At present, Indian equities are seeing a technical bounce due to lower stock prices. Chakraborty desists from calling the current rally a bull run saying the real one will begin after the elections.
Nandan Chakraborty MD, Institutional Equities Research at Axis Capital says the euphoria in Indian market following the crash in crude and gold bodes well for the India’s current account deficit (CAD). He reasons that market underperformed in the past because focus shifted to Japan.
At present, Indian equities are seeing a technical bounce due to lower stock prices. Chakraborty desists from calling the current rally a Bull Run saying the real one will begin after the elections. His bet is that a massive amount of capex will be released after elections, which will unleash a sustainable rally.
Chakraborty is also against establishing a correlation between commodities and equities. A crash in one need not spill into other asset classes, he told CNBC-TV18 in an interview. When commodities go down, emerging markets also go down, but India over the last one year has not necessarily moved at the same times as other emerging markets.”
Speaking about the impending monetary policy on May 3, Nandan Chakraborty said the need of the hour is liquidity injection and not so much as a rate cut. The former will have a greater impact than the latter.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: India has underperformed since the start of this year, but last couple of days there has been some genuine reason for India to unwind some of that underperformance do you think?
A: Markets moved out of emerging markets as a whole. Then they moved into Japan and so on, which is why we suffered. Obviously this crash in crude and gold prices bodes well for the Current Account Deficit (CAD) that is one reason.
The other is what happens when absolute levels of stock prices are low then despite other things it starts. It is just a technical bounce which happens. It is a combination of both factors I guess.
Q: The fear with this crack in commodities though is that it may lead to some kind of collateral damage in terms of funds pulling out from other markets. In the past would you say that has been the trend that such a big fall in one asset class has usually lead to damage in others?
A: You cannot keep going back into history and drawing the same correlations in each time. Each time is different. I will give you an example. Gold and other commodities do not usually move at the same time. There is risk aversion versus there is risk-off. This time what happened was when commodities go down, emerging markets also go down in general. However, India at least over the last one year has not necessarily moved at the same times as other emerging markets. Though in general it always does and even this year it did.
However, it is moving away as a pack. India’s problems are more internal in terms of what we are doing, in terms of our political uncertainty and the macro economy. Those are the real concerns. In time once you have the election there is a huge pipeline of capex as we have published recently, which will come up in FY14-16 period.
So, there is a massive amount to look forward to post-elections. For pre-elections one has to be careful because it is going to be extremely volatile market. It all depends on what emerges over the next six months both internally as well as externally.
Q: What is the probability that what we are seeing in commodities sort of presages some kind of deep growth issue, which crops up in global markets or global economies later this year. Do you think that is a risk that global growth might actually disappoint, something for which commodities are beginning to selloff already in sight of?
A: Yes, that is possible. That is one of the theories. On the other hand the amount of liquidity that is available in the bond markets of the US is just phenomenal. When it goes to such a huge limit, when it comes back into US equities and therefore it goes into EMs is also unforecastable.
What I mean is normally people think that it is US versus emerging markets, risk-on versus risk-off. This has been the trend for the last few years, which is why we have started thinking in that direction. This time one has to think a bit differently that at a time when bonds will go back into US markets, then with a lag what will happen it will come back to good markets like India.
When money goes into US equities which is where it has been going out for the last few years. Once there is enough money in US equities versus US bonds some part of it will be allocated into non-home markets. However, that has to collect first. The problem out here has been that the lack of macroeconomic positives.
We think that a new bull market may easily start once you have a government in place. People are confident about unless this government takes some steps soon. So, a new bull market will really start only after the new government gets into place. Till then we will have these rallies and we will have to trade them as it comes.
Q: Would you raise expectations in terms of monetary policy relief though because of the events of the last few days both on these commodities crashing, the ease off in inflation. Do you think it maybe an easier policy now?
A: Yes it will. Interest rate cuts have played out somewhat, but it is not being transmitted into the economy. What we really need is liquidity infusing measures, whether through Oil Marketing Companies (OMC) or through Cash Reserve Ratio (CRR) cuts. That is what is going to drive.
One of our main thesis is that liquidity is going to be injected into the system in a huge way in this financial year. So, more important than rate cuts is the liquidity injection. Most people including us expect some sort of rate cut, maybe 25 bps in the next month. As it has to be a bit front-ended. However, I do not think that is as important as liquidity injection.
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