Mkt range-bound till Jun, tough on returns: ILFS

Moneycontrol Bureau

Indian equities are unlikely to crash near term, but could remain rangebound till June-July, making it tough for investors to make decent money, says Vibhav Kapoor of IL&FS, in an interview to CNBC-TV18.
For the market to collapse, as being predicted by a section of experts, Kapoor says one of the three has to happen: India's economic fundamentals worsen, there is a global scare, or central banks globally start hiking interest rates. Kapoor says the probability of these happening is quite low.
On the fundamentals of the Indian economy, he says that things will start improving here on because of the recent measures by the government. But he cautions that corporate recovery will be slower. He says that the market will have to reconcile to one or two more quarters of weak growth. He sees March quarter numbers being worse than the December quarter numbers. Below is an edited transcript of the interview on CNBC-TV18 Q: Do you think the pullback rally is over from last week or is the market in a phase of consolidation and can still move higher?
A: By and large, the markets are going to trade in a range after that big fall till 5,600 and then this sharper-than-expected rally. At lower levels, the valuations are starting to look a little bit attractive after a passage of another two-to-three months and FY14 is going to be get fully discounted. But at the upper levels, there are still a lot of macro-economic issues which are still very uncertain. The economic data is still uncertain. Therefore the market will find it extremely difficult to go beyond a certain level. In short, till the results season starts, which should be in a month’s time from now, the market should be range bound. Q: What kind of range are you looking at for the Nifty?
A: I would say something in the 5,500-5,600 range which was the earlier level and maybe touch 6,000-6,100 on the upper side. Q: The market seems to be in a kind of a funk though after the Budget. Do you think that should be the approach to trade now with the market being listless and without direction?
A: There aren’t too many events except for the RBI policy on March 19 and till the results, there aren't too many domestic or even international events of any significance. Of course, there is a lot of liquidity flowing in from the global markets but India has really underperformed in the last two months or so while a lot of the global markets have actually gone onto new highs. This is because of the current macro-economic uncertainty. Q: There are forecasts about a much sharper cut. Do you see that as a possibility through the course of the next few months?
A: Not immediately. At the lower levels, the valuations really have to start to look a little attractive. For that I think two events have to occur- If economic data turns worse or there is a global scare. Both seem unlikely at this particular point of time given the fact that global situation has improved considerably.
So over the next few months, the markets should stay in the range and this will depend on the kind of economic data that starts to come in after that. I estimate a bit of improvement in the economic data over the next three-to-four months given the fiscal deficit will become much smaller. So that should rein-in inflation. But all that is going to take time. Q: Do you think it might end up being a difficult year to make a lot of money out of equities unlike 2012?
A: Yes, it started off being a difficult year in the first two months, no doubt about that. Our feeling has been throughout that at least for the first six months, you aren’t really going to go anywhere. Therefore, till at least June-July, the markets are going to be stuck in a range. It is going to be very tough to make money. Then, in the second half of the year, depending upon the macro economics, whether things start to really improve, you might get back to 6300 but beyond that, right now looks a little bit difficult. Q: The last time the RBI delivered rate cuts the market actually went nowhere. What reaction do you expect this time around?
A: The problem is that the benefit of the rate-cuts is not being passed on. Last time, several PSU banks particularly SBI , they actually increased deposit rates. There was just about a 5-10 basis point cut in the lending rates. Now the problem is that there is tight liquidity but more than that, the deposit growth rate is only 11-12 percent.
Retail inflation is at 11 percent so real interest are still is negative. Therefore, if the banks aggressively cut down the interest rates, deposit accretion growth rate is going to slowdown further. So I think you have a very difficult situation there. Therefore, the room which the RBI has after maybe this 25 basis point cut on March 19, is very limited.
So I think the overall market will be happy that we have had a rate cut because it is largely priced in and you may get just a small rally. I don’t think it is going to change the trend of the market. Q: What would be your preferred asset allocation for 2013 between real estate stocks and fixed income?
A: I think if the markets were to go down say to 5,500-5,600 levels, one should start increasing allocation to equity. But only very gradually, in the largecap stocks where you are really sure of the fundamentals and not just indiscriminately buying any stock.
Given the fact that there is not that much potential of interest rates to come down after 25 basis points, even the fixed, bond funds for example or the long bonds are not going to give you too much of a return. So probably it will just give you a 9-10 percent return from there onwards. So I think if the markets kept on going down, I would increase allocation to equity. Q: What would you like in the second phase where growth has been poor, inflation remains a problem and earnings have very paltry?
A: This are tough times. I wouldn’t say that it is equal to what happened in the 90’s but it is definitely difficult I would say. It is one of the more difficult times that the economy has had in the last 15-20 years. Then you of course have the selection coming which is coming closer and closer and that obviously causes more uncertainty. So, I think it is quite likely that the next 12 months could be pretty difficult. Q: In that context, would you say it is also a possibility that the markets see stronger contraction in valuation before seeing any improvement? Right now, people seem to be working on the premise that valuations remain sacrosanct, it's the flows that are causing any volatility .
A: It could happen but I don’t see it happening immediately. For that, economic data has to worsen and I don’t think that will happen given some of the steps which the government has taken. Hopefully, economic data actually will start to improve but what does happen is that even when that happens, at least for one or two quarters, you are really going to see a the corporate performance not being all that good.
We saw that in the third quarter. I think the fourth quarter is going to be equally bad or maybe a little bit worse because we have seen some very terrible numbers in car and cement in the month of February. So going forward, while economic data may start to improve let’s say after three-four months, the corporate performance could remain still bad for another quarter or maybe two quarters. That’s where the markets run into that difficulty. Probably, that’s the time if the markets were to go down significantly at point of time that you really start to buy. Q: When do you see this domestic apathy towards equities as an asset class changing? Do you think the retail crowd, generally investors have made up their mind that unless they see visible signs of secular growth, they will not be getting back into this asset class and is that a fair call?
A: Yes, I think it is always difficult to say but the way things are going, yes, I would think so. I don’t think this is going to improve if you ask me really till after the elections. I think there is a lot of uncertainty in the minds of the domestic investors - that’s what’s going to happen after 2014. With the economy not doing well at this point of time, etc, I doubt whether you will see really big flows coming into equity from the domestic side till after the elections happen. Q: Could it happen because of disappointment in other asset classes that some money gets shifted to equities, whether real estate starts floundering or gold like it has starts disappointing. If that continues for three-four quarters, do you think people might be forced to look at other avenues?
A: Yes, little bit of this could happen but we have always seen that equity doesn’t seem to be a direct alternative to other investments for example real estate. I really haven’t seen many people get out of real estate and saying we will put this money into equity.
Gold, again, maybe to a limited extent. What normally does happen is that you probably get some shifting of money from let’s say liquid funds into equity or from some bond funds into equity. For that to happen as I said people have to be reasonably sure that they will get much more secular type of higher returns than they are getting from liquid funds.
If you really look at the past five years experience and I have been talking to some people on this, even the lot of SIPs have not even given the return equivalent to what you would have got in liquid fund over a year time frame, not even a small timeframe. So I think that’s one of the reasons why people are not coming into equity. Q: On this point you were making about the way consumption trends are faltering though, cement sales, auto sales, FMCG as well, where does safety lie for the rest of the year then in terms of sectors?
A: We have been overweight on IT and I think that’s definitely a sector which should do well. Of course, right now it has run up a lot so you might get a little bit of a correction there but I think that’s one sector which is relatively safe. Pharma is another sector which could be relatively safe although it hasn’t performed all that well in the last couple of months but I think that should do well. So I would really prefer these two sectors and maybe to some extent private sector banks but again they have run up a lot so maybe after some consolidation has taken place. Q: Aside from the daily grind in which markets and stocks lose a 1 percent or 2 percent, what would have hit retail sentiment tremendously is what happened last month on the midcap screen and those blow ups we saw on stocks. Is that a bubbling situation? Do you see that returning or did some of that get cleared out in last month’s purging?
A: I guess most of it should have got cleared out but it is always difficult to save these type of situations because you really don’t know what is the situation as far as the structure of the shares are concerned in a particular company. To be honest, I don’t really follow all that too much because my feeling for a long time has been that in India, it is always better to be in the larger cap and safer companies than in the midcap and smaller stocks. They just don’t give you consistent returns. You might get an odd multi bagger or two here but it is pretty difficult to find that. Q: We have had five very average years as you described. All of us hope things will get better but we continue like this between 5.5-6 percent growth for two more years which drains the economy and economic participants of any kind of energy that’s left?
A: Hopefully, even say six percent economic growth will improve from here onwards going forward maybe to 6-6.5 percent. Beyond that, it looks difficult. Even that weren’t to happen, if you are talking purely from the stock market point of view, earnings can continue to grow at 12-13 percent and therefore at some point of time, again the markets will start moving up.
If there is a lot of political uncertainty and if there is a feeling that things are not really improving on a very significant manner then you will not get the P/E.