Axis Capital’s big bets for 2014 are large cap IT, “vice-industry”, telecom, private sector energy majors and select pharmaceutical names, says managing director, Institutional Equity Research, Nandan Chakraborty.
In an interview to CNBC-TV18, Chakraborty says he sees agri-inflation receding in the coming weeks as the government steps up its drive against hoarders in the run-up to the general elections.
According to him, things are improving at the margin, but there is still “growth anxiety.”
He sees interest rates in India rising for some more time before peaking out this calendar.Also Read: Fed policymakers wanted cautious approach to QE3 taper: Min
Chakraborty sees the global liquidity scenario remaining benign even as there are concerns about Fed cutting down on monthly bond purchases, and this resulting in a liquidity crunch.
A positive for countries like India, from the QE tapering is that it will lead to crude oil prices declining.
Chakraborty says he will be considering investments in sectors like banks, automobile and realty only once there is stable government at the Centre after the elections.Below is the verbatim transcript of Nandan Chakraborty's interview on CNBC-TV18Q: Will it be a very happy new year for the markets? Up until elections people were expecting some fireworks but we have been staunchly range bound, how will be the next six months?
A: The title of our strategy report is that it will be a range bound market till the elections and after that normally what happens when we do a last fifteen year analysis of the markets and elections, what comes out very strongly is that a few months just before the elections is usually very volatile.
Secondly, there is absolutely no correlation between what is the direction of the market before elections and the direction of the market after elections.
Thirdly, there is no directional view on the pre-election whether it will go up or down, over the last fifteen years nothing of that sort.
The only correlation is one-year forward earnings per share (EPS) and the market trajectory post elections are usually in sync. This time it is even more important that the elections throw up a stable government, which leads our EPS growth come up otherwise you will get a P/E fillip, which maybe short-term and what you all are hoping is an EPS fillip because that is what history has shown.
The reason that we have given this as a range bound because unfortunately, our long-term comes in the next six months in this particular case and we have divided it into two phases. One is the January-March phase where we think the market will slide down. The other phase is March-May, where off consensus we think the market will go up, which is why we think it is a range bound market.
The main fundamental reasons from a range bound market is that liquidity will continue to be strong providing a support that is both on the foreign as well as domestic side. Negatives are many, but first I’ll talk about the liquidity. What has happened is because of the QE taper, there is some amount of incremental QE that will decrease but the reserve money in the US remains same.
Essentially and more important is that the interest rate scenario globally remains low which is why the global liquidity scene will remain very benign for the next six months at least.
Secondly, when you look at domestic investors, there has been a turnaround. It is very slow but the number of folios into broking this thing - this thing has increased and the redemptions in the mutual fund industry have stopped for now.
On a fundamental basis what has happened is compared to realty and gold, these are the two big alternatives and of course tax free bonds. Tax free bonds are very small, but property transactions now have gone down and property prices are fairly high and gold is also down which is why at least relatively, the other two are not as attractive as it used to be.
There is a massive support in terms of liquidity to the markets which is why we are calling it range bound despite the obvious negatives. So now, let me just take the two phases in turn.
If I take these two so called long-term phases till January to March and the one after that; January to March the negatives are one, there could be bunching up of divestments given that government needs funds, they maybe willing to issue stocks at whatever reasonable prices or not so reasonable prices. Two, interest rates may rise before they fall. Three, there is still growth anxiety. The auto numbers for December have not been very good and this is usually a lead indicator so while at the margin things have improved there is still growth anxiety and so, these are the negatives for January to March period. On the positive side there are two things, one is liquidity including the domestic turnaround. Second, agri inflation is expected to fall.
There are two things at play there, one, we have seen this trend over at least a decade or so that around 4-6 months before elections there is a lot of money made by traders out of holding and I assume that money is distributed all over the place, that it is not only the traders who make money, but just before the elections there is a clamp down on traders and inflation is kept low. This is one reason why agri inflation usually falls.
Secondly, acreage has been good, rabi crop has been good and so, you will have agri inflation starting to fall which is more controllable in very short-term.
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Q: What would be the sector-wise top themes for 2014? 2013 was largely defensive, but now, do you think one should start chipping into some of the cyclical sectors?
A: I am sure getting to that, but just a minute so that people do not know only half the story. Second part, which is depressing part is electoral anxiety, but the positive part there is twofold, one, QE tapering may lead to falling crude and secondly, in the second quarter of this calendar year, you might have a peaking off of interest rates and this is why we think that markets will start going up.
My top themes for six month period include large cap IT with a very few choice midcap IT, but largely large cap IT. Second would be the vice-industry. Three would be telecom. Four would be private energy companies. Five will be certain select pharmaceutical companies. I think these five could be my broad themes generally among the large caps.
Q: Just elaborate on private energy. Do you expect this to be a good year for Reliance?
A: I am not allowed to talk stock specific, but I am talking about private sector energy. So IT, large caps, vice, telecom, private sector energy and select pharma.
Q: You said there could be a PE boost but maybe an EPS boost is still a hope. Do you see that happening at all? How would you bet that?
A: What I meant was post elections if you have a stable government there would be a PE boost, however EPS boost would take time, because the new government has many challenges. It got a hole in its fisc. It has got huge amount of debt maturities coming up over the next 2-3 years, so there are many negatives which I do not want to get into, but a good leader at the top needs to work with the states because most of the things that are required to accelerate our EPS growth are actually at the state level, whether you call it the Land Acquisition Act, the GST or all the important ones.
The Food Security Act, the implementation/dis-implementation of it. Most of the things are to be implemented at the state level, so if you have a good leader who is working closely with the states, a lot is possible and that will translate into EPS growth over a period of time.
Right now you are getting a kick-off of EPS growth and more in the Sensex rather than the larger market. As far as our quarter preview is concerned, Sensex earnings is expected to be at 16 percent Y-o-Y which is slightly more than Q2 and this compares with 13 percent for FY14 as a whole. While for our coverage universe which also includes certain midcaps, it is only 8 percent ex-OMCs.
Generally, the Sensex should do well and also when you talk about growth anxiety, 25 percent of our market is export related. Apart from pharma and IT which is roughly 25 percent, we also have Reliance, Tata Motors and Bajaj Auto. So you have a lot of plays that are not directly related to what the government does.
Q: The one sector that does not feature in too many people's list is telecom. Can you just give us the reasons why you have picked up telecom as a top theme for 2014?
A: The government made some good money out of spectrum auctions and is also likely to cooperate. Two, the competition is definitely easy, because a lot of these players are now not in fray as earlier and enough time has gone by, so people have now started increasing their capex. Fourth is the fear of large players coming in and spoiling the market and it is also being shown that they are at least now targeting the creamy segments and I do not think it will be market disruptive.
Q: No biting into the cyclicals, just a little ahead of the curve maybe private sector banks or anything like that?
A: We are expecting the market curve to go down and then up. At a point, low is low enough. So there we have three themes in terms of - I wouldn’t call it cyclicals. We have three themes in how to play if things get better. One is financials because both the balance sheets as well as profit and loss benefit out of it.
Second is operating leverage stories. Because if you have already done your capex, any increase in capacity utilisation immediately follows to the bottomline.
Third is consumer discretionary because when sentiments move forward, first thing that you scale up is your consumer discretionary, not your staples. So, these are the three plays and you have different types of stocks in our strategy report for the year which I think are reasonably good plays for playing into the post election period.
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