Motilal Oswal AMC sees muted flows ahead of earnings

Q: What about the policy side because we haven’t seen too much by way of action even the petrol price hike has not happened and the grapevine has it that S&P officials are meeting finance ministry officials ahead of what could be a downgrade of India’s rating, is that something which is still a headwind for the market?

A: I think very much so. Few months ago, I talked about reform holiday and now we are on an extended reform holiday. We haven’t seen any significant action from New Delhi on what could be construed as taking this process forward. At this point, people aren’t even looking at reforms; they are looking at basic governance. The kind of things we have seen coming out of Delhi has been pretty disappointing for the market. It’s probably expected that there will be some sort of a review given the fiscal imbalance that the government is running, the high borrowing and what that is doing interest rates.

So I think it’s not a surprise that we are hearing news about potential rating reviews. It may be too early to call it downgrade but definitely it’s going to be reviewed deeply over the next two quarters. And one has to wait and watch and see whether the domestic macro situation improves or not. In an environment where global macro is still pretty challenging or at least it’s uncertain this dual headwind for the market will continue to be a cause of concern.

Q: What does it represent even in terms of trading risk? Is it possible that we break 5,000 and then go on to test the 4,800 level as well, what would you set out as markers for the market?

A: At this point in time, my estimate is that the market is going to continue to bounce in the range of 5,000 to 5,500 based on newsflow, triggers and events. Its very hard for anybody to take a much longer term call on the broader indices but one has to then start looking at where the risk is higher and where its not. Essentially one must continue to focus on areas where the risk reward ratio seems favourable. We have seen pockets in the market where despite the market having been down 10% in the last fiscal year, they have returned double digit returns despite the market’s uncertainties.

So it’s becoming a much more sector specific, stock specific play, basically taking bet on something that is non-cyclical or secular in nature. It is a hard call from a broad market perspective but one has to then start looking bottom up.

Q: Any thoughts on these tariff cuts that have been recommended for some of the gas carriers because faces like IGL and GAIL are pretty well held and tracked by institutions?

A: Absolutely, this is an extension of the theme that we were all worried about over the last few months which is the whole risk of public sector enterprises and how they can be susceptible to government action or inaction, whatever you call it. So it is another of those extension of what we saw in Coal India.

Obviously the stock is going to be hard hit today, you may even see some reaction on Petronet LNG even though that is not directly regulated but I think there is going to be some distortion in prices there as well. It adds to the whole risk of being in PSUs and there are periods in the market where PSUs are in favour but right now everything is going against that.