See no positive breakout till macro cues improve: StanChart

Dhiraj Agarwal of Standard Chartered Securities tells CNBC-TV18 that the recent correction in Indian equities is because of a combination of global and local factors. “Weak IIP and higher inflation weighed on market sentiment, and the market is likely to recover once domestic factors improve,” he said in an exclusive interview.

With this view, Agarwal says the Nifty is likely to remain rangebound between 4800-5600, which means that the Nifty is currently at the bottom end of the trading range. “The Nifty will break below 4800 only if there is a panic situation,” he said, adding that the panic at this point of time in the global arena is not as bad as last year and nowhere close to 2008. He further adds that the market could break on the upside if there is an improvement in macroeconomic data. In this environment, Agarwal says consumer names could continue to enjoy premium valuations. “This is because the market is willing to ascribe premium for consistent growth,” he explained. Coming to the other worrying factor, the rupee, Agarwal says that the currency’s weakness is a direct reflection of the country’s current account deficit problems. He also says that the Reserve Bank has limited room to the stem the rupee slide. Despite these negatives, Agarwal doesn’t expect significant foreign inflow outflows. “At this point, FIIs are just reshuffling their portfolio,” he said. If the rupee weakens any further from here, however, Agarwal warns that the risk of a rating downgrade for the country goes up. “To my mind, this is a larger risk from the point of view of foreign inflows into the country, whether it is FII or FDI,” he said. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: It’s been a big correction, 14% from the February highs. What's really been the problem? Is it that Europe has come back as a risk or is it the local concerns which have pegged the market back so much? A: It’s a combination of both. We have seen domestic worries re-emerge in last couple of weeks. At the same time there have been domestic factors as well which is playing on the minds of the markets at this point. The IIP number was very disappointing at -3, the inflation number was higher than expected. So it’s sort of a double whammy from that point of view that growth is slower, inflation is faster. What’s been happening in the global arena is not helping either. So I would say it’s a combination of both the factors. Q: Do you think global events are headed for some kind of escalation over the course of the next few months? A: I actually believe that investors will start differentiating at some point of time. The panic at this point of time in the global arena doesn’t seem to be of the same proportion as what we saw last year and certainly it’s nowhere close to what we saw in 2008. This tells me that the contagion that we saw in 2008 and to smaller extent in 2011 is unlikely to get repeated. So at some point of time, if domestically things start improving, I think differentiation will start to come in. So at this point, everything is getting clubbed as one but I don’t think it will last very long. Q: What’s the likely road map for India then? Will the market grind in a bit of a range or do you expect it to be a much sharper correction in the second half of the year? A: In a grind for sure, whether we are in 4800-5200 or 4800-5600. 4800-5200 is a very small range, I mean 10% range is okay if we are talking about few weeks, but it is too small if we are talking about a few months. So I would put the range slightly higher. I would put it at 4800-5600 maybe even 5800, possibly a thousand point range. So from a very short term perspective, I think we are pretty much near the bottom end of this range at this point. For equities to break out on either side of this range we need something more concrete to happen. So pretty much all the negative news is out there, out in the open, and unless things become really significantly worst from here, I don’t expect a big crash. But at the same time a breakout on the upper side will not happen till we see concrete signs of macro variables improving in India. Q: How do you expect FIIs to behave at such a time because the rupee is at a new low versus the dollar? Is that spooking sentiment and do you expect outflows? A: I don’t know, that’s a tougher call because in general at this point investors are taking a very business specific call, bottom up call and sector specific call. The market is seeing a lot of rotation, so money is moving out from one sector and going into the other. Will the large scale exodus be only based on macro variables in India? I mean, anything can happen. I see that to be unlikely at this point of time simply because there isn’t much to differentiate between different countries' macro variable, so where do you go. I think the money will be more rotational rather than large scale entries and exits. Q: Do you see risk of downside below this 4800 kind of level that most people are talking about? A: The risk is always there and if the worst that people are thinking at this point of time actually materialise, I mean it could breakdown. So it will be very brave at this point of time to say that under no circumstances do we break the lower end of the range. The probability of the range not breaking violently on the downside is simply based upon the fact that all the negative news is out in the open. Nobody, even in the wildest of the dreams, is imagining anything positive to happen. So your negative trigger side of the column is full and the positive trigger side of the column is completely empty. And yet while the markets have been grinding down, I don’t see the kind of contagion fears or panic or desperation like we saw in August-September 2011, like we saw in mid of 2008. I don’t see those kinds of panic situations developing. So it’s purely based upon the fact that I think most of the negative news is close to being discounted. I think the lower range which we are seeing at this point of time should hold, but then as I also mentioned the positive triggers are not visible on the horizon. I mean they will have to start appearing soon because otherwise negatives will just take over. _PAGEBREAK_ Q: How big a deal is the rupee for what's happening with the equity market especially for the FIIs now? A: See for most of the long only FIIs they benchmark their returns to MSCI (Morgan Stanley Capital International) which is the dollar denominated index. So purely from the point of view of benchmark returns it doesn’t really matter because MSCI index, or any other international indices which is dollar denominated, also reflects the inherent strength or the weakness of the rupee. From an absolute return investor perspective, where the investors are looking for absolute dollar returns irrespective of currency movements, yes it makes a difference. So in the hedge fund world, in the absolute return world it does make a difference. Rupee is worrying investors from a different perspective. If it weakens any further from here, which is a direct reflection of the current account situation which is weakening continuously, the risk of the rating agency downgrade for the country goes up and that to my mind is a larger risk from the point of view of foreign inflows into the country whether it is FII or FDI. So I think just intervention is not going to solve rupee slide because it is driven by very strong fundamental factors which is increase in current account deficit. So RBI has limited ammunition to control that, it has to be more policy in terms of fiscal management. Q: What do you do with these consumer facing names? Do you think they will continue to outperform or are you getting a little worried about them given their valuations? A: A generalized statement in that respect is difficult to make, but my belief is that the companies which can deliver consistent growth in this environment where growth is difficult to come by, will continue to outperform on a 12-18 month basis. There will always be pockets of 3-4 months where after strong performance they might go sideways and the market goes up and they seem like they are underperforming for a brief while. So growth is at a premium at this point and that reflects in the premium valuations because it’s really hard to find businesses which can deliver consistent growth and which can deliver low risk growth. In the sense that they can grow despite all that is happening and the growth doesn’t just collapse because of one variable change. Q: How have you read the trend of earnings so far? A: Earnings have been broadly okay. I think FY13 also we will see low single digit kind of earnings growth, nothing to get either excited or too bearish about. So theoretically you can say in last three years earnings have grown whether at 5-7 or 10% but last three years cumulatively earnings have probably grown by approximately 25-30% whereas the market have gone no where. So enough time correction has happened and that might provide enough cushion for the market to move up from here. But for sustained upmove perspective, we need some macro triggers. Q: What are your top picks at this point, what are you telling your clients to buy? A: It’s again extremely stock specific so I am not able to give a very clear answer to that. In our top buys we have HUL, ITC, DLF and L&T, so I don’t know whether you call it beta, defensive, non-defensive, it’s very stock specific.