Faith in mkt restored, next 3-6 months vital: StanChart Sec

Ratnesh Kumar, MD & CEO, Standard Chartered Securities explains to CNBC-TV18 that the market has survived a period of extreme pessimism last year to witness a restoration of faith and belief. Ratnesh Kumar opines that the next three-to-six months are crucial as the many of the government’s initiatives are expected to be passed in Parliament in its winter session which is due to begin in ten days.

Below is an edited transcript of the analysis on CNBC-TV18 Q: What is your view on how the markets have performed from last Diwali up until now and do you think we are still in this consolidation phase or do you think there is something that structurally changed which could evince a breakout on the upside?
A: I think last twelve months have been obviously very tough and eventful for the markets. It has survived a period of extreme pessimism at the same time last year, to a partial restoration of the faith and belief. This year, in Asia, India is probably the only market which has received the maximum amount of FII flows. But the road towards sustained positive momentum is still a long way ahead. But going forward, I would be slightly more optimistic on a three-six months’ horizon than on a 12-months’ horizon. Q: What is your call for 2013 then? Do you expect the market to gradually move higher?
A: I think with the market’s current position, we should be looking at a three-to-six months’ call. On a three-to-six months’ basis, I would be far more comfortable on the market because over the next three-to-six months there is increased possibility of policy initiatives. The earnings downgrade cycle has bottomed out and there haven’t been significant downgrades. In fact there has been a small upgrade in the market earnings from May 2012, so there has been a bottoming-out of earnings.
The disappointment of a capex cycle slowdown has also played out and now we are bouncing around the bottom as far as the capex cycle is concerned. So there is reasonable amount of optimism that over the next three-six months, the momentum on continuance of liquidity, no risk of significant downgrade in earnings and the implementation of a initiatives will result in a positive performance in the market  Beyond that, I think a lot will be determined by how the capex cycle turns and what happens politically. Q: The earnings season started well. However, dismal results announced by SBI, Tata Steel and ONGC last week dulled the market's mood a bit. Were you disappointed by the dismal earnings?
A: I think on overall, basis from May-June 2012, there has been a bottoming-out of earnings and that trend hasn’t changed through the last week as well if you take the results on an average. Clearly, there are certain stocks which have not met expectations,  but on an overall basis for the market, I think the broad signal is that the worst on earnings was pretty over a quarter or two quarters ago. Q: The rally that started in September after the policy announcements from the government will be put to the test during the Parliament session which begins in ten days. What are your expectations?
A: It is hard to expect any probability, but I think the market is betting that the government will be able to push through some of the critical reforms that were announced. I think will be very critical for the market to sustain the extent of belief and momentum that has returned. Though it is hard to predict how the Parliament session will go, but from a market perspective I hope that most of the initiatives are pushed through.
_PAGEBREAK_ Q: Have you factored-in the possibility of rate cuts in your three-to-six months' estimate?
A: The rate cuts have to begin. The biggest problem in the economy today is that the entire capex cycle is absolutely at the bottom. To get the market booming again, the whole investment cycle has to start moving and though the road towards that goal is long and hard, some reductions in rates would be necessary. I think by the March quarter, if inflation is trending lower which might comfort the central bank, then you may begin to see the first of the visible rate cuts. Q: What is the sense you get from your trading desk regarding global flows?
A: You need the global risk-appetite to remain good for flows to come into India. But despite the first half of the year not being good for India in terms of the economy, earnings momentum as well as news flow, whole India is now the recipient of maximum portfolio inflows from foreign investors across all Asian countries.
So I think there is a fair amount of fundamental belief, which has returned and the valuations are not excessive. So unless something dramatically goes wrong in the world, the flows over the next three-six months should remain positive. Q: Let me ask you about a couple of stocks where results have not been great and where there seems to be some degree of disenchantment like Tata Steel. How are you positioned in that segment?
A: Overall, on materials, my view is slightly neutral because if there is no support from price and global growth, the earnings momentum will not be positive in that sector though the valuations might be fairly reasonable. This is why I would not go around selling the material sector. Within materials, of course, my preference is for cement where I think the momentum is still fairly strong and could continue for some more time.
So between global commodities and the domestic cyclicals like cement, I think at this point of time, the preference should still be towards cement rather than on commodities. Q: Public sector banks are the other segment which has been tricky for the market. Do you have any picks or are you staying underweight?
A: I think public sector banks are a point in the economic cycle where there will be further bad news on asset quality. So at a broader level, the preference within the financial segment has to be on private sector banks whether it is ICICI Bank, YES Bank or HDFC Bank.
However, I have been, from time-to-time, been positive and opportunistic on some of the smaller PSU bank stocks. So without preference for any particular stock, I think one should approach the PSU space from quarter-to-quarter and look at individual stocks, especially the midcap PSU bank-stocks which offer opportunities from time-to-time. But otherwise the private-sector bank segment looks more attractive.