Q3 earnings to be weak; pose downside risk: Morgan Stanley

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Q3 earnings to be weak; pose downside risk: Morgan Stanley

The third quarter (Q3) earnings season is just around the corner, like most experts, Gaurav Doshi of Morgan Stanley PWM also foresees a weak quarter. Speaking to CNBC-TV18, Doshi said, "Our expectation is that it is going to be a tough quarter."

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » 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

The third quarter (Q3) earnings season is just around the corner, like most experts, Gaurav Doshi of Morgan Stanley PWM also foresees a weak quarter.

Speaking to CNBC-TV18, Doshi said, "Markets from here could rally in anticipation of earnings. We are going into for a tough earnings quarter. Therefore, one could see this momentum fizzle out ."

However, healthcare and IT sector may surprise positively. "Healthcare could surprise because of a lot of new launches and IT on the back of the rupee," he added.

Morgan Stanley PWM expects Q3 Sensex earnings to grow 10% year on year (YoY).

Below is the edited transcript of Doshi's interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Between now and the budget and through earning season what is easier for you to see, a 5,100 Nifty or a back to 4,500 Nifty?

A: There is a possibility we will see both. Markets from here could rally in anticipation of earnings. I don't think 5,100 levels is a possibility, but around 5,000 levels is something that we could see relief rally towards.

We are going into for a tough earnings quarter. Therefore one could see this momentum fizzle out. The market could turn cautious ahead of the state elections and budget. So, the possibility is that we will swing both ways, first up and then back down.

Q: What do you hear about money interest especially for the first couple of months which are big on news for the market?

A: The money flow factor is one concern that the market is not factoring in because we haven't seen that big an FII outflow last year. We have only seen about USD 500 million, while other emerging markets like Korea and Taiwan have seen USD 8-9 billion in redemption. I don't think our current market has a depth to absorb any big FII outflows, if they were to take place in the next couple of months.

It is all dependent on the rupee and globally things seem to be okay. I don't see a risk off trade taking place, but Indian markets have to be very vigilant about FII outflows. If we do start seeing big sell numbers, I don't think our market currently has a depth to absorb any big FII selling that may come.

Q: What is the expectation at Morgan Stanley in terms of how tough this earning season will be?

A: Our expectation is that it is going to be a tough quarter. Ex-ONGC, we think Sensex earnings will grow year on year by about 10% compared to about 8% last quarter. Last quarter we saw a scenario where bottom line shrunk but top line stayed robust. But in this quarter we will see both the bottom and top line shrink and that will keep pressure on earnings this quarter.

Sectorally, healthcare and IT are two sectors that could positively surprise. Healthcare because of a lot of new launches and IT on the back of the rupee. Telecom will face a lot of pressure because most of the debt is dollar denominated and other companies which have dollar denominated debt will also to be under pressure this earnings.

Q: What is the bond market telling you because there yields have softened considerably to 8.2%? Do you think we'll get a rate cut on the 24th of January or is the market expectations misplaced?

A: Our house view is that we shouldn't get a rate cut before March - April and these concerns are valid because deposit growth has overtaken credit growth for first time in 20-21 months. That is a clear indicator that the market is expecting inflation to ease off.

Having said that we don't think the RBI will act in that much of a hurry as early as this month. No doubt the domestic inflation concerns have started to come off, but now there is new problem of importing inflation because of the way the rupee is behaving and India is an importer of commodities.

We need to see what is happening and how inflation plays out with regards to the imported inflation that we may get from crude and other global commodities. There is a possibility that RBI will take a wait and watch approach before aggressively cutting. We believe that RBI should cut may be around March-April when inflation has hit may be the 7.5% mark.

Disclosure: It is safe to assume that me, my firm and our clients may have an investment interest in the stocks or sectors that have been spoken about.