Need to recalibrate earnings expectations: Karma Cap

In the past few weeks a lot of smart money has flown (back) to US treasury due to market concerns like deflation and growth crisis, which have taken hold of the entire world, says Nandita Parker of Karma Capital.Amidst the tensions, India does not remain untouched by the same. Despite the needful in terms of government spending and higher interest rates, investors are confused about the stimulus measures in both fiscal and monetary policies, Parker tells CNBC-TV18.Not just this, the market hasn't taken cognizance of the fact yet that India's nominal Gross Domestic Product (GDP) growth is lower than the real GDP growth. She is of the view that there is a need to recalibrate the earnings expectations and further expects a lower earnings cycle and a de-rating in fast moving consumer goods (FMCG) sector. Markets are due for a snap-back rally, she says.Meanwhile, media sector might be a good way to participate in growth seen in e-commerce, start-ups and Digital India, Parker says.She says the US economy is in a better shape on the back of strong sectoral growth in consumer, auto, housing and commercial construction.Below is the verbatim transcript of Nandita Parker’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: What are hedge funds thinking now and is it a time to cash out of commodities? Where is the money really going, smart money?A: As you saw the first couple of weeks of the year the money has gone into US treasuries, so we have seen the impact of that globally. It has been a risk-off kind of scenario. I think the concerns that the market has had are basically two fold. One are the deflationary forces that have taken hold of the world, and the second is there a crisis of growth. Now I think that everything is not as black and white bad as it appears to be. We saw the China gross domestic product (GDP) growth numbers today they weren’t bad at all. I also believe that the US economy is in much better shape than what people are fearing. If you look at the US consumer it continues to be strong. US auto sector continues to be strong, housing is strong and commercial construction is strong. So, there are large parts of the US economies that continue to do very well. We need to take some solace in that. As far as India is concerned we are facing again twin forces of deflation as well as some growth, pockets of growth. Government spending which isn’t quite or what it should be but it is their interest rates which are higher than where they should be and so investors are asking themselves why we are not having a more simulative kind of policy measures. I think that is what they are looking for both on the fiscal as well as the monetary side.Sonia: I was going through some of your products and you have Karma Star which is the long short India equity strategy. Tell us about the changes that you have made to that particular product in the last say three to four months? Have you increased short allocations and if yes to which sectors?A: I won’t to able to talk very specifically but we are a running more a lower net exposure and a lower growth exposure than normal. We have to sort of take into account this spirit of volatility that we are going through. Having said that, we are probably due for a snap-back rally which is quite tradable, so don’t hold me to any exposure levels that I might have had in the past couple of months. I would like to say couple of things, I think that the market has not taken cognisance of and that is that we really have a very different scenario in India than what we have had in the past 20 years. For example I have never seen a nominal GDP growth lower than a real GDP growth. What this means is that we need to recalibrate our expectations for earnings across the board. Analyst will be the last to do unfortunately but we really need to do that. We have seen already some of the impact from the results season. The FMCG companies like Hindustan Unilever (HUL) which are having to pass on the lower commodity prices by lowering their price levels into the consumer. What this is saying is that we are in a different world and so don’t expect the same kind of double digit earnings growth from these kind of places where investors have hidden or made; in fact considerable sums of money in the past seven years I would argue that it is time that this changes and that not only we are looking at a lower earnings growth cycle for this sector but also possibly a de-rating.Latha: What would be the sectors that you would like in that case?A: There are lots of good news out there in the economy. If you look at the earnings season so far the media company Zee Entertainment Zee Entertainment has done extremely well. Advertising growth is 28 percent on the broadcasting side. Where is the buoyancy? A lot of the buoyancy is coming from e-commerce. A lot of the buoyancy is coming from digital India start-ups. The media sector might be a really good way to participate in that growth. So, I would focus more in that area on the broadcast side as well as if you look at this decimation of valuations that has taken place again within this sector you will see that you can buy the entire cable industry in India for a billion dollars. This is not sustainable, right? So, this industry if digital India has to happen broad band has to be built out. This industry needs huge amount of money. It has gone through a tough times and is now set to enter a new level of growth. So, these are some of the areas that I am interested in.