India may see more FII outflows going ahead: Kotak's Bhatia

Foreign-owned exchange traded funds (ETFs) could pull out more money from Indian equities in the coming days, says Sandeep Bhatia of Kotak Securities.

He says foreign fund outflows through ETFs is clear indication of that overseas investors are increasingly becoming risk-averse.
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"Emerging markets have seen USD 5.3 billion of outflows over the last two months, so there is a risk-off happening. We would see more outflows from ETFs in India," Bhatia said, adding that the situation may not worsen as long investors got the impression that the government was moving in the right direction.
Investors are gearing up for earnings later this month, which would indicate how much impact the struggling economy is having on corporate profits. However, Bhatia feels the market may not have much to cheer from the corporate earnings.
"I do not think we will have much cheer for the next six months in terms of earnings. The focus is on incremental announcements by the government to see if the diesel price increase is on track or if the government is not falling apart, because some ally has decided to move out," Bhatia said.
Bhatia expects earnings of fast moving consumer goods to be under pressure, and does not expect average earnings growth in the sector to be more than 8-12 percent.
Bhatia sees banks reporting a decline in earnings in the March quarter. Below is the verbatim transcript of Sandeep Bhatia's interview on CNBC-TV18

Q: How is the market looking as we enter another earnings season, is it a difficult trek?
A: Everyone knows that there is not going to be much cheer from the current earnings season. I do not think we will have much cheer for the next six months in terms of earnings. The focus is on incremental announcements by the government to see if the diesel price increase is on track or if the government is not falling apart, because some ally has decided to move out. So, the whole action is not on the corporate news flow or earnings, which is expected to be weak.
People look at the incremental signs of weakness in sectors that are very expensive to see if consumers will have another weak quarter or if there are issues on the banking side that are blowing up. It is looking at specific sectors and stocks within that, rather than any expectations from the entire earnings season.

Q: What do you hear when you speak to large investors and clients? Are people beginning to defer their expectations of a recovery by another quarter or a couple of quarters? None of the macro numbers or even the anecdotal evidence from cement, autos is suggesting that a trough has been formed and a recovery is underway.
A: People fall in two camps. They say this is the time to do stock picking. If you can hold off for two years then these are the best values you can get on a large number of midcap stocks. There is still pressure on large cap stocks. They have not corrected massively like last year in August. It is very selective midcap buying that one can indulge in, but with at least a two year timeframe, one year will be a bit early and that is the only positive vibe one gets.
The other data worrying people is that we have seen outflows coming from exchange-traded funds (ETF). Emerging markets have seen USD 5.3 billion of outflows over the last two months, so there is a risk-off happening. We have seen outflows coming in from China and Brazil at around USD 800-900 million. India itself has seen a USD 300 million outflow. There is a bigger emerging market risk-off trade happening and we see that in the ETF outflows.
_PAGEBREAK_ Q: Do you hear of the outflow situation from the ETFs getting accelerated over the course of last few weeks?
A: We would see more outflows from ETFs in India. We have seen some selling on the desks and that needs to be monitored. It is impossible to predict whether we will see incremental outflows. As long as we continue the impression that government is moving in the right direction, I hope that trend does not accelerate. Q: How does one approach fourth quarter earnings? The feeling going into Q3 was that this is the trough quarter and is going to be the worst. It got postponed to Q4. Are you confident that fourth quarter will be the worst and indeed the trough in terms of earnings performance or earnings disappointment?
A: Fourth quarter will not give us any reason to feel optimistic about corporate earnings trajectory. What can make it the worst quarter will be the improvement in the consumer’s demand sentiment. This depends on a whole host of factors, whether it is a bumper monsoon, due to which agricultural incomes are buoyant and all that is in the realm of possibility but impossible to predict. To that extent, fourth quarter is a weak. Also, the July-September quarter could have better tidings, but it depends on a lot of factors and are impossible to predict.

Q: With regards to ETF outflows a bit deeper, is it because of disappointment about growth in emerging markets? Or is this money going back to the US where the data points are strong consistently and where the market performance has been trending much more smoothly than emerging markets?
A: Despite the political gridlock in Washington, the economy in the US continues to show at least improving trend unlike in emerging markets that have their specific problems. Each market is different from the other. Brazil, Russia, India and China (BRIC) markets are completely separate with their own political cycles and economic issues.
The outflow that we are seeing is more thematic, more broad-based as emerging markets are not a place of sanctuary or high growth compared to the west. Whether those flows are coming back to the US or any other developed markets, is impossible to predict at least from the data. There is a risk-off happening as far as emerging markets are concerned.

Q: What do you do with the autos right now? Every month the numbers are bad, commercial vehicles, two wheelers, even cars now. Do you buy anything here or stay away from names like Tata Motors or even Bajaj Auto?
A: The auto sector is a reflection of the weak consumer demand. While we have been clamouring for rate cuts by the Reserve Bank of India (RBI), it is not the only factor driving decisions as far as buying two wheelers or four wheelers is concerned. Four wheelers will struggle for sometime, even if we see rate cuts, we can see an incremental rate cut of 50 bps by the RBI over the next six months. Other than that, there is very little room. It has to be a broader recovery in the economy that drives auto stocks. I do not see that happening. We will have to wait to see if the agriculture rebound happens after a good monsoon, then two wheelers will rally first and the four wheelers can follow.
Among the stocks, we have liked Tata Motors because of its Jaguar Land Rover (JLR) component. Stock has come off from Rs 300. At these levels it is extremely interesting. We have seen the launch of the new Range Rover Sport and it is one of the best selling models that JLR has in its range and does very well in the US, so we will see good numbers coming through from JLR in the second half of this year. Q: You have tracked fast moving consumer goods (FMCG) for a long time. Do you think these stocks can hold onto the kind of premium valuations they had so far or will this consumption slip start showing up in FMCG numbers as well?
A: Earnings will be under pressure. I expect operating earnings growth to be between 8-12 percent for most of these businesses. Will that sustain the high ratings? No, valuations will come under pressure. The only thing that is holding them up is the rest of the economy looks even worse. It is just a play between what you choose to have on your portfolio rather that whether you want that to be on your portfolio. So numbers and earnings would be under pressure. These names remain sideways for sometime and people seek refuge away from the bad news that the other sectors keep generating.
_PAGEBREAK_ Q: The problem with the entire midcap universe is that once earnings disappointment or some other negative news comes through, there is a big technical reaction on the stock and we see a freefall almost. Can we get into that situation this month as well?
A: I hope that we do not see a freefall. I do not think that is healthy for markets. It depends on external news flows and is impossible to predict now. If there is a sudden political development that makes the market nervous, there could be a sharp correction. It is mostly in the realm of speculation. Q: So far the hope has been that sectors like IT will not disappoint. Is there a chance that Q4 earnings may not be as buoyant as stock prices have been going into them?
A: For specific sectors there would definitely be disappointments. We expect banks as a whole to record negative earnings driven by negative earnings growth coming from the PSU banks. As far as the IT sector is concerned, it will be a story of companies. It is a story in which people would compare Infosys versus Tata Consultancy Services (TCS). It will be interesting to see what kind of guidance Infosys gives or whether it gives the guidance at all. So these are specific developments and will impact near-term movements.
The real underlying issue that there is recovery happening in the banking, financial services and insurance (BFSI) space, especially in the US, so people are seeking refuge and we are in an environment of a weak rupee. The current account deficit (CAD) generates bad numbers every quarter and to that extent, the tech is another space like consumer where people are hiding rather than seeking actively. Q: What is your view for the rest of the year? At the start of the year, most people were quite bullish talking about 15-20 percent upside for the year. In the first quarter we have sucked in nearly USD 12 billon of flows, yet the market is down from where it started. What will happen in remaining three quarters?
A: In the remaining three quarters, we see some interest rate cuts. We see some recovery coming through in the exports, because the west is rebounding. We see a smaller CAD than we saw last quarter. We see, hopefully a good monsoon and growth remaining in the current region of 5-5.5 percent and seeking value in specific stocks. That is the most likely outcome for the current year. Q: What about politics? Where does that fit into the picture?
A: It is impossible to speculate what can happen on politics and we all know that. We have to react to it when it happens. Q: It is tough to call because of how volatile the situation is. Would you say that at least the broader end of the market looks like a bear market right now? How high are the chances that this year closes up with negative returns?
A: We have seen a fair bit of deterioration in the macro balances. When the markets are going up, everyone thinks that the markets are going up and therefore they should continue to go up. When the macro is bad, everyone will believe that this will continue to deteriorate. Of course that can happen, but at some level action will kick in. There are agencies like the RBI. There is pressure coming from the credit rating agencies.
I do not think there would be a big turnaround in the macro. It is impossible. It will take at least a couple of years for a turnaround in the macro to be evident. We would see at least incremental positive signs come through and that itself will hold out. Even if that does not happen we can see the markets greater, but that is not the base case one should run by.