Q4 earnings to trigger market but won't leave lasting impact: Daiwa Mutual Fun

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

N Sethuram, CIO of Daiwa Mutual Funds in an interview on CNBC-TV18 spoke about his reading of the market and where it was headed in the days to come.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh and Gautam Broker. For the complete interview watch the accompanying videos.

Q: What sense are you getting that 5,550 will get pierced? Is there a sense that fundamentals are changing for the better, the shadier deals are probably lessening and the government seems focused on some kind of reform? The Pensions Fund Regulatory and Development Authority (PFRDA) bill has just been introduced in Parliament. Is there a sense of positive vibes in the air?

A: Not really. This is a market which is not going anywhere. It is just being impacted by whatever political or other news which are just flowing in, both, from the domestic and international side. Memories in India are very short so people are now tired of the scam news and since there are no new news coming in, the market is probably adjusting itself to the reality that this is the way it is in India and life goes on.

The market has gone through a corrective phase. In the last three months we have seen a 9% correction in the Nifty and the Sensex stocks and little more in the midcap and further more in the smallcaps. This is normally a phenomenon which is expected in a downward trending market where the midcaps tend to correct a little further. At these levels markets are fairly well and comfortably valued. I won't say they are either cheap or overpriced. This gives a comfort level so nobody wants to rock it.

Q: What is the next trigger you are looking out for? Do you think it will be Q4 earnings that we will have to wait it out for or do you think there are a few political events that are coming up, the telecom probe and 2G scam report that could impact the market?

A: On the domestic side it's only going to be the Q4 which should happen in another 15 days or so. That would be the next trigger for the market. It may not rock the market because there is nothing which has changed in the last quarter which should seriously impact the market. Yes, commodity prices have firmed up and there are some margin pressures likely but nothing serious.

Q: There is the SBI Retail Bond issue which has had a fairly decent opening in the market. A lot of interest has been shown on day one and day two. Likewise, the Tatas are out with their Perpetual Bond trying to place something like 11.8% which looks like an attractive yield. Is this a steady improvement in the range of bond instruments that will become available to retail and institutional investors?

A: I hope that there are lots more of debt issuances which come into the retail fold because at these levels of interest there would be a lot of retail interest happening. If there is availability, we are looking at what you call 10% plus kind of a return on these bonds at the coupon level.

Of course, the demand supply factor would tilt the yields on the bonds when you go to actually purchase them. Today, one can look forward to getting a 10% yield on a five year or a longer-term. Of course, the yield is same on a three month term also where the curve is absolutely flat.

Q: Usually you see bond instruments coming up thick and fast when inflation is very high which is the case at this point in time since we have had a sustained high inflation. A similar period happened in mid to late 90s when we had a host of debt instruments in the market, but some of them ended in a very sorry fashion. Many of them had to change the terms of their offer, the debentures were defaulted on. Do you think this time it is different and we will have a steady, strong, stable growth in the debt market?

A: Yes, this time it's definitely different. If you see the financial condition of the companies in the 90s and now, there has been a very significant improvement in the financial conditions. The debt equity gearing of most companies has improved and there is generally a strengthening in the balance sheet of the corporate sector as a whole.

These are bonds which are coming in for development purposes and these are welcome. Given the interest rates, there is obviously going to be some demand in the market for such bond issuances.

Q: How much are you expecting in the way of interest rate hikes and what kind of an EPS growth are you factoring in for corporates? Do you think they will get trimmed?

A: Obviously, in our internal discussions also we have been factoring that inflation is not going to go away as easily as was expected by the government. In fact the RBI's last policies had realigned itself and they are bracing themselves for a continued spate of inflation which will probably die down very slowly.

But this should not seriously impact the corporate performances because ultimately what happens is the growth may get trimmed by a percent or so but that should not impact the nominal growth because nominal growth includes the inflationary factor and most of corporate results come based on nominal growth.

Q: The broader markets haven't been doing too badly in this consolidation phase. Do you think it's a good time for a bottom up approach and do stock picking or do you think you could take sectoral bets at this point because valuations seem to be quite comfortable?

A: This is a market where I feel its going to be strictly bottom up stock picking because within each sector you have some stocks which are not favoured and some stocks which could do well.

In the corrective phase we also find that some of the stocks have corrected more significantly than the rest where there is not so much of concern in terms of future prospects. Those are the stocks which would be looking a little more attractive at this point in time so it's absolutely bottom up stock picking for this kind of a market conditions.

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