Fed move likely pushed to Sep; mkt pause to continue: HSBC

“We are positive on the market from the medium term perspective, say over two-three years,” he said, adding that investors should seek opportunities in paints companies, urban-facing consumer plays, media firms or capital goods companies focused on rails and roads.

Below is the transcript of the interview on CNBC-TV18.

Latha: The big Fed news has come on expected lines. What is the three month call on the index? Does it get ranged? Does it break on the upper side? Does it break on the lower side?

A: On the absolutely near-term basis, I would say there would probably be a little bit of a relief rally now in the market given that most people are now pushing back the rate hike expectations probably to Q3 of this calendar. And our house call is also that probably you will expect the first rate action coming through only by September of this year.

Having said that, I would probably say that the market would become more dependant on local news at this point of time, since this big event is out of the way. My worry is that the April results, the earnings season might still be a little bit lack-lustre as what you saw in the Q3 numbers as well. So, I am expecting a much more range bound market over the next three months rather than something which is trending rapidly up or down either side.

Sonia: What is that local news or trigger that can take this market out of its slumber?

A: I would say that one could be on the legislative front which is more to do with passage of some of these debated laws like land acquisition or whether it be goods and services tax (GST) related works or something to do with the labour reforms and so on. So, this could be something which market is still a little edgy whether it gets passed or not passed.

And assuming that there is a smoother passage of these without too much valuations as a give-away, you might see that there might be some leg-up for the markets then. But other than that I would probably say that if I look at pure earnings, it is still a little time in coming by. So, my feel would be that you might see a much more range bound market.

Latha: Let us come to some of the sectors. How are you looking at the financials now? How many rate-cuts are you pencilling in and what about the public sector banks in particular?

A: On the rate-cuts side, for this year we have 75 pencilled in, 50 done already, so our call is that there maybe at most another 25 more. Although there is a local rationale obviously to argue that, to promote investment one needs, but you are going to be constrained by two factors. One is the fact that as the US Fed starts to lift rates, to keep India as an attractive investment destination and to continue to induce inflows of equities and bonds, you might need to keep a higher rate structure prevalent in India.

The second factor is also you have had a lot of unseasonal rains come through in March. I do not have an accurate estimate on the crop damage which has happened. You might see a near-term lift up in terms of primary articles inflation which could again mean a little bit of a delay in terms of the rate trajectory coming through from the Reserve Bank of India (RBI). So keeping those two things in mind, I would definitely say, 25 bips more for the year, probably more around the June policy meet at the earliest.

Coming to the public sector (PSU) banks space, I would say that if I were to take a call of purely as, you will obviously have these small periods where you can play them as a quasi bond in a sense of playing the rate easing cycle. But other than that, the end game is still pretty much unclear on the public sector space.

You have a massive capital requirement there given Basel III obligations and I really do not know how it is going to pan out over that period of time, whether what the government does, whether it is able to successfully orchestrate this kind of a holding company concept or whether it is able to do some kind of massive recap which at least from the budgetary allocation does not seem to suggest so.

So, we would be very selective there and generally as an asset class we are under-weight that space. We much rather play the growth recovery through the private sector banks at this point of time.

Sonia: By the way, just keep an eye out on the market. Now the high point of trade up more than one percent, so the Indian team may not have a scored a century just yet but the Nifty is on its way to score a century, now up 90 points and big moves coming in on names like Axis Bank, TCS, Sun Pharma, etc. Has the texture of this market in the near-term at least changed from a buy on dips to a sell on rallies? And if yes, at what point do you think the market would reverse its trend now once again become a buy?

A: I would expect that from a medium-term, I mean a 2-3 year perspective, I would definitely be positive on market because they are clearly coming up. We have reduced our external fragilities; we are improving on the growth front and so on. Having said that, the market has run up a fair amount in the last one year or so and part of it to my mind would seem that it is probably a little ahead of the fundamental improvement at this point of time. So, catching the breather for maybe another 3-4 months, very much possible.

I would probably expect at least the current earning season, I mean the January through March season and probably even the June season to be a little bit muted before the recovery process starts kicking in. And, do remember that Q1 of last year has a high base because if I recollect correctly, the Morgan Stanley Capital International (MSCI) India probably posted an earnings growth in Q1 of about upwards of 25 percent.

So, you have a high base to contend with even for Q1. So my gut feel, another 3-4 months at least it meanders around the current point of time before it shows any kind of directional move there.

Latha: So, what would your 12 or 24 month target for the index and what takes it up?

A: For the year end we do not have a 24 month target at this point, we have a calendar year end target of 30,000 per Sensex which means more like a 7-8 percent kind of an upside on this point of time. So, partly because the market has done quite well in the first three months in terms of move-up.

So, I would say that we are more looking at a more constrained return at this point of time. But at the same time, I would say that the bias for the medium term is definitely optimistic given that it is the market that is recovering, improving on external stuff and all that.

Sonia: How do you play this home improvement or this smart city theme now because this is something that is played out over the last many months whether it is the paint companies or some of the plywood companies or even just basic real estate players as well, the good ones with no debt of course. How do you play this theme now?

A: On the home improvement side kind of thing, we are definitely constructive on the paint space given that there is a huge tail wind also coming from commodity price correction. Most of the paint ingredients are crude linked to a large degree and that would have its implications in terms of margin uplift for these companies.

On a holistic basis I would say the other theme that we are playing on the consumer, not necessarily home improvement is also the fact that we are seeing better traction coming through on the urban side of things rather than the rural side. Mainly because the improvements in disposable income given crude is come off, given primary article inflation is softening will probably be of better benefit to the urban consumer at this point of time. So, that is the space within the consumer sector that we would like to play.

But having said that, real estate is something that we are still quite cautious on and the reason there is that also do remember that the government is making a big crack-down to try and move the parallel economy on to the main stream economy. Now, real estate has traditionally been a big haven for black money to house itself in, so if you have some kind of tightness coming in there, you will obviously have its implications in terms of all these pre-sales, kind of demand that gets picked up from some of these developers and so on.

Latha: We always live in hope that those plans will succeed. One final question to you, in the midcaps space, where do you still see valuation gaps? What are the nuggets you are picking up?

A: On the midcap, clearly, media is one space that we like because that is one area where there is multiple triggers coming through. One that you are seeing this re-evolution of how the business is sold-out, the aggregators and stuff. The second part is we are seeing a big uplift in data and media is also a proxy play on that data theme. So, that is one theme that we like.

Auto-ancillaries is another space that we like because we are seeing both export competitiveness there, plus the local industry is also slowly turning around.So, that is the other space. Then the third one is some parts of industrials which are more exposed to the infrastructure area so, road build is one major area of capex that we are seeing coming through from the government, railways is another big investment avenue that the government is targeting. Defence indigenisation is the third thing so, capital good names exposed to these kinds of spaces is something that is definitely attractive to us.