Industrial recovery still away; like construction: HSBC

Below is verbatim transcript of the interview:

Q: You have been underweight on India for a while. Yesterday we got some signs of cooling off in the market. What is the sense you are getting from here on? Are we in for a period of price wise correction?

A: Firstly, we were underweight prior to the elections. Post elections we have turned neutral on India especially given the kind of verdict that came through and all the improvements, which we expect in terms of stable governance.

The key question that is on investors' mind at this point of time is whether it is too much too soon? You have seen a sentiment related uptick and whether now it translates into earnings.

You have had seven, eight months of continuous uptick in the market month after month. But will the baton passed into earnings uplift be as smooth as what it was in terms of sentiment uptick.

Thankfully, the monsoons have revived and so it brings to some rest the fact that inflation will potentially start coming up into next year. So catalysts are now falling in place for earnings led recovery. Maybe the market will take a bit of a breather now given that we have seen a lot of upswing in the market prior six months or so.

Having said that, the key parts to look at is that we have seen a lot of activity in midcap. Part of it has go to do with the fact that domestic mutual fund industry is finally seeing some inflows after three, four years of struggle and lot of valuations in the frontline names have moved up. There is still an arbitrage available in the midcap universe at this juncture.

Q: How are you approaching the global space now? Should we worry about the slow down or worry about the rate hike?

A: There is clearly an expectation that sometime by the middle of next year, US will start to tighten. But India still has a lot of benefit into 2015 because globally the Federal Reserve being such a big counter balance to most global forces, you will see the Fed tightening.

On a counter side, you will have India starting to ease into next year after a long pause. So you will have a situation where cost of capital dynamics by and large for the world as a whole might be seen inching up. Whereas, for India you might see it coming off, which should place us as an advantage.

The catalysts or the fundamentals are definitely starting to form a fairly steady base for India. Question is maybe in one quarter or so you might take that breather before you allow that earnings to start catching up and allow for market valuation to be more sensible for the next upmove.

Q: I was going through the list of speakers at your conference. You have some capital goods players like Thermax, Bharat Forge who will be speaking. What is the sense you are getting about whether the capital expenditure (Capex) cycle has turned at all. Are there any signs of a nascent recovery?

A: Industrial capex recovery is still a little while away because most of the capital goods industrial companies are still reeling from the hangover of the past capital binge. If you go sector by sector, capacity utilization, whether it is something like petro chemicals, cements, steel, in most places there is still ample headroom in capacity utilisation, commercial vehicles in all these areas will still require one or two years of growth before they feel constraint on capacity to further put up capex.

So industrial capex might be a little while away, but the areas which could see more activity in the intermediate period would be on the infrastructure side whether its railways, defense, affiliated areas where we are still lacking on the capacity severely and where we could see that being the initial engine of growth.

A lot of these names will also be exposed in some piece to these sectors as well which is where we see the near-term growth catalyst forming for these companies.