Fed issue done with for now; see mkt bottom at 7300: IL&FS

A: I think for the time being the Fed issue is sort of over. I expect that while the Fed will increase rates next year and they will be gradual as they promised and I think the next hike will not happen before March. So, for the time being it is out of the way and the markets globally will now find their own sort of direction and levels based on their own fundamentals.

Sonia: What about the markets locally, what is the prognosis here?

A: I was actually expecting a sort of a bigger reaction to the Fed than what has happened locally. Most of the other markets are in fact quite strong and we have not been able to do much. It could partly be due to the fact that maybe the market is now realising that the goods and services tax (GST) is not going to happen in this parliament session.

So, basically, we are in the process of forming a bottom but that bottom could be 7,550 which we formed earlier, a double bottom or maybe it could be another 100-200 points below that. However, over the next two to three months, I would expect this bottoming formation to happen and the market to be largely range bound and hopefully after that sometime in 2016 you should see the uptrend resuming and 2016 should definitely be a better year than 2015.

Latha: Earnings wise you expect an improvement, what is the expectation on FY17 earnings for that matter?

A: For the Nifty we are expecting about 6 percent earnings growth this year i.e. in FY16 and about 15 percent next year which puts you roughly at about 500 for FY17 as far as the Nifty EPS is concerned. If you have a PE of say 15 on that which is the average PE, you come to about 7,500.

So, of course the only issue here is that the market is still expecting a higher growth rate than what we are projecting and therefore there could be still some downgrades to happen. So, all-in-all, somewhere between 7,300 and 7,600 the market should bottom out. However, you would still need maybe a couple of months after that for it to sort of consolidate there before moving up.

Sonia: Is there a risk of more money rushing out of emerging markets like India and into developed markets like the US purely because things are improving in the US and we don’t seem to be having any macro improvement especially in earnings?

A: To some extent that is true but as I said, at least the first part of that is over. We have seen money moving out and the Fed has very clearly stated that the rate cycle is going to be very gradual and it is not going to be very high.

So, there will be some negativity on account of that which means that FII inflows may not be as strong as they have been otherwise but having said that I think if you look at the valuations and you look at the fact that hopefully earnings growth should revive next year, you should see the market bottoming out somewhere in the range as described.

Latha: I take your range and your earnings growth of 15 but what may be the leaders next year, obviously the resource stocks are still very beleaguered so where will the outperformance come?

A: That is a good point because even I find it very difficult to see where the big leaders will be because there is nothing new. There is no new sector which is going to really develop leadership; it doesn’t seem likely. So, it is the same old sectors which will have to take leadership because if we are assuming that there is going to be a 15-16 percent earnings growth next year, that means the economy will also start to revive. Therefore you have to go back to the same sectors, you have to go back to private sector banks, maybe PSU banks if they go down further, automobiles and the economy related sectors which should do well.

Latha: Would midcaps outperformance continue you think?

A: Beyond a point no because a lot of these midcaps, the valuation gap between the midcaps and the largecaps has really reduced a lot. The midcaps largely depend on whether you continue to get inflows of domestic money because it is the domestic mutual funds who really buy those stocks but beyond a level I don’t think that would happen.

Sonia: How do you treat some of these auto stocks, most of them are coming in for some heat – Mahindra and Mahindra (M&M) because of the diesel ban, Maruti Suzuki because of how highly it is valued, Tata Motors because of JLR issues, etc. Do you use this as an opportunity to buy or do you stay away?

A: I think valuations are important so wherever you find that valuations are very expensive even after taking a growth for next year I would not be looking at those stocks. However, where valuations are reasonable and you see a reasonable growth happening, maybe two wheelers if not the four wheelers because they have not done anything and once rural growth picks up next year maybe those ones could outperform.