Oct 05, 2012, 08.26 AM | Source: CNBC-TV18

Seeing some signs of investment cycle revival: Religare MF

Vetri Subramaniam, chief investment officer of Religare Mutual Fund feels further market upmove is likely to depend on earnings and GDP growth.

Vetri Subramaniam

CIO, Religare Invesco Mutual Fund

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Vetri Subramaniam, chief investment officer of Religare Mutual Fund feels further market upmove is likely to depend on earnings and GDP growth. The BSE Sensex surged over 200 points in early trade on Thursday and moved past its crucial psychological level of 19,000 for the first time since July 2011.

The rupee rose to a five-and-half month high, breaching 52 to the dollar, on the back of gains in riskier assets and as the government is expected to announce further reforms measures. According to Subramaniam, the appreciating currency is likely to dampen export-related sectors' growth. "We need to be company-specific when playing rupee appreciation," he told CNBC-TV18 in an interview.

On the positive side, Subramaniam feels, the liquidity inflow will aid stressed balance sheets raise some capital. However, he does not see any significant earnings upgrades in the near-term. "We have seen some signs of investment cycle revival," he said. 

Here is the edited transcript of the interview on CNBC-TV18.

Q: The mood in the markets itself with this string of announcements coming in, how long do you think this rerating story can go, does this look like 6,000 gets taken or do you see too many roadblocks?

A: I think it is good that after a long period where the government was very slow in terms of taking any actions, they seem to have seized the opportunity and started to move the policy momentum along. That certainly is welcome. Given the fact that we have become pretty despondent about this government’s willingness to do anything for the economy, it certainly surprised everybody positively and I think that has given the market a bit of a tailwind. The global liquidity environment has also certainly helped the markets along.

Markets have gone from trading at valuations which were almost about 15-16 percent cheaper than average to almost reaching long-term average valuations. You can put index numbers on it but, I prefer to look at the market in the prism of valuations and in effect what has happened is that a little bit of positive newsflow has helped the market go from trading below average to average.

But, from here onwards, it is more heavy lifting and eventually the markets are slaves of earnings. The market is not a slave of announcements and therefore, we will have to see some traction in terms of GDP growth and earnings growth if the market is to climb much higher from here.

Q: That was what I was coming to, it has been a rerating story as you said, it is not an earning story yet but couple of parameters are changing tangibly and if the rupee average shifts to something like 51-52, on the ground for some companies there could be some advantages and there could be some disadvantages so is there already some kind of an earnings story or earnings revision on the ground, are you seeing some signs of that?

A: That is a little bit trickier to look at because there are a large number of Indian companies who now have a significant overseas operations, a large number of them have significant proportion of their revenues coming from exports. Therefore, I am not very certain that this necessarily has a very positive impact on earnings in the short-term.

If anything, the appreciation in the currency internationally dampens growth in some of the sectors which have otherwise been growing very strongly. On the other hand, what the appreciation on the currency does is that there are a large number of companies which were expecting balance sheet related pain because they had a large component of foreign exchange borrowings sitting on their books and did not have a relevant hedge. To some extent, the sort of solvency or liquidity or debt refinancing related concerns that some of these companies have get lifted but, whether it necessarily improves their earnings trajectory is still a question mark.

I actually think there is a significant component of the market which is the exporters and the overseas businesses of Indian companies which may initially report damp in the earnings because of the appreciation in the rupee. It is not as straight forward or as simple as you make it out and I think you need to be a little more company specific when looking at these issues.

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