SENSEX NIFTY
Oct 29, 2009, 12.45 PM IST | Source: CNBC-TV18

Positive on mkts in medium-term: Girish Pai

Independent Analyst Girish Pai, in an exclusive interview with CNBC-TV18, said, "From a medium-term standpoint, that is about twelve-eighteen months, I am still positive on the markets."

Independent Analyst Girish Pai, in an exclusive interview with CNBC-TV18, said, "From a medium-term standpoint, that is about twelve-eighteen months, I am still positive on the markets."     

Here is a verbatim transcript of the exclusive interview with Girish Pai on CNBC-TV18. Also watch the accompanying video.

Q: There has been some correction over the last few days, do you see it deepening or as an investor you think the time to buy has arrived already?

A: From a medium-term standpoint, that is about twelve-eighteen months, I am still positive on the markets. However, in the nearer-term, if you look at the next two-three months, there are a few factors which are probably going to play against the markets.

We could see a decent correction come through and these factors include price performance, valuation, earnings outlook and the global macro set-up. If you look at price performance, we are up almost 100% from March levels except for a very brief correction we saw post the budget. There has been no meaningful correction in the market thus far.

From a valuation standpoint, we are running slightly above average multiples, P/E multiples that you have seen over the last couple of decades at something like 17 times September 2010 earnings. From earnings outlook standpoint, I would think that we went into the earning season expecting an earnings upgrade to come through on an aggregate basis and as we exit the season my sense is that aggregate earnings are probably headed lower, primarily, due to downward revisions in banking and telecom and to a lesser extent probably in autos and cement. Therefore, I would think that the expectation on an earnings upgrade cycle continuing beyond Q1, into Q2 and later into the second half of this year is probably going to be belied and that might be a little bit of a dampener on sentiment.

The other thing is global macro setup. The big run-up in equities, especially, emerging market equities has been on the back of liquidity from developed markets especially the US and that has been driven by the dollar carry trade––a weak dollar outlook. Having come down from 88 to 75 we might probably see a small bounce back happening in the dollar.

The other factor to look at it is that investors might be a little skittish on the tightening that we see across the board and a lot of countries we saw some of it in India, Australia, Israel and Norway. So there is some bit of tightening happening and today’s US gross domestic product (GDP) number is very critical in the sense that if it comes above a range of 2.5–3.5% or substantially below 2.5%, markets could get a little worried. If it comes below 2.5%, market is going to be worried that we are probably going to go in a double dip. If it is going to be above 3.5%, there could be a worry that things are getting overheated. So these are things which are near-term issues.

Q: What do you think the market’s take will be after this earning season because day after tomorrow, by the end of this week we are done? Do you think earnings and how they have turned out will play a decisive role in where the markets head now or the other factors that you were talking about the dollar, flows, global cues will establish what happens in November–December?

A: The market direction is determined by global factors and local factors probably play a lesser role. They probably determine the speed of movement of the local market in one sense in the direction that is set by the global markets or global factors. Global factors in my opinion are going to tend to the reverse at this point in time. The dollar index for instance could probably rebound a bit and there could be some concerns on potential tightening globally in one sense. From an earnings output standpoint, as I mentioned, this particular quarter I don’t think is going to have so much of an impact. I think it is most likely the earnings are going to come out along the lines of markets expectations; however, I think the outlook is probably turning a little negative primarily on the back of the credit policy that was announced a few days back and the provisioning coverage that the Reserve Bank of India (RBI) is now wanting of banks which might impact earnings of some key banks like State Bank of India (SBI) and ICICI Bank and some others. Banks index constitutes almost 23% of Sensex and constitutes almost 16–17% of Sensex earnings and that might get impacted going into the next couple of quarters and into FY11 if that particular coverage ratio has to be attained.

So I would think that the aggregate earnings picture is probably going to look bad post the result season. The other thing you have to look at is telecom which has a fairly large weight about 7–8% of the index. I would think that we have seen just a first cut in terms of earnings by the sell side.

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