Global cues, lack of reforms to upset mkt: Pacific Paradigm

After a brief spell of calm, global cues are back to haunt Indian equities. Equity market worldwide tumbled on worries that a ‘band-aid’ solution in Europe is not enough to resolve the region’s crisis. Things this morning, however, have settled down a bit, but the uncertainty in the market continues.

In such an environment, Punita Kumar Sinha of Pacific Paradigm Advisors says that Indian equities will not be determinant on domestic factors. Speaking to CNBC-TV18, she says that India will not operate in isolation and will move in line with global equities. “If Europe and Asia is down, then India is also down regardless of what happens within India, and I think that trend is likely to continue,” she said. However, if things remain stable and positive globally, Sinha says it will be internal factors that decide if India outperforms or not. For instance, she says action from New Delhi on reforms and policies will decide the magnitude of India’s outperformance or underperformance. She goes on to say that investors will have to deal with a stock picking environment in India for the rest of the year. Below is an edited transcript of her interview with Udayan Mukherjee and Mitali Mukherjee. Q: Do you think cues from New Delhi will determine where the Indian market will head, or do you see the market very tied to global cues and global linkages right now? A: I don’t think the Indian market is operating in isolation, it is moving very much with what is happening globally. There are very few days this year where the market has bucked the trend. If Europe and Asia is down, then India is also down regardless of what happens within India, and I think that trend is likely to continue. However, the magnitude of the movement might increase if for instance the government does not move forward with reforms. If global markets are generally stable and positive, India may not outperform, but if they do announce reforms India might actually outperform. So it is really going to be the magnitude of outperformance or underperformance that will be affected. Q: Are you worried about the euro crisis? We have seen Spanish yields above 7% again and do you think in effect this would lead to another round of QE (quantitative easing) propping risk assets in the second half? A: As growth fears continue to resume, I do think that there is more and more expectation that there will be another round of QE. If you also read between the lines of what Bernanke said in his last speech, it does appear that the Fed is waiting and watching and will intervene if things go bad. So I do think that at this point it is likely that we may see sometime during this year, if growth fears continue another round of easing. Q: So what to your mind is the biggest risk for a market which is trying to grapple with this 5100 kind of support? What do you think can break it potentially below these levels? A: I think in this environment it’s very easy to come up with a number of risks that are out there, but one also has to focus on the value. If the market does correct, then the value emerges and that balance has to be maintained. There is of course the India specific factors, global factors such as QE3 and what happens to Indian political situation itself are the risk factors. So there are a number of risk factors out there and that’s something to be watching. But on days like today for instance, panic just sets in. The VIX indicator is up 25% in just one day and that tells you how nervous people are. But at the same time stocks and companies that have been delivering good earnings even in the US are moving very sharply in one day. So there is money in the system, people are looking for ideas, and they punish ideas and companies that don’t deliver.
 
Q: Now that the Presidential elections are finally out of the way, do you expect the reform situation to pick up soon? A: I think the expectation in the market is that reforms should pick up because the government has actually gone ahead and made certain announcements and built up expectations that they will move forward with reforms and they mean business this time. So I hope they do, because if they don't the market will be extremely disappointed. _PAGEBREAK_ Q: Where do you stand on the diesel price hike? Do you think the market has priced it in already or do you think that can trigger off some kind of a rally when it comes in? A: Even though the expectation is that there will be a diesel price hike and there will be certain announcements that are going to indicate that the government is actually going to move forward with reforms, I still think that if and when it is announced, it will still be viewed positively. Right now, it is only an expectation and that changes by the day. So I think the announcement should still result in a positive movement if that does happen. Q: How would you tactically position your portfolio now given all the triggers that you have alluded to? A: The general mood is so negative that one forgets how many stocks have actually outperformed this year. There are a huge number of midcaps that are up more than 20% year to date. So even in this kind of environment, we have seen stock picking has been very rewarding because there are just a number of stocks that have actually gained. The number of stocks that are up more than 40% year to date is also quite a lot, so I think that kind of stock picking environment will continue for the rest of the year. Obviously globally people are still allocated to credit because they do expect some more easing. Credit has done well globally and inline with equity markets, so I think people are allocating to both equities and credit. They are also having a lot of cash in their portfolios. In the equity portion of portfolios, it is all about stock picking. I think you will see a balance of somewhat defensive and aggressive growth stocks will probably help performance. Q: What do you expect to see from earnings by the end of this quarter and do you think it will be supportive for more upsides in the market? A: It’s still very early days to really make a call on how earnings have been overall. If you look at what’s happening in the US, it’s similar to what’s happening in India, which is that companies which surprise even a little bit are seeing people rush to buy the stock. One difference that we have seen in companies in India versus companies globally, at least in the US, is that we have seen pressures on the top line growth and revenue growth has been weaker than expected. Companies have been able to deliver earnings because they generally manage their costs very well. In India, what we have seen so far is that the revenue growth has still been double digits or in the high single digits, so that has not been that big a concern, whereas margins have been under pressure. So the earnings have been affected more by margin pressures than by the top line and that is consistent with what is the general view on emerging economies versus the developed world where the growth is significantly lower in the developed world. So I think if companies globally continue to show a trend where revenue growth is under pressure, all the earnings are coming from managing cost, that is an indication of a potential slowdown and potentially some kind of easing down the year that might happen. In India one was obviously disappointed because you started the earnings season with Infosys and that did disappoint. So the start of earnings season was disappointing, but as we go through the earnings season we might be surprised by some of the companies and disappointed by others. Q: How are you approaching the rate sensitives now? What do you think the RBI can deliver at the end of this month and how are you positioned? A: I think the inflation numbers that are coming up are going to be of concern for the RBI. Given the stance that they have taken in the past few months, I think they will continue with the same stance and not really lower rates. But given that globally we might see at some growth fears continue, then there may be QE and that may affect how the RBI thinks about this. Q: What do you expect for the second half of the year, given how big a deterrent rupee has been for global investors in the first half? A: The rupee has been the big concern for India, The equity markets have been up year to date, it’s the rupee that has eroded the returns for a lot of global investors. While it appears that reforms happen and government doesn’t disappoint on the expectations that have been built up to date, then the rupee may also stabilize because that would attract foreign investment. So it’s important for the government to take measures that do help the investment climate in India and bringing foreign investment because that would stabilize the rupee.