Mkts not to feel long-term impact of NSG deal: Experts

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It has been a volatile week. That big 500-point rally took place, then the market gave it all up in the last couple of trading sessions of the week, partly because of global weakness. On Friday night, the Dow Jones did not plummet again; Europe pulled back from the lows of the days. So we don't have to wake up to other bad cues from global markets at least from the US markets on Monday morning.

Surjit Bhalla , Chairman, O(x)us Investments, Vibhav Kapoor , IL&FS and Anand Tandon , Director-Equities, Brics Securities spoke to CNBC-TV18 in an exclusive interview to discuss how the various cues shape up and how the markets will react to the cues.

Bhalla said that the inflation has shown signs of cooling off; which is a positive sign for equities. He said that if the developed markets see a slowdown, commodity prices will correct further. He expects crude to fall to USD 90 per barrel if slowdown continues.

 

 Excerpts from CNBC-TV18's exclusive interview with Surjit Bhalla, Vibhav Kapoor and Anand Tandon:

Q: How are you reading the situation on the ground now and what impact if any, do you see it having on the financial markets going forward?

 

Bhalla: Coming to the financial markets domestically there are two concerns that we are dealing with. The first is the international market situation; it has been somewhat in doldrums this last week. The second is the impact of this deal not going through. I think given the way the Dow reacted, the US market reacted it is likely that the international markets are finding a double bottom and should be able to proceed from here because I don't see more bad news on the horizon. So in that sense, the framework or the outline is rather positive for India.

 

Secondly within India, we have had our growth numbers out. We have had our inflation numbers out and the story is not that bad. So I think if the deal does go through it is obviously an unambiguous positive for the Indian markets. If it doesn't goes through I think it is only a temporary setback. 

 

Q: Would you agree with that assessment or do you have a different point of view on the impact?

 

Tandon: What does it mean from the economic point of view? I think absolutely nothing. It is not going to lead to any strong infusion of capital, it is not going to change the economic parameters under which we operate. So having some kind of a sentimental matter attached to it, there is no direct economic impact on this and there is no direct impact on it for the next ten years. Therefore the deal itself has got nothing to do where the market will go, the market can go various ways and of course we can debate that separately. Yes, the inflation numbers are little lower than before but by and large, the consensus says that inflation will continue to remain in double-digits till the end of the year.

 

I think one more number that one needs to look at carefully is the credit growth. Even though the RBI has been arguing that credit growth is high, if you remove the credit growth that is suffering because of the bonds that have been issued to the oil companies; we are now at about 16% credit growth -that would mean to me that the worst in terms of corporate performance is not yet behind us.

 

Q: How are you reading the market then? Do you think the NSG impact either way can nudge the market out of the range of 4,200-4,500 on the Nifty or do you think it might just be a temporary impact and no more?

 

Kapoor: I tend to agree with Mr. Tandon that the nuclear deal by itself is not important in the medium-term or in the short-term from the financial markets point of view. Sentimentally it could give a positive impact but it's not going to change the earnings of companies for the next five-seven years; it's not going to change the economic fundamentals and even after five-ten years when we would have setup a nuclear plant, study shows that it's going to be only 5-7% of the total power generation in India and that's going to happen by 2015-2020.

 

So there is no argument to say that if the nuclear deal is signed then suddenly the economic fundamentals are going to change or the GDP (Gross Domestic Product) growth is going to be faster or that companies on broad spectrum are going to benefit out of it. So its purely a sentimental issue. It might impact the markets for a day or two and after that the markets are going to largely forget about it and go back to calculating what the EPS (Earnings Per Share) is going to be and how inflation and interest rates are faring. If the deal does not get through, there will be probably a short-term negative disappointment but I do not think it's going to make much of a difference.

 

So ultimately we are going to get back to the fundamentals and the fundamentals as we have said earlier are that the worst probably is behind us in terms of inflation, the worst is not behind us in terms of corporate earnings because that impact will still come over the next few quarters. But at the same time, I think the global situation is still not so good - the slowdown and the recessionary conditions are spreading into Europe and into Japan. So the flow of money is not going to be all that good.

 

So there are some negatives and some positives, particularly the fact that if a slowdown continues then commodities will keep on going down, oil will probably keep on going down and those are positives for India. So all in all we are still going to remain in a rangebound sort of market. We also have the political situation - the elections coming up over the six-nine months. On a very broad range, something like 4,000-5,000 is the range which the market will continue to trade for, over the next six-nine months.

 

Q: Commodities have cooled off and India has outperformed. But other global equity markets have been in complete shambles. Why do you think that is the case and is there more pain left from there you think?

 

Bhalla: I do not know the answer. But let me state that right now, the situation has been good for equity markets in developing countries if one believes that commodity prices are going to go down. It's no longer fashionable to keep talking about USD 150 per barrel or USD 200 per barrel, regardless of the circumstances. So I think there has been some sanity coming back into the commodities market. Therefore let me extend that sanity and say that if the world economies are slowing down, then commodities can't stay at these elevated levels for very long which means that oil has to drift lower somewhere in the USD 70-90 per barrel zone. If that happens and that can happen quicker then we can imagine; this will be one of the greates positives for the world economy as well as for the developing economies and maybe, for India.

 

Add to that the fact that now the increasing interest rates cycle is completely over and four counties have announced that they have cut rates and the UK Committee meeting that was held two days ago - rumours are bound that when the Committee minutes  were released, there was a significant disagreement with the UK decision to hold interest rates constant.

 

We, in India look at the latest YoY (year on year) inflation numbers and think inflation is high. The inflation over the last three-four months is now trending down. My point is let us not keep talking that the inflation rate year-on-year, will be 10% until the end of the year and then decide where interest rates are going to go. That is not how policy making is made or should be made.

 

So the reality is we are looking for commodity prices going down, we are looking for interest rates to head downwards not upwards over the next three-six-nine months - that to me is hugely bullish for the Indian markets as well as for other markets around the world.

 

Q: You view is not quite so sanguine or optimistic?

 

Tandon: I agree with the analysis that Dr. Bhalla has put out, except for the conclusion. The only difference of view I have is that if the markets were bearish in terms of valuations, it would be hugely bullish. But right now if one looks at the valuations of companies - we have a large mix of commodity-based companies. Those earnings will decelerate; as commodity prices fall, it will leave a cap on the Index. These are the ones that are trading cheap and the rest of the companies are trading very expensive. Consequently the interest rates will actually trend down or inflation will trend down. One could argue that most of the inflation is imported, raising interest rates in India perhaps would not necessarily be the best bet.

 

So all the policy actions to some extent are in agreement - I am not comfortable with the valuations and when you put that in context with the fact that the slowdown is occurring in commodity prices due to fall in corporate earnings; there is a pressure and a degrowth that is going to happen. This cannot be bullish for the equity markets. So we are in a bit of a fix where some of the macros are improving but due to the valuations and the earnings, there will still be continuing pressure on the markets.     

 

Q: What's your sense of the key risk right now because crude was the big risk - that's cooled down to more respectable levels of close to USD 100 per barrel? Do you think there is even a possibility that over the next quarter or so the market may go back and test the lows that we made in July and if that were to happen, what would drive that. What could be the negative trigger, according to you?

 

Kapoor: I think the major risk right now is that the global markets continue to reel under pressure. While it is correct to say that the overall inflation rates are going to come down in future and the interest rate cycle is probably peaked, one must also remember that commodity prices are coming down and this is happening because there is definitely a slowdown happening globally. Commodity prices will come down further if that slowdown probably continues or intensifies over a period of time and in such a situation, it is obvious that the flow of money into India will be very limited or it may not happen at all. Besides, in comparison to the global markets, India might do well but it is very difficult for single country to keep on outperforming in a big way when the others are coming down.

 

So if the global markets continue to reel either because of the slowdown and the recessionary conditions globally or because of some more problems in the US financial markets then one could see some temporary blips down here and can test the earlier lows.

 

But overall the Indian markets will outperform in the sense that they will go down less than what the global markets will and if the global markets start to go up, then we will probably go up more then what they will. But I do not think we are going to go against the trend. I am also very in agreement with the fact that valuations are not all that cheap; they are probably finely priced at this point in time. So looking at the overall scenario over the next six months, the best scenario one can think of is a range bound market between 4,000-5,000 on the Nifty and in the shorter-term maybe, 4,300-4,700.