Expect corporate tax rate cut of 10% in Budget: UBS

ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

The bulls seem a little tired again! After closing at all-time highs for quite a while now, the markets ended in red near its day's low on the last day of the week.

Sandeep Bhatia of UBS believes that global interest rate cycle are peaking. Bhatia expects Indian rates may continue to rise. He sees the 10-year bond yield going up to 8%.

Bhatia is extremely positive on the markets. He expects corporate rate cut of 10% in the Budget. He further adds that the market has strong earnings momentum behind it.

Excerpts of CNBC-TV18's exclusive interview with Sandeep Bhatia:

Q: How are you feeling about the market at 14500 plus?

A: We remain extremely positively inclined towards this market. This market, as I have been saying repeatedly, would be strong in the first quarter. We expect positive Budget announcements; there could be corporate tax cuts to the extent of 10% so the tax rate could fall from 33% to 30% - that would be earnings kicker for the broad market.

The results season, which we just came out from, continues to show strong topline growth, margin expansion and earnings growth. Infact, we have reached 70% earnings growth for the UBS universe that we track. So this clearly shows that the market has very strong earnings momentum behind it.

Q: What about flows, what are you sensing there because after a very quiet January we have seen flows open up once again. When you look around the region, do you get the sense that flows will be benign for the next couple of months or are there apprehensions?

A: Flows should continue to improve at least until April-May. There is definitely more interest coming into India after the results season is behind us because what we have seen is that some large cap stocks have surprised like Bharti, Reliance, and of course the oil and gas sector also had a huge surprise on the back of year to year comparisons.

So, on the whole, the way we look at the market earnings growth for this year is poised at 33% - that is a blow out number and higher than the last couple of years as we have seen. So this is clearly one reason why flows will continue to remain strong and Budgetary announcements, if they are positive for the market flows, will continue to pick up during the next three months.

Q: The point is taken about earnings and everything else being fairly benign but the inflation numbers are beginning to bother a few people and the fact that most of the big banks are raising interest rates too is an attendant problem. How have you, at UBS, been resolving this with a bullish undertone that you foresee?

A: We are anticipating higher interest rates all along. I don't think we are far away from the end of that cycle. The rest of the world is probably near the peak of the cycle. Infact, we expect US interest rates to come down from May onwards. But as far as India is concerned, we are projecting the 10-year-bond yield to rush to 8.5% by the end of the year, we could even be earlier than that. That is something, which is going to happen in our view.

The way we have looked at it is basically put in higher cost of capital for Indian companies, and when we look at the price targets that we put in, we build that in. The good thing is that on the corporate leverage side, the large companies have very little gearing even now on their balance sheets. Infact, the impact could even be positive because non-operating incomes expand for companies, which have a lot of cash when interest rates go up.

Contd on Pg 2....