With global tensions on the Greece exit, slowdown in China and a US Federal Reserve rate hikes easing, one can expect a relief rally in the Indian equity market, says Tirthankar Patnaik of Mizuho Bank.
Speaking to CNBC-TV18, Patnaik says “I guess we are in for some relief times for the global equity markets and Indian markets and hence, therefore saw FII buying come in in a big way.”
On the back of an ongoing negative earnings season especially in public sector banks and IT companies, the market will remain volatile, he says adding, “Therefore, that information is going to play on the markets, you are not going to have a smooth story in the markets over the next month or so."
Asset quality has been a niggling worry for state-run banks and there has been no significant improvement in them, hence he expects negative Q1 numbers from banks as against Q4.Meanwhile, the other two sectors which are likely to remain under pressure are cement space and steel sector, on the back of imposed anti-dumping duties.
Below is the edited transcript of Tirthankar Patnaik’s interview with CNBC-TV18s Sonia Shenoy and Reema Tendulkar.
Reema: 8600 is here on the Nifty, do you see us scaling past our previous record high levels of 9100 and what have you made of the fact that we have climbed to these levels without any fundamentals backing us?
A: There is a relief rally here that is helping the markets. There is the Greek deal that went through so we do not probably have to worry about Greece over the next one to two years. The deal with Eurozone is coming through. We should see about USD 90 billion odd come in and that should keep Greece of our backs for the next two years. Clearly there is some amount of comfort that we can take from the fact that the Fed chairman announced that there will be a rate hike this year. Every meeting from now should be a live meeting, they are also not ruling out intra-policy meetings where they could raise the rates. However post that there has been comfort that the rate hikes would be very gradual.
So, from that perspective also markets took a lot of comfort. Probably the greatest relief came from China where the freefall that we have seen over the last month or so has probably stalled for now. With recent data from China that came in fairly okay be it in industrial production, be it on GDP, be it on retail sales, I guess we are in for some relief times for the global equity markets and Indian markets therefore saw FII buying come in in a big way which is what we are seeing just now.
Sonia: Do you think the run-up from here on will be a clean uninterrupted patch or do you think it could be interspersed with a lot of volatility given that we have the Fed lift off that will take place, we have earnings that doesn't look like it is recovering anytime soon?
A: There is no case for a clear move for the markets going forward. I have noted that this is a relief rally. Relief rally has probably run its legs. If one sees volumes come off over the next week or so then we should see that we have probably reached the end of our tether. At this point we have practically the entire earnings season coming up with us and the numbers are nowhere going to give a positive surprise especially places like public sector banks we are probably going to see very bad numbers. We are going to see fairly bad numbers for the commodity space as well. Therefore, that information is going to play on the markets, you are not going to have a smooth story in the markets over the next month or so.
Reema: What did you make of the composite cap announcement on foreign investment which came out last week and therefore the impact it has on names like Axis Bank and Yes Bank?
A: The announcement was first made in the Budget and the clarity that came in yesterday turned out to be there was no clarity there at all. So, after the entire announcement of the composite cap we are still at 49 percent FII limit for private sector banks. So, to my mind that was a disappointment. I would probably wait now for the DIPP print to come in, lets see what the consolidated FDI policy has to say before taking a firm view on this because otherwise it is just remarking to news that has not really been in paper actually.
Sonia: One sector that did quite well this week was technology and that is interesting because TCS came out with not so impressive numbers. What led to the tech sector coming back in focus you think and would you back it hereon?
A: We have been buyers of the technology space all through. Companies have been showing up fairly negative numbers but the way the domestic economy is likely to perform over the next two quarters or so we are not likely to see any kind of significant improvement that should see earnings move up beyond news.
So, domestic sectors are good from a news perspective but from an earnings perspective we are going to see disappointments. Therefore our view has been global over local here except the commodity space.
So, for the IT space in general we are supportive and that is one of the reasons why we saw the IT sector move up and I would expect it to continue outperforming over the next month or so as we see higher volatility and that volatility especially being there in the domestic names.
Reema: In the week gone by we also had some small banks like South Indian Bank, DCB, Karnataka Bank which disappointed the street on its asset quality. How will the asset quality for financials look in Q1 when compared to Q4?
A: We had the RBIs financial stability report that came in around June which gave us some sense of how asset quality had moved out since September 2014 all the way till March 2015.
If I look at macro aggregates since March 2015 there is very little for me to see that asset quality has improved meaningfully since this period. So, I would expect asset quality numbers to be fairly bad. One is likely to probably see numbers fairly negative. Street is ready for a significant amount of rise in asset quality but I guess they will still be disappointed as we have seen in the results that came in.
Sonia: You were telling us about how you are positive on the technology space. However apart from that what are the other sectors that you would be bullish on where you would advise investors to increase their allocation into?
A: At this point I see the market going into enhanced volatility. The market is probably at the end of its relief rally and I see earnings season coming in where there is unlikely to be a significant positive surprise. Rather than pushing on sectors I would be advising investors to be cautious about certain sectors and these sectors would be steel, this is one of the sectors we are fairly negative. Numbers for all the large companies are likely to be fairly negative given the drop in commodity prices that we have seen in this particular quarter.
With the government support on anti-dumping duties coming in only about June, we have already seen numbers where the imports from China until May had gone up about 53-54 percent on a year on year basis. So, that is likely to hurt steel companies in a meaningful sense. The other sectors that we will be worried about will be the cement space where again we see numbers to be fairly negative.
So, these are two sectors where I would be worried other than the public sector banks space. Public sector banks is again one space where despite all the negative news that is coming in there is disappointment in-stored further in terms of asset quality. So, these are sectors cement, steel, basically commodities and public sector banks where I would be fairly negative.
Reema: Last week even education companies did fairly well. We got the Prime Minister launching the Skill India mission. NIIT Limited earnings were fairly good. I am not asking in particular about the education sector but do any sectors or themes look attractive in the midcap space which you would bet on ahead of the earnings season?
A: We are not following any specific midcap theme at this point that really interests us.
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