SENSEX NIFTY
Jan 30, 2013, 03.39 PM IST | Source: CNBC-TV18

Eyes on 100-bps cut in CY13; fin, auto dull: Morgan Stanley

Sridhar Sivaram, MD, Morgan Stanley Investment Management explains on CNBC-TV18 that the 25-bps rate-cut by RBI was a welcome move and that the market expects 75-100 bps in repo cuts for rest of the current year of 2013.

Sridhar Sivaram, MD, Morgan Stanley Investment Management explains on CNBC-TV18 that the 25-bps rate-cut by RBI was a welcome move and that the market expects 75-100 bps in repo cuts for rest of the current year of 2013. Sivaram points out that the RBI commentary suggested the need for more action from the FM and underlined the hurdles the market will face over next few months.

He emphasises that corporate earnings had to improve to help the market move up from hereon and that fears of a slowdown in China led to high FII flows in India. Sivaram hails the government's effort in announcing reforms during the previous quarter and holds a benign view on currency, expecting an upward move from hereon. However, he continues to remain underweight on the financial and the auto sectors.

Below is an edited transcript of the analysis on CNBC-TV18

Q: What is your opinion of the RBI's cut in interest rates and how would you interpret the RBI governor's commentary?

A: I think the cut in rates should be taken as a positive. However, the commentary was slightly negative and the suggestions put the ball back in the finance minister’s court. Some of the key suggestions call for increased reforms, effective measures to contain the current account and fiscal deficit, and lower inflation to allow the central bank room to reduce interest rates further.

The market’s general expectation is hovers around a 75-100 bps cut for the full year. To induce a rate-cut of such magnitude, a lot needs to be done by the finance ministry. So, the RBI has clearly indicated where the government was found wanting and maybe that is why the market didn’t cheer as much as it should have.

Q: What do you think will be the next trigger for the market and what is your estimate of the upside levels on the Nifty on the upside?

A: Actually, it is very difficult to arrive at an exact estimate on how the market will play out, but the first quarter will see a bunching up of lot of paper. At the end of the day there is only that much capital that can flow into the economy and will put a cap on the market in the near-term. For the market to sustainably move, there needs to be a substantial improvement in corporate earnings and continued reform momentum.

Though a number of reforms have been announced, the market is eager to witness the implementation of the policy and a very attractive Budget. But in the near-term, the situation looks difficult. The market may actually be fatigued at this level in trying to absorb all that paper that is coming through and may switch from one sector to another.

As a result the overall market may not move up so much. But in our view, the market may go up 10 percent from current levels, but a large part of the return maybe back-ended than being front-ended.

Q: You expect the first quarter to be dominated by new issues. Even in the remaining part of the year would fiscal contraction be a worry? With little investment to drive the economy, it was the fisc that drove consumption and provided the leg up for economic growth. If that is constrained due to higher rail tariffs and increased diesel prices, it would remove consumption worth Rs 1 lakh crore. Wouldn't that actually tell on the corporate sector? Can we really go gung-ho on earnings and on markets?

A: You can’t go gung-ho on earnings. Corporate earnings are already stressed and there is expectation that the consumption, which has already been very strong will continue to remain so. There are already signs of fatigue in consumption. And some of the results suggest that growth in volumes is not as strong as expected.

Typically when there a number of state elections lined up, there is an increase in consumption and there is a possibility that this plays out to some extent. However, the government has begun to reduce planned expenditure and this results in lower levels of consumption. So, the overall situation it isn’t looking very positive. Investors have to moderate expectation and to that extent the portfolios have to be adjusted.

Another negative is that the market's focus on interest-rate sensitive sectors such as the financial and auto sectors. Though telecom, IT, oil and gas have performed well, the market is capable of suprising in all kinds of ways. And that’s what is happening right now. The financial and auto sectors are struggling.

Q: Do you think FII flows will continue to be robust and what is the reason for this robustness?

A: In 2012, a lot of factors turned positive for India. So the FII flows to India were disproportionate on the general fear that the slowdown in China was much more than expected which caused related markets like Russia and Brazil to underperform. Another driver of increased inflows for India was domestic consumption.

But as 2013 kicked off, the bearishness on China has surely come down and there is widespread expectation that the Chinese economy would stabilise. So, now the number of countries that India has to compete for capital has increased.

So, I don't think the flow capital will be a given this year and may reduce unless the government significantly increases the tempo of the reform process. So for Q1, I think the government has done a great job and has resulted in the increase of inflows.

Q: What are the kind of sectors expected to do well in 2013?

A: IT looks interesting because it is a global sector and globally, the situation has begun to improve and we estimate that discretionary spending could go up in the second half of this year as most of the uncertainties are nearing resolution such as the US Presidential elections and the fiscal cliff. Corporates are now looking to spend more than last year.

Even for the financial sector, some of the regulatory spending is set to increase with Obama's return to the White House. Europe is also starting to look better in 2013 than in 2012.

So, the overall scenario indicates a return of discretionary spending.  I estimate IT to offer a few surprises as investors have generally been underweight on the sector and currency will turn benign and has any further room to appreciate with the current levels of CAD. So, I think IT sector is surely looking very interesting.

The other sector that looks attractive is, of course telecom where some of the regulatory challenges are nearing resolution. The sector is under-owned sector and the incremental newsflow is positive be it on the pricing front or the regulatory front and has potential toi throw up quite a few surprises.

Q: Would you use the cut in interest rates event to sell holdings in real estate, autos or banks?

A: We are already underweight on the financial and the auto sectors. We have held the view from beginning of the year that it will be difficult for the sectors to outperform the elevated market expectations.

The entire auto sector did not have any growth in earnings barring one or two companies. Generally, the auto sector had no growth in earnings in 2012, but the stocks were up 40-50 percent in anticipation of continued fall in interest rates which never happened.

With cut in interest rates turning effective this year, auto companies will have to perform and some of the expectations are very elevated. So if they don’t perform in line with those elevated expectations, there could be disappointment in the market.

The situation is similar in the case of the financial sector which performed extremely well last year and a lot of dilution is expected this year as companies are starting to raise capital. So for those financial-services companies that performed well last year, it is going to be very difficult to maintain the levels of performance or outperform.

So, investors are better off looking for opportunities in other sectors rather than ones on which there is a consensus trade. I think every strategist has a long on interest-rate sensitives.

Q: With regards to the consensus trade, what about infrastructure in light of the earnings announce from the capital goods and infrastructure sectors?

A: We still remain underweight on infrastructure. So, infrastructure as a sector be it owners or developers, the growth in assets or order-books is going to be fast as expected.

Investors putting money in industrials need be patient for at least three-to-four quarters because the results do not offer support.

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