Mkt to remain rangebound but downside protected: Jaipuria

Jyotivardhan Jaipuria of BofA Merrill Lynch expects the market to remain rangebound, but adds that the downsides are fully protected due to ample liquidity and a lot of hope that the government will finally muster the strength to take up on some much-needed reforms.

He says parts of the inflows are due to arbitrage funds and ETFs. Asian shares paused on Friday as investors took stock of a four-day rally driven by optimism, yet to be borne out by action, that authorities will soon take the steps needed to ease concerns over the eurozone's debt crisis and weak growth. Jaipuria says the market has now moved closer to the top end of the range. "The market probably needs to correct a bit if you see the macros, growth data, which has come in adverse. So, we will probably get a pullback," he told CNBC-TV18. Going forward, he expects the central bank action to restrict downside in equities. Also read: Liquidity keeping market afloat, macros remain poor, says Udayan Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Q: The macro newsflow has been awful to say the least. But, so far, liquidity has kept us afloat. Do you think it might continue to going forward? A: I think market is going to remain rangebound. It is not going to run up anywhere. At the same time, the downside is pretty protected with a bit of liquidity and a lot of hope. The hope really is that things are so bad that, at some point, the government will move. We will have reforms happening. So, things can start changing twelve months down the line. So, I think it is still a very rangebound market. We are not going anywhere. Q: Do you think the kind of macro newsflow that we are seeing with crude going back to USD 114 per barrel have raised the risk of downsides opening up? A: I guess we have moved closer to the topend of the range. If we see from where the market started, the big move came in. We are up 10% from the lows, which we had in May. Most of it was triggered by crude falling off. Crude now is, more or less, coming back to the old highs. If you look at it in rupee terms, it is probably very close to the highs. So, to that extent, I think the markets probably need to correct a bit. If you see macro, you see growth data, it has come in adverse and so has earnings data. So, to that extent, I think we probably will get a pullback in the market. The hope is that central banks will play a role. That is what is keeping global markets afloat, that is what is keeping the Indian markets afloat. Q: What sense do you get of this liquidity that has come in? In August, we have got a billion dollars in cash market, what kind of funds are buying? A: Part of this liquidity is arbitrage fund. So, it is not liquidity that is coming in the market because people do sell-off some position in the future market against it. Part of it is coming from ETF. So, I would think a lot of it is arbitrage and ETF money. On the margin, then there are probably long-onlys who have adjusted the India weight a bit or they have seen some inflows and they have put in money into India. _PAGEBREAK_ Q: What have you made of this telecom bust up over the last couple of days? What are your clients telling you about that big disappointment? A: To some extent, this is in line with our views because we were one of the few brokerage houses that were negative on telecom over the last one year. Our view was that the regulatory pressure is too much and at some point these stocks would disappoint. So, to that extent, it is justified what we have been saying over the last one year. For people, who are bullish on it, it has come as a bit of a surprise. So, to that extent, we have seen a sell-off in the stock. I think it is not just telecom, wherever the results have disappointed sharply, we have seen stocks correcting down quite a bit. Q: Do you think the weak gross domestic product (GDP) trends and manufacturing trends, which we are seeing at the macro level, will translate to more earnings disappointments or drag downs as the year passes or will earnings be far more resilient than the breakdown in the macro numbers? A: Earnings, to some extent, may be resilient. We have seen earnings getting downgraded quite a bit. So, now analysts’ numbers are not that optimistic. But for the last eighteen months I have been in the camp that will still keep seeing earnings downgrades, earnings are going to be very slow. I still believe there will be downgrades in earnings going forward, though the magnitude may not be what we have seen over the last eighteen months. I think we will end the year with a single digit earnings growth. Q: How much longer will the macro turf make this market grind in a range? Earlier, the hope was that by the second half of this year, some improvement will happen. Do you think it is looking like a longer haul now? A: My view has been that we had a major investment cycle, 2003 to 2008. That was like in some sense unprecedented in India because we have never seen investment demand grow at over 15% in real terms, year-after-year for the period of five-six years. So, I think till we get that moving back, market is going to grind in a range because we will have slow GDP, earnings growth. That always makes it very difficult for the market to have a sustainable rally up. I think we are in for a long grind in some sense. If we can get a few reforms in place then the grind would be higher rather than in a range which we have had over the last few years. Q: How are you approaching infrastructure stocks like GMR? They remain stressed in terms of their balance sheets, interest costs are 20-25% of sales. Do you see this kind of trend changing anytime soon? A: We are generally being negative on these names because we are still very cautious no the whole investment cycle. Till that starts picking up, some of these names will continue to be underperformers in the market. So, overall, our stance has been underweight. There are ofcourse some stocks we play on and off, when valuations start to get cheap. But otherwise on the whole we have been underweight the sector. Q: What are your expectations from public sector banks? Today, SBI announces numbers and we have not seen a great set of earnings and these stocks have corrected quite significantly. A: The public sector banks are under pressure because their lending is to a vast range of the economy, unlike the private sector banks that are much more selective. So, to that extent, we were expecting NPLs to be high in lot of these public sector banks. I think the results have justified that. In some sense, it has been very consensus because I would say most people in the market have not been very excited about the public sector banks. Only thing, which stands out for them, is lot of them on valuations look cheap. So, if we get a turn in the economy, if things stabilise then maybe we get little more optimism on the future growth outlook. Some of these could turnout to be good value buys. But otherwise generally we have been cautious on the public sector banks. _PAGEBREAK_ Q: Are you still buying the public sector banks or the valuations divergences between the two become quite extreme? A: The valuations are high. But we still are more comfortable with the private sector because I think it is still a phase where the economy will be uncertain, the economy will be slow. To that extent, what we want is earning certainty more than looking at valuations. Typically, you see this in India, you are seeing this all across the world where if you look at so called defensives versus let us say the rate sensitive names, the valuations for defensives are extremely high versus the rate sensitive. The last time we had this was in 2002. This is a similar trend that we are seeing across the world. But we are still in some sense sticking largely to some of the defensive names and playing some select rate sensitives where probably the earnings outlook is not so bad. Q: Shortly after that period of extremely high defensive valuations in 2002, we saw the onset of a bull market, a five-year bull market. It did not happen immediately, but after a year of that, we did see the onset of the investment cycle. Do you see that possibility that sometime in the next three-four-five quarters you see that cycle turning and the exact mirror image of what happened in 2003 to 2008 may be beginning to unfold again? A: Yes, hopefully it will happen. But what required at that time was reform. So, we had a series of reforms at that time. It was a highway project. It was power sector reforms. There was a whole set of reforms, which triggered this. Even now if we can get something similar where we suddenly have a step-up in the reform process then we could get this investment cycle coming back. In the last two-three years, projects have just not been happening. At the same time, companies are cash-rich, gearing is very low. So, to that extent, all the makings of an investment cycle are there. If we can get reforms happening, business confidence changing then maybe we should get another set of investment cycle starting. Q: But you would not buy that in hope or preemptively, you would wait to see the first signs of that before changing stance from defensive to aggressive, right? A: We would wait. At the moment, we have what I call a bubble strategy. So, we have a lot of defensives in our portfolio. At the same time, we have gone into some of the rate sensitives. But the rate sensitives have not been the infrastructure or capital good names, but it has been more like a consumer related rate sensitives which we have been playing in some of the private sector banks. To get into the infrastructure names, we probably want to wait for some more signs that okay the reforms are starting or probably they need to get so much deep value that you just say okay, at these valuations, there is nothing to worry about. Q: What about autos? You have seen the four-wheeler numbers out now, M&M, Tata Motors. Would you buy anything there? A: We have been more optimistic on some of the car names. We have been playing the two-wheelers all this while, but have cut our weight a bit and have gone more towards the car manufacturers. That is where we see probably see some valuation. If the cuts come then probably it is the consumer side, which will pick up before. The investment cycle will take some time to pick up. So, in the initial stage of the rate cut cycle, we would play the consumer rate sensitive names. Q: What about IT, where does that feature in your portfolio? A: IT, we have been neutral. There is a lot of pressure from the globe in terms of the demand scenario. At the same time, because you have the rupee, which has been weakish, it is providing some support to the numbers. We are selective there, but overall we are neutral on IT. _PAGEBREAK_ Q: For the market, you don’t fear a situation where because of this constant negative news, which is coming in on the macro front, at some point, the global guys, who are putting in money now and keeping the market higher, will lose patience. A: We are seeing bouts of optimism and bouts of pessimism. My view is that there are numbers, which are negative. That will lead to a bit of downside in the market. But I think the downside will be protected to the extent that we are going to see is central bank action or atleast hope for central bank action. It is not just India, it is across the world. From the Fed, people are looking at QE3. So, they say, ‘if we get a QE3, we will probably get a rally in markets.’ In Europe, everybody is hoping for the central banks to pump in liquidity. In India, every credit policy will get a hope that there is a rate cut coming around that corner. Q: What about oil? Have you given up on expectations of that diesel price hike? A: If you would have asked me in March, I would have said probably we will see it once the session ends in May. We have still not seen it. We keep talking about it. So, there is always a hope that at some point it will come through. I guess it is not going to come through, when the Parliament is in session.