With the Reserve Bank governor Raghuram Rajan putting action in the ‘wait and watch mode’, he introduced a certain degree of volatility and uncertainty into the market, says Manishi Raychaudhuri, MD & Asian Equity Strategist at BNP Paribas Securities. He says till the next set of data points come through in first half of January; the market would continue to behave this way.
The RBI today kept rates unchanged today. The governor, however, said action may be taken even on off policy dates if inflation does not behave.
Also Read: Expect food inflation to ease going ahead: Rangarajan
With the domestic policy behind us, global factors once again become important. He says the US Federal Reserve wants to make sure of growth certainty before embarking upon the journey of tapering. He feels Fed will begin tapering only in March. But the good news is, whenever Fed may begin tapering, its impact on emerging markets won’t be of the same magnitude as seen during the summer. A lot of concerns that were plaguing countries like India and Indonesia do not exist now.
He expects some degree of decline in earnings estimate coming from Indian corporates. He feels this consolidation phase will continue for sometime. He does not see the Nifty going to 6400.
He is positive on private banks, but advises investors to tread with caution and go in for better quality names like the IndusInd Bank. He continues to remain bearish on PSU banks despite the RBI draft norms.
Below is the verbatim transcript of Manishi Raychaudhuri's interview on CNBC-TV18
Q: What is your reading of the credit policy and now does this make you positive on rate sensitive in any sense?
A: The credit policy is a short-term reprieve and a positive surprise. We were expecting about 25 bps repo rate hike and it now seems clear that the Governor is waiting for more data on inflation and he seems to believe that in the interim food inflation and even core inflation on both Wholesale Price Index (WPI) and consumer price index (CPI) would decline. However, having said that I think that this space is watched carefully because he has kept the space open for a potential rate hike if the data points going forward are not in favour of what he did today. So, I would think that there is a degree of uncertainty or volatility that’s been introduced into the market by this action and till the next set of data points come through in first half of January; the market would continue to behave this way.
Q: What is your approach to markets now? Do you think the markets can make a dash towards that 6400 mark pretty easily if Yellen were to be Yellen later on today?
A: I think after the domestic credit policy is now behind us the global factors would become important again. We do not know what is going to happen this evening, but our expectation is that a December tapering from the Federal Open Market Committee (FOMC) is possibly not on the cards or has cues that it will start in March and it seems clear that though the Fed chairman and the incoming chairman are quite clearly in the camp who would possibly want a growth certainty before they embark on liquidity contraction. Even when tapering eventually starts it will possibly not have the same impact on equity market volatility in India and other Southeast Asian countries to the extent that they have in May to July period this year, because some of these current accounts have been addressed to a certain extent by India, Indonesia and the other countries.
I think those are the variables that would become important now and in January we step into another result season where I would expect some degree of earnings decline come from Indian corporates. So I would think that this consolidation phase that the market has entered into would possibly continue for sometime. I am not really betting for another race to that 6400 which you talked about and I would think that the market will become possibly more attractive with some degree of correction in the near-term.
Q: What would your stock specific approach be right now? In the last 4-5 days we saw some of these banks, the rate sensitives, some of the capital goods names be slightly subdued. What would you buy on a dip?
A: Apart from our usual favourites which are the exporters and the rural and semi-urban consumption plays I think one would be a little bit biased to get somewhat into the private banks. Earlier we were clearly of the opinion that the private banks with a liability franchise who do not have to depend on wholesale deposits would be the winners. Now after this some of the banks with a relatively weaker liability franchise with some wholesale deposits could also come back into focus. That said I would suggest that investors be slightly cautious and go for the better quality names, let us say IndusInd Bank. That could really be the strategy in the medium-term.
Q: When we spoke to you earlier this week you did mention that you would not be very bullish on the PSU banking space. Post the draft norms which have come out with regards to final restructuring or on bad loans, would that change your opinion in any which way for the PSU banking space?
A: Not really. I would think that the restructured loans showing up as bad assets or the whole affair of non-performing loans (NPL) accelerating, we would continue to see that over maybe next 2-3 quarters. So I am not really dipping into the PSU bank space at this point of time. Admittedly, there are some very cheap banks there, but one needs to be reasonably certain about asset quality correction before dipping into that space.
Q: I did not get your take on Trent. That is a big investment being announced by Tesco. Would you grab into that stock now?
A: We do not cover Trent, so I cannot make any specific comment on it. I would think that this trend of MNCs investing either through subsidiaries or joint ventures will accelerate going forward, because many of these subsidiaries have excess cash lying on their balance sheets and in the developed economies that earn very little returns. So it is actually beneficial for them to invest it in some of these emerging market countries, maybe in their own subsidiaries or joint ventures where it earns significantly higher return on equities than in home markets.
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