See 10-15% fall if govt fails to bring in reforms: Religare

With the market pinning hopes on Dr Manmohan Singh as the new finance minister for major reforms, Gautam Trivedi of Religare Capital believes that the current rally may be sustainable.
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Jul 12, 2012, 08.23 AM | Source: CNBC-TV18

See 10-15% fall if govt fails to bring in reforms: Religare

With the market pinning hopes on Dr Manmohan Singh as the new finance minister for major reforms, Gautam Trivedi of Religare Capital believes that the current rally may be sustainable.

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See 10-15% fall if govt fails to bring in reforms: Religare

With the market pinning hopes on Dr Manmohan Singh as the new finance minister for major reforms, Gautam Trivedi of Religare Capital believes that the current rally may be sustainable.

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Gautam Trivedi (more)

Managing Director, Religare Capital | Capital Expertise: Equity - Fundamental

With the market pinning hopes on Dr Manmohan Singh as the new finance minister for major reforms, Gautam Trivedi of Religare Capital believes that the current rally may be sustainable.

Giving his view on policy action by the RBI later this month, Trivedi said he will be frankly surprised if the central were to cut rates on July 31. However, he anticipates another 50 bps cut this fiscal.

In his opinion, the market is set for 10-15% downside if the monsoon does not favour and the government fails to deliver on reforms .

"There is clearly another 10-15% downside to the market if the monsoon continues to not work out and if the news of that spreads that will definitely set in some degree of a panic in the market. The market has rallied a fair bit even year-to-date as I mentioned earlier. So I think expectations are high from the government to deliver something. If that doesn’t come through, the market will be disappointed."

Below is the edited transcript of the interview. Also wacth the accompanying video.

Q: Do you think this rally is sustainable going forward?

A: I think it’s sustainable to a point. There has been lot of expectations built in. The market at this point is clearly looking at Delhi for future direction. But if I look back at this calendar year so far, India has pretty much been the best performing market in Asia. It’s up 8% in dollar terms year-to-date.

Also, the other three BRICs nations have done actually pretty well even though retail investors and mutual funds have been net sellers in the market. So I think net-net, compared to the rest of Asia and pretty much rest of the world, we have done pretty well.

Q: What is the market pricing in in terms of expectations of policy? Do you think some of the liquidity that’s come in over last three-four weeks is pre-empting that or is coming in independently?

A: A lot of the liquidity that’s come in the last three or four weeks has been pre-empting that. I think the talks of Pranab Mukherjee being a potential presidential candidate has been talked about for the last over a month. Hence, I think a lot of people do believe that he is going to finally be able to make it. Given that and with the fact that the Prime Minister, who has been a former Finance Minister is taking on the portfolio people are expecting a lot out of him. So I think expectations are clearly quite high at this point.

Q: How does this underlay with your core expectations in terms of earnings growth? Do you think the worst in terms of earnings markdowns is behind the market?

A: Earnings downgrades will actually continue because the economy clearly is contracting. Obviously, a monsoon that doesn’t so far seemed to have worked out also doesn’t help. So given both these factors, I think earnings downgrades will continue at least into another quarter before we actually see any signs of revival of the economy or earnings expectations.

Q: How much of a support do you expect from monetary policy for the stock market? Are you guys expecting any major moves from the Reserve Bank or given inflation it’s unlikely for the next couple of months?

A: We think it’s unlikely for the next couple of months. I think a monsoon which hasn’t worked out yet will add to the inflation. We will be frankly surprised if the RBI were to cut rates on July 31, but having said that we do believe this fiscal there is another 50 bps still to go.

Q: What’s the upside-downside according to you to this market if you just map it with the Nifty?

A: There is clearly another 10-15% downside to the market if the monsoon continues to not work out and if the news of that spreads that will definitely set in some degree of a panic in the market. The market has rallied a fair bit even year-to-date as I mentioned earlier. So I think expectations are high from the government to deliver something.

If that doesn’t come through, the market will be disappointed. But at this juncture, I want to bring two specific issues which most foreign institutional investors, most FIIs that I speak to, have in mind; one is the fiscal deficit, no surprise there. But if the government shows any concerted effort to try and cut it down that would be taken very positively.

Second is a return of capex from the private sector. That is also a major hurdle why a lot of investors at this point have been shying away from the market. Until the sentiment, which in turn, will impact capex as well from the private sector does not improve, I would be careful about putting fresh money to the market at these levels.

Q: What feedback are you getting from institutional clients on the currency? Has it stopped worrying them given that the fall has been sharp and protracted over a period of time or is it still very much within the consideration set of their India worries?

A: FIIs have been fairly patient and tolerant as far as the Indian market is concerned. They tolerated basically multiple issues, scams of course, the plunging currency, poor macro, unresponsive government and so forth. So to give them credit, I think they have been patient, but the fact is at this point their view is the currency seems to have priced in most of the pain that we have on the macro side.

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