Vetri Subramaniam, Head-Equity Funds, Religare Aegon Asset Management, expects markets to see some more recovery in August. "The markets may surprise on the upside. One could see sharp rallies in this weak phase."

According to him, oil prices will act as the key driver for markets going forward. "Crude is likely to cool down."
 
He feels it will be difficult to predict whether all the reforms being discussed will actually go through. "Some positive news will definitely help improve sentiment."

The Impact of Monetary tightening will be seen next fiscal or by end of this fiscal, he said. "Rate sensitives may be the most affected as borrowing costs have gone up significantly."

Excerpts from CNBC-TV18’s exclusive interview with Vetri Subramaniam:

Q: It has been very volatile in July, but now most of the triggers are out of the way. Monetary policy is done, earnings is done and politics is sorted out. What do you think happens in August?

A: The month went reasonably well. I was quite optimistic that the markets would do well this month and the results were going to be broadly in-line with the expectations. The numbers that have come out are broadly in-line. There have been worries on the margin front. In general, most companies have tended to do far more poorly on margins than expected. So, there are a lot of pressures over there for sure.

But the kind of pounding that we took last month, we have seen a little bit of recovery from that. I am quite optimistic that we will continue to see a little bit more recovery as we go into August.

The main reason for that would be the fact that results are broadly in-line. I am also encouraged by the fact that we had a CRR hike and a repo rate hike, which was not fully expected and the markets were quite resilient in the face of that. At some level, the extreme sort of oversold nature of the markets is also helping things and you will see the market tread higher through hopefully next month as well.

Q: Do you see significant upside or just a bit of upside and then the markets stabilizing and trying to form a bit of a range or a base?

A: The market could surprise a little bit on the upside from here if you have 2 or 3 things go right for the market: one is definitely oil prices. We have already seen a little bit of a cool off from the high in terms of oil prices.

If you see oil prices cool off little more from here, that could definitely contribute to the Indian equity markets moving higher. If you run through all global emerging markets, it has been the oil consuming markets, which have done very poorly. It is the oil exporters who have done far better in this volatility over the last three-four months.

If you see a cool off in oil prices, it will be a market like ours which will tend to do better. Looking at the global data, there is every reason to believe that oil will soften a little bit more over the next few months. That should kind of support Indian equity markets.

Q: Do you see any help coming from New Delhi over the next 4-8 weeks in terms of any announcements on reforms, which the market might like, which might boost sentiment on the margin?

A: It is hard to say. We have heard some positive noises from Delhi that they will try and get a move on with some of the legislation that has been hanging fire in Parliament for a very long period of time.

Most of the legislation is pertaining to the financial sector. It will definitely be good for sentiment, But these will definitely be positive steps in terms of legislation for the longer-term in terms of carrying through the reform process in the financial sectors. So I would definitely be enthused if they are able to push through something. 

Q: Do you think we have put a bottom firmly in place? Are we talking about a better patch in an otherwise shaky kind of a market?

A: It is still more of a shaky market. In the last six-months we have seen the market go from being extremely overvalued to pulling back to slightly more reasonable valuation levels. But there is still going to be an issue in terms of the follow-through on earnings growth both for FY09 and FY10.

Bank’s PLR has now gone up by close to 6% in the last two-years. A big chunk of that has come in the last six-months. A lot of the effect of this monetary policy tightening that we have seen in the past six-months will actually be really felt by the real economy in the next year or so.

Q: Do you think this earnings slowdown or pain that we have all been talking about, will not go away with the next couple of quarters? Have actually deferred or postponed some of these problems or prolonged some of these problems into FY10 as well?

A: I think so. Typically, if you look at this kind of tightening that’s happened in the last three-four months, the impact of that really filters through the real economy with a six to nine month lag. So, one will really start to feel the pain of this only as you get perhaps to the end of FY09. That will definitely impinge on earnings growth for FY10 as well.

If you just look through this quarter’s numbers as well, the two very clear trends that one is able to discern - a) the pressure on operating margins.

If one also takes a look at interest cost for particularly a lot of the companies that have large projects and have brought those projects onstream, there has been a big jump up in interest cost for them as well. This is simply because of bringing those projects onstream. Now you will have to also account for the sharp jump that you seen in interest rates in the last six-months. That will really start to filter through your earnings over the next 3-4 quarters. So, it is definitely a treacherous environment for earnings.

Q: What levels are upsides capped at? Can we get to 16,000 odd levels on the index or beyond that or not even that?

A: One cannot rule it out. The kind of mental map I have for this is very similar to the kind of market environment we were faced with in the 1996, 1999 period when we went through a round of tightening. If you look at that, the market was definitely in a fairly tight spot for almost two-three years at that point of time.

You will see sharp rallies during this period. It is not that there will be no rallies at all. But point-to-point year down the road you might just find that you have made no progress at all.     

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