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Stay on sidelines as lot of -ve news yet to come in: DSP ML

Published on Fri, May 30, 2008 at 20:00 | Source : CNBC-TV18

Updated at Mon, Jun 02, 2008 at 09:17

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Mixed cues from the economic front kept investors on their toes today. The markets cheered strong GDP numbers, but the surge was contained by higher than expected inflation. The Nifty finally closed just 35 points up at 4,870, while the Sensex shut shop 99 points higher at 16,416.

Andrew Holland of DSP Merrill Lynch remains circumspect on the road ahead. "I am surprised how global markets are holding up. A lot of negative news is coming in, so the next quarter is likely to be difficult." He feels Brazil and Russia can fall and India can gain if crude prices drop further. "Overall, global cues don't look good. So, we will remain on the sidelines."

According to Holland, higher oil prices would impact the current account deficit and rupee. "It is difficult to take a call on the IT sector based purely on currency moves." He feels FIIs don't want to loose on rupee depreciation, so we will see more outflows.

Excerpts from CNBC-TV18's exclusive interview with Andrew Holland:

Q: Last time we spoke, you sounded quite circumspect. Are you still apprehensive about how markets may move in the near-term?

A: Yes, very much. I am actually surprised that global markets are holding up so well with all the kind of negative news coming from the US and Europe in terms of consumer confidence. I am not sure why there is so much optimism. Some of the figures coming out in terms of durable goods was okay. But in any kind of downturn, there is a lag effect for consumer spending to really start digging into manufacturing, adding to a higher oil price. I cannot see why everyone is getting excited.

Q: That is precisely the point that the optimists have been talking about, that commodities might have had a blowout spike and they could be peaking out in the intermediate-term. So, when they cool-off maybe Brazils will correct and the Indias will go up, is that a tenable hypothesis?

A: Yes, they have been long on Russian and Brazil and are shorting on India and China. So, you can see the reversal of that if there is a sustainable fall in oil price. You got to take into account that in a lot of countries like India, earnings are reliant on commodity prices too. So, we might see a kind of a relief rally or funds moving into India because of that. But I don't think it is going to set the market on fire in terms of that move. But lower oil prices in the shorter-term would make me more optimistic about India, in terms of the emerging market kind of basket. But the global cues still don't look very good. So, I can't believe that even with that kind of scenario you could see funds just staying on sidelines.

Q: How are you gaming the currency out here which has had a weak trot, has pulled back a little bit, and has resulted in significant outperformance for the IT sector? How do you map these two going forward?

A: At the beginning of the year, most commentators were saying that the rupee was going to 37 or 38. Now, those same people are saying that it is going to 47 now. So, a higher oil price has its impact on the current account deficit and that obviously impacts the currency. If you reverse the oil price, then obviously you could go the whole way in terms of the rupee strengthening. I still think it is a dollar play that you have to look at. If anything, people are talking about interest rates in the US maybe having to tick up because the growth is stronger than was expected, so obviously that would help a stronger dollar.

So, the combination of some of RBI and Sebi moves yesterday creeping flows back into the market, which with a stronger dollar would obviously mean that the rupee would strengthen in the shorter-term. Would you be a buyer of IT on the back of currency movements or sellers is a very difficult call. I tend to step out the currency movements anyway. You got to look at the underlying strength of the businesses. In terms of the outlook for the US and European economy, I still think the jury is out in terms of whether we are going to see a big slowdown there. I expect to see IT spending start to slowdown in the US probably in Q3 this year.

Q: We have lost a billion dollars in the last seven-eight sessions from the FII basket. Do you see more selling coming in or do you think this is it or could we see some reversal in flows?

A: It goes back to how global cues are looking. What we are seeing now is really the fact that investors are concerned about the currency. You have lost 5-10% depending on when you invested this year. If you feel that the global markets are kind of still too high, then obviously you do not want to lose on currency depreciation. So, flows will remain on the negative side in the short-term until there is a decisive move in terms of global markets, which will then throw up opportunities. We all are sitting on the fence at the moment. The Indian markets held up quite well in the last few weeks mainly on the back of developed markets doing okay. If you look at those developed markets and whether behind it is the oil price force, the kind of other sectors within that index do well and vice versa, you will find there is no real kind of leadership and that is a concern for most global markets.