Rate-cuts take 6 months to boost earnings: StanChart

A recovery in earnings is possible only in FY15 given the slowdown in the capex cycle, says Rahul Singh, head-equity research, Standard Chartered Securities. "Previous rate cycles have evinced a six-month lag between cut in rates and boost in earnings."

In an interview to CNBC-TV18, he says that in the past 15 months the market has moved in the opposite direction and with the policy cycle bottoming out, recovery is to be expected only in the mid-term.
The senior analyst expects the market to remain rangebound in near-term with no earnings upgrades for next six months and advises investors to choose stocks from the bottom up based on financials. Consumption-dependent sectors are to be avoided currently and investors could go overweight on IT, pharma and select energy stocks.
With the IT segment, the analyst is bullish on HCL Tech and Tech Mahindra and indicates that the high credit deposit ratio still remains a major concern. "I do not expect the rupee to remain strong going forward and maintain a neutral rating on private sector  banks after the recent allegations of money-laundering. The valuations are attractive for oil and gas sector," he says. Below is an edited transcript of the analysis on CNBC-TV18 Q: How weak and protracted is the rate-cut cycle? Will it significantly hamper the recovery in earnings?
A: Expectations that earnings will recover in FY15 have now increased due to the slowdown in consumption which may throw a negative surprise. This has not reflected in the earnings or on the street as yet. The capex cycle will take time to pickup even when rates start to come down because there are other policy issues that drive capex cycle rather than just the interest rates. Q: Do you think that the market will go through a period of adjustment and perhaps lower valuations as the economy turns around or will liquidity continue to come in and markets will move differently because of this liquidity cushion?
A: The markets have moved in the opposite direction couple of times in the last 12-15 months irrespective of the earnings. The markets would remain range-bound with the range depending on the global scenario. Q: In your experience has it been a good idea to be in the market on expectations of global liquidity?
A: I think you have to adopt a bottom-up approach and there are no easy answers. We are still not positive on financials despite rate cuts because of the high credit deposit ratio. I don’t think the transmission from the repo rate-cut to the cut in lending rates will be as swift.
So investors will have to start looking at sectors that need to be avoided rather than sectors to invest such as the consumption-0related sectors have to be avoided, financials also have to be avoided except a few private sector banks followed by industrial stocks.
But I think we are bullish on IT services over a more 9-12 months’ view. I would stay overweight on IT services, pharmaceuticals and to some extent energy and extent telecom. Q: If the global scenario were to turn negative do you think overownership might actually hurt the sector?
A: It might, but we have to go with companies that are gaining market share within the sector. So when I say overweight on IT services, it doesn’t mean investors are go and buy a basket blindly. We are bullish on HCL Tech and Tech Mahindra as the companies are gaining market share and inking bigger deals.
Any macro risk would also have its implications on the rupee. So in a way in a very twisted perspective it provides some kind of earning support to IT services and even pharma companies because the rupee would no longer look as strong or as stable as it has looked over the last six-eight months. Q: Will private sector banks lose the some of the premium parameters they enjoyed in the past?
A: The scenario is evolving and the implications have to be evaluated on two factors. One, what happens to the growth in fee income and the deposit growth if the norms are tightened and if the branch licensing norms are under review. Q: What is happening to stocks such as Oil and Natural Gas Corporation (ONGC) or Reliance Industries?
A: The market is trying to absorb what has happened and also trying to take measured call on what could happen given the general elections next year.  The reason for a positive bias on these companies is based on the valuations and the fact that the government is completely aware of the situation.
There is a lot of comfort to own these stocks on two aspects. One, the government is going to incrementally move in the right direction and there will not be any backtracking. Secondly, if there was a global risk-off scenario then crude prices and commodity prices will cool off a bit and this will provide further respite to these companies.