SENSEX NIFTY
Mar 04, 2011, 04.51 PM IST | Source: CNBC-TV18

Budget created perverse relief: Anand Tandon

There is a growing fear that the rising oil price may have far dampening effect on Indian market. In an interview to CNBC-TV18, Anand Tandon, CEO, JRG Securities is worried that the oil shock may again deflate the economies fairly significantly.

There is a growing fear that rising oil price may have far dampening effect on Indian market. In an interview to CNBC-TV18, Anand Tandon, CEO, JRG Securities warned that the oil shock may again deflate the economies fairly significantly.

Arguing further, Tandon said that the budget has created a perverse relief as expected sectors which were supposed to take a hit in terms of taxes have been spared. ďTherefore, for the near-term, the market seems to think that thatís good for the economy and has taken the leg up. But the longer-term fundamental arguments remain weak.Ē

However, a sigh of relief can be breathed here as India among all emerging markets may prove to be the best to put in money. ďThe one thing that this budget has enabled is to raise some money for infrastructure,Ē Tandon added.

Below is a verbatim transcript of Anand Tandonís interview with CNBC-TV18ís Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying videos.

Q: What do you think is the worst over for this market?

A: Right now we are living in Aliceís Wonderland. The markets are not at new highs but doing reasonably well as is oil. We all know that for most world economies, high oil prices may not necessarily be good. While in the initial stages there seems to be a direct correlation between stock market prices and oil prices, as the price continues to rise I would imagine beyond USD 100, the correlation has to be breakdown because you are going to start having some kind of an oil shock and that will again deflate the economies fairly significantly.

This is probably in my view the last leg up before you start trying to figure out the realities of higher oil prices, unless the oil prices themselves were to come back to more normal levels which given the current geopolitics seems to be right now less than 50-50 chance.

Q: With what has been happening in the market post budget, would you sell into this relief rally or do you think this market has found some kind of bottom that itís put in place and after this we will see where it goes?

A: Technically, there has been some kind of bottom formation. You reached a certain level twice over and bounced from there. The budget has created a perverse relief in my view. If you have a situation where you tax healthcare but not cars, that leads the market to go up. That is strange logic.

The fact of the matter is most of the expected sectors which were supposed to take a hit in terms of taxes have been spared. Therefore, for the near-term, the market seems to think that thatís good for the economy and has taken the leg up. Technically, you have reached some kind of near-term bottom but the longer-term fundamental arguments continue to remain somewhat negative.

You will continue to find margin pressures, earnings pressures, all of which we have discussed in the past. Interest rates still have to go much higher. The headline numbers for the budget were generated by a random number generator. We have had a situation where social expenditure is down year on year on the budgeted figures and I donít know how those figures came through.

I am not even talking about the big subsidies. You will find that as the year goes by, for the first half, the market will get tighter in terms of interest rates and therefore that cannot lead the market up very high. I am still not very bullish on how high it can go but for the near-term, the immediate danger of a collapse seems to have been averted.

Q: You donít believe the market is reading an end to the interest rate hike post the budget?

A: We have a strange situation. This is not only true to India but if you look at the UK, you have 4% inflation and 0.5% interest rate. Will that be the end of the interest rate hike? I would think not. The numbers in the budget to me are extremely suspect. You have a situation where revenues have not grown and you have a situation where we claim to have a lower fiscal deficit. Even if you take a nominal 15% growth in expenditure you should have an increase in deficit.

Of course, we have done some Houdini act in terms of making the expenditure numbers vanish but when it comes out to paying salary, I donít see how itís going to change it very dramatically. Expenditure will be higher. The market fixation on saying the borrowing is below Rs 4 lakh crore is complete hogwash.

Given that scenario, how will you expect to get to borrow more unless there is a large inflow of capital? Can the inflow of capital come? Yes, it can because you have a situation where the US has probably peaked out or is near the top and the economy while it is supposedly doing well, fundamentally it remains very weak. The move back to larger economies, in terms of money flow may reverse sometime soon, given that commodities are also fairly strong and reasonably highly priced there arenít that many places except to look at emerging markets again.

Now will India be beneficiary of it? I would imagine we will get a fair share of it because there arenít that many emerging markets which have any kind of structure where you can put in large amounts of money. The one thing that this budget has enabled is to raise some money for infrastructure.

Therefore, in terms of bonds for infrastructure, you may find that there is a significant inflow. We have not been able to demonstrate the ability to use that capital sensibly but if we were to be able to absorb that money, we will be able to get some reasonable inflows through and that can keep some cap on the interest rate. Itís a bit of an iffy situation; it requires a government that acts and not one that does the acting.

Q: Post budget, the interest rate sensitiveís have done well. Bond yields have cooled down and banks and autos have done particularly well. How would you approach those sectors now if your view is that this stock of interest rates leveling off here is not entirely warranted?

A: With a lot of caution. The immediate relief seems to be over in my view. The auto numbers continue to be very robust but I find it difficult to believe that in the next six months, if interest rates remain or rise from here and if oil prices continue to go up that it will have the same level of demand.

The fact is year on year growth will be a lot more challenging to achieve this year because of the high base effect of the previous year. You will have a situation where the growth has to start leveling off, if itís not coming down. That cannot be good for valuations. The same goes for banks. Banks have been able to price in their loan book quite well, so to some extent, they have benefited from that.

The other interesting thing is with money market funds becoming much less attractive now, given that they have been taxed at the marginal rate for corporates as any other deposit, the ability to retain CASA deposits goes up. So, banks are a little bit of a mixed bag. You may still find that they may do reasonably okay but when I say okay you are talking about a 17-18% kind of M3 growth. So for the most part, thatís where you would find most of the banks to be.

The NPA levels will rise this year, unless the RBI decides to let them not recognise any NPAs. Assuming that normal accounting holds, you would find that the margins this year will be somewhat under pressure but not as much as I thought a couple of months back. You would perhaps give a more upside to the banking sector. I am not so sure that you would do the same for the auto sector.

Q: What about infrastructure, thatís another space which hasnít done bad post the budget. Did you take away anything positive which warrants a relief rally here?

A: The couple of structural changes of allowing larger amounts of bond money to come in are very good. The fact that you have allowed infrastructure companies to raise money, it means in dollar terms hopefully there can be some level of interest rate lowering or at least tapering off for many of the infrastructure companies.

Unfortunately, I donít think right now the issue is infrastructure financing. Longer-term it will be but for the near-term itís simply a question of being able to implement. Land acquisition and laws related to that continue to remain very murky. From the market point of view, in the near-term, infrastructure is something that looks attractive. In terms of implementation, the challenges remain. We have to be selective about what kind of companies we would look to buy. In terms of relative valuation, it certainly is a more attractive sector than most.

Q: Does it look like the market will slowly come around to that point of view and perhaps grind lower to its trade to the lower end of its trading range or do you think there is another leg down coming at some point this year?

A: I donít see anything that has changed in terms of substantially changing the earnings growth for this year. Assuming that we have a best case situation where interest rates stop another 50 bps higher from where we are, you are looking at a market which is fully priced at least till December 2011. Consequently, you would continue to have these wild swings.

How far the swings will go will depend not only on how the Indian economy behaves but now increasingly we have a whole set of issues on the western side of our border, much near our home and that problem seems to be spreading. That can be a googly and can throw spanner in the works but that is not India specific, it can happen for most of the economies as well.

Oil is a worry. We have started to see price divergence between oil and copper for example, usually, the two commodities move in tandem because you would argue that the oil and copper demand are both driven by economic growth. You find right now that copper has started to ease off big time whereas oil continues to rally. The market itself is confused.

You are not particularly bullish on the economy but what you are saying is because of supply constraints, one particular commodity may do very well whereas the other commodity has probably for the near-term reached its peak. Thatís pretty much the shape of the world economy as I see it. The Indian markets also will remain in this kind of split personality.

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