Mkt's next move dependent on policy action: Envision Cap

With over 14% gains in the past few weeks, market men have been saying that Indian equities are at the end of their steady upmove. Nilesh Shah, MD & CEO of Envision Capital, is also of the same view.

In an interview to CNBC-TV18, Shah says that it is very unlikely the market continues to register upsides from current levels because of poor outlook on earnings and the monsoon. He also says policy action is key to determine the market’s next move. “If there is really no concrete policy action and if the monsoon continue to be the way it is at this stage, my sense is that you would probably see some kind of correction in the market,” he said. Shah does not expect the Nifty to fall to its lows of 4,800 anytime soon. “The probability of 4,800 happening is very low unless we see some really terribly negative global event,” he explained. However, he says a slide back to 5000 is possible, after which some support comes in. “It would be pertinent to note that around 5,000 would be a good level the market could take support and that would be very healthy for basically the trend of the market,” he said. But, he bases this view on the assumption that India Inc manages to deliver on the earnings front. Also read: Is India ready to push the reset button on reforms? Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Q: How do you see the market position, it has done quite well over the last five weeks. Do you see more upside? A: It is going to be very challenging for the market to continue to register an upside from the current levels. The market has been in a range of 4800 to 5300, and clearly we are already at the top end of the trading range. So it’s very unlikely that the market would be able to continue to register an upside from the current levels given that the earnings visibility still continues to be a little poor and the outlook on the monsoon front is still very challenging. Also, there have been significant expectations on the policy front and none of these expectations have so far materialized. If there is really no concrete policy action and if the monsoon continue to be the way it is at this stage, my sense is that you would probably see some kind of correction in the market. So it is very unlikely that you could see a significant upside from the current levels. Q: As we wade deeper into the summer, do you think it is likely that the Nifty goes back all the way to 4,800 again? A: The probability of 4,800 happening is very low unless we see some really terribly negative global event. At this stage it would be pertinent to note that around 5,000 would be a good level the market could take support and that would be very healthy for basically the trend of the market. This is of course assuming that the 8-10% overall earnings growth which is expected for FY13 materializes and there is atleast a good visibility on that kind of a number. If there are challenges to that visibility on account of the monsoon or lack of the investment cycle kicking in in the domestic economy, it is only then could you see the levels of even 5,000 get breached. But at this stage, I think it would be suffice to say that probably levels of 5,000 should act as a good support for the market. Q: Expectations have been raised on pretty much everything on the policy front - diesel, FDI, etc. If there is disappointment there, does it have the potential to break the market below 5,000? A: Absolutely. I don’t think there is any doubt about that because you would then really be testing the nerves of investors who have been around for a very long time. If you look at the first six months of this calendar year, foreign institutional investors have already poured in billions of dollars, so I clearly think that their faith, their confidence in India continues. We are probably entering the best possible time zone during which you can take policy action. Commodities have corrected, which I think is extremely good news for India, the Presidential elections would be done with and there would not be any material elections for the next six months. So all in all, we are probably at the best possible time over the last one-two years where policy action can materialize or happen. If despite that we see no policy action, then that would pose significant challenges for the economy as well as for the market. _PAGEBREAK_ Q: Between the local trigger of policy action over the next few weeks, earnings season which we are in the midst of right now and global cues, which of these would be the most important in determining where the market goes from here? A: It is local policy action, that is probably the single biggest variable or catalyst which is going to influence the market. I think global cues are something which the market is pretty well aware of. The likelihood of a QE3 or some more liquidity loosening measures could materialize, and I broadly believe that that’s very much in the price. But what is really not yet completely in the price is the policy action, the nature of the policy action. If there are certain key legislative reforms which really happen, I think that is going to be important. But more important is going to be the policy measures which really help in kicking in the investment cyclen which means granting of more road projects, kick starting various power projects which basically have been stalled for many months and quarters. If that is the kind of policy action which gets taken then we could be on a significant surprise for the market on the upside. But if that does not materialize and if that gets coupled with low earnings visibility, then we could be in for some really difficult times for the market. Q: Do you see any kind of near-term macro triggers which changes the mood in the market? A: I think the RBI has given enough hints that till inflation does not sober down or moderate it is unlikely to get onto basically a rate cut cycle. So I think it is better at this stage not to expect anything significant from the RBI. I think what is really required at this stage is to kick in the investment cycle. I believe that that is going to be far more important than even permitting FDI in pension and those kinds of areas. So the real area where a lot of action is required is basically kick-start the investment cycle, which means award more road projects, facilitate smoother execution of those road projects, kick-start the power sector, sort out issues relating to coal, particularly issues relating to logistics. These are not things which require any significant push, it just requires a little bit of push on the execution side and I think those are the things which can help kick-start the economy and the investment cycle maybe over the next few months. Anything pertaining to FDI and making certain legislative changes could have impact over years, but what we require now is impact which could materialize over the next few months or maybe over the next couple of quarters. I clearly believe that it is all to do with on the ground execution on a lot of big bang investment projects, which I think should be the utmost priority for policy makers. Q: Can you say with confidence now that the worst is over for the year and the market started that process of making higher bases? First 4600, then 4800, and now you are saying 5000. So may be higher bases have been created from which even if we don’t do a major jump this year may be at some point next year we could start outperforming or generating serious returns? A: I’ll assign a pretty high probability to that scenario because if the market continues to make higher bases, that’s pretty healthy for the trend of the market. The foreign flows continue to come in, so that’s the second big positive. Thirdly, if we do have some favorable policy action and with the fact that commodity prices have come off, there could hopefully be a cut in a rate cut cycle sometime during the later part of this year, I think that’s going to have a very positive and a healthy impact on earnings. The moment the market senses that from a single digit earnings growth of about 8-10% for the overall market, if we do get into basically an outlook where earnings growth will step into the double digit zone which I believe there is a high chance of that happening from the next financial year then I think it boards really well for the market and it is quite possible that the lows for this market between that 4600 to 5000 would be in place and may be next year we could be looking at significant. Q: What is your first reaction on what we have seen so far on Infosys? A: It is a bit disappointing. Clearly it has not met the street expectations, particularly on the rupee front, and that is where the big problem area is.