More M&As to boost global mkts: DSP ML

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Q: What is the call on the metal space? Do you think that this part of the market can do more by way of outperformance?

 

A: I think maybe in the short-term, metal prices or commodity prices might see some form of consolidation. Inventory figures in the US are reasonably high, which really gives me some concern of some kind of supply pressure there. Obviously, China has got its own problems in terms of trying to stop supply. So we might start to see metal prices ease a little bit. But with so much capital chasing around assets, these can be squeezed higher. In the case of mining stocks for example, if there are any strikes anywhere, we will see copper prices up, 4-5%. So we will have to watch the news flow. I think increased prices worldwide will probably slow down now. I think we are seeing quite a number of increases, particularly in Europe and some of Asia. So I think we are probably there or thereabouts in terms of price increases. But that doesn't mean that the metals can't get higher just by funds playing them in terms of news flow.

 

Q: We haven't seen too much money coming in from the FIIs in the last few days. Is it just because of the primary market where the money is going in now or is there any other reason for it - the fact that India is not getting too much net money into the secondary market?

 

A: Well, actually, if you look through the figures there has been a net outflow for the past two to three weeks. So that could well be that raising money for these issues. But it could be that the market has seen, we think in rupee terms, we have actually seen no increase. But from an FII perspective, with the rupee appreciating, there has been a 9% on top of whatever gains you have in stock. So there has been some profit taking on that, possibly on the view that the rupee could depreciate. So you lose some of those gains. So there could be some of that.

 

In terms of FII flows I think they will come back. I think if you look at the Japanese yen, I think that is pointing towards more outflow from Japanese investors and I think India is very much on the radar there. We are hearing that there has been money raised in Japan. So that will start to come. But let us not forget, as you mentioned before, domestic mutual funds, which are sitting on quite considerable cash at the moment and I think they will continue to be buyers going forward.

Q: There have been some concerns raised about gaps showing up in earnings performance this quarter. Is that a concern that you share?

 

A: This is probably going to be the more difficult to predict. Obviously, we all know the kind of short-term problems with the rupee for the software sector. Whilst they are giving guidance, we are seeing some forecast coming down across the market. I am not sure it is very easy for any analyst to really calculate the rupee appreciation and how that impacts earnings. We are probably going to be more worried at the time in terms of what those figures might look like.

 

Generally most domestic sectors, maybe those apart from interest rate sensitives, should continue to see very strong growth. So, maybe midcaps will continue to lead the way in terms of earnings growth. Then there are certain sectors like the
refining companies, which are doing extremely well and margins are continuing to be very high. I would expect earnings to be mixed, but I think we will still be around 15% plus growth.

 

Q: Last week saw a lot of sales in the Nifty Futures from the FIIs - almost USD 1-1.25 billion. Do you think those were essentially hedges which were opened up, or directional short positions that might need to be covered, if the market does not fall below a level?

 

A: It is difficult to be exact on that. I suspect it is a little bit of both. With global markets the way they are, obviously some investors might be taking the view that India, which has been liquidity driven will see more outflows, which we have seen. But I would have thought it has more to do with hedging rather than with taking directional shorts.

 

Q: Last week, we wrapped up a rather large issue from the real estate universe as well. How are you feeling about that particular rate sensitive sector?

 

A: In the longer term, the property market in India will continue to be an asset class, which will attract huge amounts of funds. The infrastructure in India, is really just taking off in terms of building that infrastructure. So, we might see short-term kind of falls in property prices, which we could all see and feel.

 

But in terms of building the infrastructure in India, we are really just at the beginning. So, when I think about the short-term, there might be some hiccups in the property market. But in the longer-term, it is an asset class, which will continue to rise.

 

Q: Where do you stand on the entire capital goods space and what might they deliver in earnings from here on?

 

A: I was at a conference last week and a number of those companies were actually presenting. The orderbooks are three years out and they are all giving guidance, which is unusual for capital goods companies. This shows strong growth and I am sure they will surpass some of the growth that they are talking about, in terms of earnings.

 

Across the board, maybe apart from a few interest rate sensitive sectors, most companies are still talking the same story of growth. So, I do not see any letup in earnings. There might be a few sectors, which might bring down the overall earnings but I think most sectors will show continued growth.

 

Q: Have you put out a year-end target for this market? Do you expect it to be significantly higher than where it is trading now?

 

A: I do not really have year-end targets now but I would have thought that towards the end of the year the market will be significantly higher than what we see it at today.

 

Q: Any disclosures:

 

A: Merrill Lynch and I may or may not have an investment interest in the sectors that may be discussed. We do not comment on specific stocks.