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Last Updated : Mar 17, 2016 02:07 PM IST | Source: CNBC-TV18

Earnings, RBI policy key; fundamental issues persist: Edelweiss

Vikas Khemani, president and CEO of Edelweiss Securities says unless liquidity concerns make a comeback, Nifty may not test levels of 6800-7000 once again.

While the liquidity concerns have more or less abated, fundamental issues continue to persist, says Vikas Khemani, president and CEO of Edelweiss Securities. The global view on emerging markets too is changing once again and is a lot more accepting after the US Federal Reserve stayed put and did not raise rates and the Bank of Japan too refrained from further lowering rates into the negative territory, he explains.

According to him, the risk-off sentiment has lifted and going ahead inflows into emerging markets is likely to increase. He believes the focus will shift to local issues such as earnings, corporate performance, Reserve Bank's April policy move, among others.

Khemani also says unless liquidity concerns make a comeback, Nifty may not once again test levels of 6800-7000.

Below is the verbatim transcript of Vikas Khemani’s interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.

Latha: We meet in vastly happier circumstances for a bull. If we remember last time when Reema was at the Edelweiss office speaking to you it was tense moments. The market was closer to the 6,800 mark, below 7,000 at any rate. How does it feel now, has it already had its day or are you buyer at current levels?

A: The global mood after the spat of policy actions by all the central bankers definitely the environment towards emerging market is lot more comforting, lot more settled down as it was a few months ago. The key thing was that it started with the Fed rate hike and subsequent depreciation in the emerging market currencies. We have seen that sort of reversing or settling down and that has also reflected into flows towards emerging market.

In that sense, the risk of environment right now has become normal and neutral environment and may be now we will start seeing some money flows towards emerging market. As far as India is concerned, we had a big problem about foreign institutional investors (FII) outflow. The domestics were buyer all along but we had significant FIIs money going out largely led by the emerging market outflows. That seems to have right now settled down.

To that extent market environment is definitely comforting and we are now back to the normal domestic issues, we will start focusing on earnings, we will start focusing on company specific issue. Global environment has definitely settled down at this point in time. We have to wait and watch.

Reema: You were indicating that global scenario is looking a lot better. We have seen the FII inflows now come into the market. Has that reached an inflection point? Is the worst behind us? Do you have the confidence to say that we are not going to revisit those 6,800-7,000 levels on the Nifty, at least in the next six months as things stand?

A: If I were to make a statement -- the global scenario is back and it is far from any problem then it will be overstatement. According to me, the anxiety level or the fear level in the markets have settled down. The global policy makers have had a coordinated action from China to Europe to US. Yesterday when Janet Yellen made a statement, it clearly shows that they are mindful of the global scenario before they do anything on the Fed rate side. This is a good development.

So the environment right now is definitely better than what it was couple of months ago. Having said that, the problem with European banks still remains I don’t think we are going to see significant recovery in the commodities on a structural basis because the global demand still remains weak. So, that fundamental we cannot ignore.

The liquidity related crisis which market was facing, the risk off which market was facing seems to be settled in and we might see a situation where markets gets a pullback.

We will have to again wait and watch like yesterday Deutsche Bank announced guidance about their profitability, their credit defaults swaps again shot up so those kinds of risks still remain. So, I don’t think one should become complacent or comfortable about the global risk. However, having said that it is settled down and I think India will come back in next three to six months above the lock the issues and all.

Unless the liquidity crisis comes back, I don’t think we will see the levels which we saw before. However, at the same time, I don’t think we are going to see extremely bullish scenario in the shorter term. Longer term, I continue to remain very positive on the markets based on the fact that the earnings will start improving in next three-four quarters, economic growth will start picking up.

There is a case, which can be made for the aggressive rate cut by Reserve Bank of India (RBI). I would expect a 50 basis point cut but if that happens, markets will again cheer up and that eventually reflect in corporate earnings. So, market mood will now shift back to some of the local issues for next three to six months. That is how markets would be played out.

Latha: Are you buying now or do you think that the market will give you a better opportunity when the fourth quarter numbers come which itself perhaps will not be very good? So, when are you buying are you putting all your cash to work right away and if yes then which stocks?

A: Honestly speaking I have said before also timing market is very difficult. Next three to six months market environment will remain, they won’t be bullish they will be uncertain, volatile. Currently, it has settled down and hence one has to put money in the market in a staggered manner. If you overlook next six months, I think market have lot more in store, lot more returns to be made from the market.

This is a time to probably look for the companies, sectors, segments where the economic turnaround starts reflecting into the corporate earnings. What are those stocks and sectors would be and that is where one can start kind of switching the portfolio, building the portfolio and that is what at least our effort and the approach has been.

Reema: It has been Rs 9,000 crore of FII inflows since the Budget days. What has been the nature of these inflows?

A: They are all led by the emerging market funds. Emerging market funds in general have seen inflows and India has been beneficiary of that. Somewhat little bit of you can call it, even India dedicated flows but I will still say it is largely part of general emerging market basket. This is precise thing I was mentioning when India went down it was also because of the emerging market flows. So, I think in some sense we are linked a lot to what is happening in the emerging market flows and emerging market currencies.

I think that the flows from a shorter term perspective should be positive should remain comfortable given whatever is happening around the globe.

Latha: What are your favourite picks at this juncture? Are they economy related sectors, separately would you still now venture into buying any of the PSU banks? They have moved off their recent lows?

A: Our views on the sector have not changed. We continue to remain very positive on banking and financial services sector. We think that as and when that environment starts picking up you will see significant money to be made in these sectors. Credit growth will start picking, right now market is focused on the asset quality issues rightfully. They will start settling down soon. Lot of efforts is being done by RBI by government. So, once that settles down you will see comfort building in along with the credit growth which might happen around 6-12 months down the line in an aggressive manner. So, we remain quite positive on both public sector and private sector.

There are names we have to pick and choose but in general we are positive on the segment. On the construction capital goods we are very bullish, very positive. The amount of order book accretion, which is happening in this segment market is right now in my opinion overlooking it. Market is waiting for it to reflect in corporate earnings, but the leading indicator is the order book inflows the number of bidding these companies are right now doing. That is only matter of time that will start reflecting in order book and in topline and bottomline. So, we remain very positive on this segment in general.

Latha: The force with which public sector banks are coming on their errant borrowers, we saw Alok Industries stock rising on expectations that it is going to be bought up, that there could be new promoter. You work very closely even with your own ARC. What is the sense you are getting should we be looking for these kinds of promoter change opportunities or is this a dangerous game to play – the Alok Industries, the Monnet Ispat, the default borrowers who may likely get new promoters?

A: There is no general answer for these cases. There are company specific solutions and answers for each of the situation. They are very complex situation, not an easy situation. It depends on promoters, industry and the bank consortium. Definitely there will be change of hands which will be happening. There will be lot of resolutions which will be happening in some of these larger assets. Unless you understand those assets you are very aware about those assets I would advise specifically from a retail investor perspective not to get carried away by these things.

There could be a situation where equities wiped out completely and lenders are trying to recover their money. In some of the cases there is no equity value and lenders are trying to recover in whichever way they can so if that is the case then whatever market price or market value is saying is not real. So, one has to really understand; in some cases definitely they will be real, so there is no straight answers for that. One has to be very careful before you dabble into anything like this.


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First Published on Mar 17, 2016 09:47 am
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