SENSEX NIFTY
Jun 18, 2013, 12.48 PM IST | Source: CNBC-TV18

See 8% earnings growth for FY14, rupee a worry: BoAML

The market will remain in a trading range and an uptrend will depend on real improvement in economy and earnings growth, says Jyotivardhan Jaipuria of BoAML.

The March quarter earnings did not see much change over the performances of previous quarters, and since overall situation appears grim, Bank of America Merrill Lynch (BoAML) pegs FY14 earnings growth at 8 percent. Speaking to CNBC-TV18, Jyotivardhan Jaipuria of BoAML said India is slightly better placed than other emerging market economies although it is a fact that a recovery in the economy is going to be sluggish and capex will get increasingly scarce. Until elections are over, one should not expect major spurt in capex cycle, he said. At the moment, BoAML is overweight on rate sensitive and rupee sensitive sectors like autos, banks, telecom and pharma.

For all the above reasons, it turns out the market will remain in a trading range and an uptrend will depend on real improvement in economy and earnings growth. The rupee remains a big concern and will continue to be a headwind, going forward. Although the currency crisis is an emerging market phenomenon, the current account deficit makes our situation worse, he said.

He does not see much downside in rupee from current levels and hoped that in three-months time, the import checks imposed by the government improves current account deficit (CAD), which in turn should help rupee firm up. In terms of fund allocation, India remains an overweight country as foreign funds are still bullish on India. Jaipuria does not see quantitative easing happening this year and believes the Fed this time (June 19) will send a clearer message on intended delaying in pulling out QE. 

Below is the edited transcript of Jyotivardhan Jaipuria's interview with CNBC-TV18

Q: How much longer will the market remain in this trading range? It has been quite a few months and the market is just yo-yoing in this 500-600 points Nifty range.

A: This is going to be a trading range and we will end with a slight positive return. It will be in a trading range because the economy continues to do badly and since economy is sluggish, earnings are going to be sluggish. So that prevents upside on the market.

On the downside, people are hoping that this is the bottom. We are hoping that things will start improving and we are having some rate cuts which are helping protect to the downside. Till we see more visible signs that both the economy and earnings are recovering, the market is going to be in a trading range.

Q: Do you continue to see the rupee being a big headwind for the equity market as well for the next few months?

A: The recent move seen in the rupee is more an emerging market (EM) phenomena. It has been true that most EM currencies have taken a knock, but otherwise this is one of our biggest concerns for the year that the current account deficit (CAD) still continues to be very high.

Our reserves are not very strong in terms of number of months of imports; we are running at like 7 month import cover which is the lowest we have had since 1995. So to that extent fundamentally the rupee is going to be a concern going forward also.

Q: Up until this recent correction India was actually an overweight for a lot of people tracking this space. What is your fund manager survey throwing up in terms of how people have changed fund allocations around to equity as well as to debt because a bit part of the problem is this outflow from the debt side from us?

A: In terms of fund allocation, people are still overweight India, maybe neutralish to slightly overweight India. I do not think people have changed much because India has got lots of problems, but so as most of the world, so to that extent people are struggling with where there are no problems today. The equity money has not been coming to EMs, it has been going to the US and Japan for most of this year. So people are struggling with EMs and India still is one of the overweight countries for most people.

Q: Some economists have begun to delay or postpone the potential recovery in the economy to late FY14. How would you extrapolate that into what you expect to see on the earnings calendar? Last we spoke you were not expecting it to be special, but how prolonged do you think this weakness is going to be on earnings?

A: My view on earnings has been and it continues to be that earnings are still very optimistic the way analysts have them. We have consensus running at 14 percent growth for FY14. I am looking at it being more like 8 percent, so we have not really changed our view. One of the reasons is that the recovery in the economy is going to be slow and sluggish; it is not going to be a sharp recovery.

We will not see too much of capex coming through. We are entering into this season which is very close to the elections now, so for a lot of people who are thinking of big projects, their mentality would be, lets wait till we have a sense of what the new government is like before we start into the new capex cycle. So to that extent over the next six-nine months we are not really going to see a major spurt coming through in capex.

Q: What is a good way to position in this kind of a scenario? If your expectation plays out and you get a range bound market with the market drifting in a 10 percent kind of a broad trading range what is the best way for investors to be positioning themselves in this phase?

A: We have been having a mix of defensives and rate sensitives. Our theme has been buy rupee sensitive and rate sensitive plays for the year. Within the rate sensitives, we have not really gone to infrastructure names, but we are trying to position more on consumer discretionary side.

So, we are overweight on autos, banks, telecom and pharma, which is really a rupee sensitive play, a bit more defensive and better quality. These are the four sectors on which we have overweight rating. It is a mix of defensives and rate sensitives.

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