Nifty may touch 5600, earnings key: Punita Kumar Sinha

Once again Indian market is holding up firm amidst nervousness that the rally is short lived. Analysts feel that much depend on the first quarter earnings and reformative measures by Manmohan Singh as he took over the finance ministry recently.

Punita Kumar Sinha, Managing Partner, Pacific Paradigm Advisors is somewhat positive as she feels that 5,600 on the Nifty can be ruled out now.  "It seems like the worst maybe behind us in terms of avoiding break up of the euro for the short-term. Things are generally going to be more stable from hereon. But earnings are going to be the next trigger, particularly in India," she said in an interview to CNBC-TV18. At the same time, there is a growing concern that absolute earnings growth of Indian companies is likely to be lower but have been priced in to some extent, she adds. Also read: See Nifty in consolidation mode for 2-3 weeks says Ambareesh Baliga Stressing that the Indian market is still trading below historical multiples, Sinha stresses that about a month ago when all the markets had corrected, valuations in India looked quite attractive. "There is a risk that India could end up with a hard landing if certain amount of growth stimulus does not come in. At this point, I think where the valuations are in India, there is probably just a little bit more upside based on the positive global newsflow but the India specific positive newsflow has yet to come," she elaborates. As an investment strategy, she prefers pharma stocks. Below is the edited transcript of her interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos. Q: We have had a reasonable sized rally for our market and others. What’s happening with risk appetite right now? Is it still high or has some of that tempered and global markets are getting into rangebound trading again? A: If you remember in May, when I spoke to you, I was saying that at that time it looked like the market had corrected too much and it was presenting a buying opportunity, but obviously news flow still being a key determinant in driving equity markets. The news flow over the last month has been generally positive, but the data is still a little mixed in certain countries and better in others. In general, I think we have avoided a collapse and a break of the Euro, atleast in the very short-term. So, I think that has obviously caused people to return back on taking risk. But then the markets have run up quite a lot. So, now again we are going to be having to look at what the news flow is going to be from hereon. Q: Since the last time you spoke to us, has your view on India changed at all? Would you incrementally increase your exposure to the Indian market? A: About a month ago, when all the markets had corrected, the valuations in India looked quite attractive and they were a lot of distressed valuations. But a lot of these stocks have rallied. Now, there is a lot of hope that the new reconstituted finance ministry is probably going to come up with certain reforms. If they don’t then I think that would be a negative because the economic activity in India is clearly decelerating and the RBI is being targeting inflation. So, there is a risk that India could end up with a hard landing, if certain amount of growth stimulus does not come in. So, at this point, I think where the valuations are in India, there is probably just a little bit more upside based on the positive global news flow. But the India specific positive news flow has yet to come. Q: What is your own sense of which way this is pushing? Are you getting the sense that the second half might be more special for the market, there is a chance we take out the highs we have had earlier in the year or is this going to be more or less about consolidation, perhaps punctuated by some of the short sharp rallies? A: At the moment, it seems like the latter because the structural problems of the developed market have not got sorted out. They have just been pushed out and only short-term measures are being put in place to sort of avoid a crisis. So, I think unless this translates into fundamentally strong companies and growth for those companies coming back, we probably will see markets trending in a range. Given that their crisis has been averted, unless there is some other thing that we haven’t seen, I think that we may not see a huge correction. But there doesn’t seem to be a whole lot of upside either, unless there is more positive news flow. _PAGEBREAK_ Q: Interestingly even though the market has not moved too much in the last couple of days, money is actually coming back. We are getting it whether in individual stock deals or otherwise, the money has definitely picked up. What’s been feeding that interest? Is it looking like there is a bit more in terms of a liquidity push for the market? A: At the value of the rupee versus the dollar of 56-57, India clearly became cheap in dollar terms. In dollar terms, the market had actually not done anything; it was down, even though in local currency terms the market was up this year. So, I think that has brought some foreign investor appetite back into the market along with the positive sort of global news of avoiding a Euro crisis in the short-term. And then the fact that valuations about a month ago were looking pretty decent, I think that has brought money back. If we do see some action from the Finance Ministry and if we do see broad stimulus then potentially more money will follow. But I think we are still waiting to see now the next steps as to what the government is going to do. Q: The EU event is done with and it has had its impact on the market. What’s your sense of how much more market should expect in terms of these big liquidity pushes, whether it comes in the form of a QE or something else? Is that something that you would hold out for in the second half or is it unlikely? A: Right now, I think the markets are expecting another round of QE or further rate cuts in the Euro zone. I think that would be viewed as quite positive. But if that doesn’t happen, there could be some concern again whether the banks in these countries will be able to get the credit growth that they need. So, at the moment, I would say that there is still some more positive news that can come from the Euro zone and is expected. Q: What kind of a downside risk does our market have, if the global events do not pan out as desired and if the macro situation does not improve? A: In my view, it seems like the worst maybe behind us in terms of avoiding a break-up of the Euro for the short-term. From that perspective, I think things are generally going to be more stable from hereon. But I think earnings are going to be the next trigger, particularly in India. The next quarterly earning season is kicking off. That would show how the companies are able to weather this economic environment. Earnings growth numbers for Indian companies, absolute numbers are likely to be lower than what we have seen in the past. Some of that is priced in. But if there are negative surprises, it could affect the market as well. So, I think generally the next things to watch are going to be earnings. Q: How do you approach the second half tactically, more of the same that is keep exposure to the defensives, avoid some of the high-beta names or do you think the dynamics within a market are changing a little bit either in terms of the midcaps gaining flavour or some other sectors versus the ones that have performed in the first half? A: Even for the first half, defensives are a core part of the portfolio. But I think it was the beaten down sectors where the value resided, whether it is interest rate sensitives, infrastructure, power etc. I still think that the defensives are generally fairly valued. Pharmaceutical is a sector that still continues to show strong growth and is a steady secular story. Some of the other defensives are long-term secular stories. But that’s not the area where you are going to get outsized returns. I think the outsized returns will come from the other sectors. But it’s very stock specific because I think certain companies are fairing better than others in this economic environment. So, I think those are where you might get more positive surprises. Q: How would you approach the market in context with what’s happening to the rupee? All the tools that the RBI has used so far have not really worked to cap the depreciating rupee. Do you expect it to weaken further? In that context, how would approach some of the companies? A: I think the government has to focus back on growth. So far, they have been targeting inflation and keeping interest rates high, but that doesn’t seem to have helped the rupee either. So, I think if the focus shifts back to focusing on growth then capital flows will follow and that would help the rupee. I think that’s what I would like to see. I think that would help the economy. In terms of companies, I think the companies that benefit from a weaker rupee are also the companies that are geared to global growth. So, the trade-off there is that while the weak rupee is going to help them like in the IT services companies, the question is, ‘are they going to be able to benefit from the growth in the global economies like US and Europe where actually growth has slowed down?’ I don’t think the companies themselves as a result are going to benefit that much from the weaker rupee. So, I would still stick to the domestic demand stories in India where I think the domestic Indian fundamentals are going to drive up those earnings. _PAGEBREAK_ Q: Companies in the IT space are not really benefiting too much. There is so much talk about a scale down of growth guidance etc., worries across the US markets. How would you approach something like Infosys or the entire IT pack ahead of the earnings? A: The earnings are right around the corner. So, I would just wait and watch and see what the earnings are like. But as I said they are facing challenges with their global growth. So, we need to wait and see how they have managed that. I still think that the sectors that one has to keep looking out for are the ones that are focused on any positive stimulus from the India growth story. Q: When you speak to people running money across the world, are you getting the sense there is more optimism about next year or the fact that maybe this five year long bear stretch is going to snap or do you think it’s a resignation about the trading rally concept we were talking about and that’s the best way to approach things right now? A: Most of the people are of the view that we are not solving any of the structural problems in the world; we are just short of pushing them out. So, for the next year or two, the Fed, ECB are going to take steps to basically avert a big crisis and hope that liquidity is going to eventually flow into the economy and we are going to be able to pull ourselves out of this crisis. So, I think that’s what people are looking at. Therefore, it’s very company specific. There is more risk-on right now than there has been in the past because people think there is no big crisis at least looming. It’s probably going to be trading in a range, until some of the structural problems get addressed. Q: How high would say are the chances in that context that India becomes an outperformer on a relative basis? A: I actually think India has actually been somewhat of an outperformer already year-to-date (YTD) in local currency terms, not in dollar terms. But in local currency terms, YTD, I was just looking at the data and India has actually done better than several of the emerging markets. So, I think that’s not the issue at all here that we have to worry about. I think if reconstituted Finance Ministry does take some steps and earnings are on target then we probably will not have a big correction, but ofcourse it’s going to be very company specific. Q: What is your assessment of how the rest of the year will pan out, if these positives play out as expected? Do you see us breaking out of the range? Do you think 5,600 is a target that we could achieve or is that a far reach at this point? A: I don’t think it’s a far reach. If you look at the valuations of the Indian market, about 13-14 times forward earnings. If the earnings come through then the market can trade up all the way to about 15 times. That’s sort of its historical average over the last five-seven years. So, I think the market could trade up to its historical average. It’s still below its historical average. Relative to other EM and Asian markets, India is still on sort of the higher-end. Other Asian markets are trading at single digits or low double digits. So, on a relative basis, India is not cheap. But versus its own history, it’s still cheap. So, if the positive news flow keeps coming, we could see India rerate up to 14-15-16 times. That would mean the market going up further from here.