. In fact they are turning more favourable. Next two-three months, there are hardly any negative news. In fact to the extent that directly the entire globe has now gone ahead and accepted that there will be some amount of cut by Fed chairman Ben Bernanke in the month of September, so those negative news are already discounted. So you will continue to see inflows particularly on the equity side from the global markets, which sustains the market.


However, the macro continues to deteriorate in India and the macro needs an improvement on the account that we need to look for some kind of investments taking place and the entrepreneurs are not at all finding it attractive to invest in the Indian market and unless there are conditions, they will probably not come back.


So you will see money flowing into the market from overseas investors, which will go in favour of those companies that are doing very well, particularly higher exposure to the global markets whereas the corporates which are not completely exposed to the domestic sectors will continue to struggle in this particular period.


So net-net if you look into the index point of view since your queries pertains to 5,500 on the Nifty, the Nifty earnings per share (EPS) will improve. Therefore, you might not see that kind of index number on Nifty, but you will probably see lower numbers in individual portfolios because the individual portfolio may not be a true representative of the Nifty.


Q: Which kind of clusters do you see the global money going into? Aside of IT and pharmaceuticals do you see any other sectors attracting capital because consumers have gone up in terms of valuations to such levels that is causing apparently a lot of discomfort to global investors and private banks where a lot of global money was stuck or was invested, that space has started underperforming of late?


A: IT and pharmaceuticals is something which is continuously attracting capital and we believe that the consumers are overvalued. There are other companies, which in the recent past, have gone ahead and acquired the businesses in the overseas markets. So if you look into their earnings, you will find that it has some amount of exposure to the global market. Plus there are certain companies which are exposed to that segment of the market which is benefitting due to good monsoon. So these are some of the segments where money will continue to flow in.


Private banks, we believe that now valuation correction is taking place considerably and with interest rates now stabilising and maybe partially going up, private banks tend to benefit in those kind of scenarios. We are of the view that just the rate cuts had no impact in terms of real rates in the Indian market, the rate hikes are also not going to have a real impact because now the scenario has changed.


Now you have a credit growth rate which is lower than the deposit growth rate. If you just go and increase the rates by 25-50 bps, there will be a decent amount of surplus of liquidity in the banking system. So the manner in which the market read the entire banking thing in the last 15-20 days, the scenario is not going to unfold exactly the same and in that context we believe that this money will definitely flow back into private banks again.


Q: Monsoon session of the parliament kick starts today, is there anything or any bill which is presented successfully will move the needle of the market?

A: Yes, surely, in fact I was pleasantly surprised by the news yesterday that the pension reform bill, there is a consensus among most of the political parties that they are going to push this particular bill and approve it. The approval of this particular bill will definitely send a huge positive signal not only to the domestic market but also to the global market because pension is one area which has huge amount of impact on the capital market globally and to open this particular sector for 26 percent FDI will be taken very positively. So if this particular bill is passed, it will send a good signal in my opinion.

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