The market is expecting the Reserve Bank of India (RBI) to cut interest rates by 25 basis points tomorrow, and even if the RBI were to deliver that, any resulting rally will be short lived, says Pramod Gubbi, VP, Institutional Equities at Ambit Capital.In an interview with CNBC-TV18, Gubbi says he is bullish on IT and pharma, and expects defensive and export led sectors to be in focus near term.On the possible upside for the market from these levels, Gubbi says much will depend on the global factors at play.If one were to leave aside global factors, corporate earnings are estimated to grow 5-8 percent this fiscal, and theoretically that will be the potential upside for the market, Gubbi says.However, given the aversion of global investors to emerging markets in general, the price earning multiple they are willing to pay for Indian equities could shrink, and that may cap upsides.Should sentiment for emerging markets worsen, India is unlikely to be unscathed and the Nifty could even go below 7500, Gubbi says. Below is the transcript of Pramod Gubbi’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: We have the big cue lined up this week, which is RBI policy. Expectations are that the RBI will cut by 25 basis points (bps) but if that happens do you see a relief rally in the markets or do you think that the market would continue its downward trajectory because of the global volatility?
A: The short-term is harder to predict but there would be some sort of a relief. However, like you said, it is sort of a general expectation across the market that there will be a cut so to that extent, it may not surprise the market that positively. Whatever relief rally -- it could be short lived and the global cues or the global factors at play would continue to drive the markets.
Latha: Chances are that Governor is going to give the cut but say that he will be entirely data dependent and cannot promise or cannot commit to further cuts, something on those lines. In which case how might the market react?
A: It would put the markets a bit back because every data point clearly suggests there is a case for a cut. I believe the global factors are out of play -- just the domestic economy be it in terms of inflation or slowing growth one way or the other, there is a case for continuous cuts to boost economy. Beyond that if the governor sees anything else coming from the global economy, which merits a pause and he views that into the guidance or the commentary around then clearly the market can react a bit negatively.
Sonia: How are you approaching individual sectors now? What is your sectoral preference for the next three months and what would you avoid now?
A: The focus will still remain on the exporters and some defensive sectors, which have at least some visibility of earnings growth. Until unless we see any meaningful recovery in the domestic economy, we would continue to focus on defensives and exporters. So, to that extent pharmaceutical and IT would be right up there. Alongside we can look at the consumer staple space, which too have some visibility on earnings growth.
Latha: How have you read the Chinese data that just came? The industrial profits contracting by 8.8 percent, it is fairly big negative hue that we are seeing in Asia. What is the sense you are getting, are we going to get further negative vibes from global investors?
A: Indeed, it is something that investor globally are trying to grapple with how bad is the situation with China. Clearly there is a transformation underway there from an investment in export driven economy to more domestic and consumption. Now what sort of changes, what sort of the implications that has both in terms of a short-term and long-term -- not many people are able to grapple with particularly given the lack of reliable data available.
To that extent the uncertainty should continue, implications on the global economy particularly with the situation that the Fed is in terms of a potential rate hike could create more volatility in the market. I would expect investors to look towards safe havens, pull money out of risky asset classes and that is the way to defend volatility in this situation.
Sonia: What could the upside be capped at you think for this market because of the reasons you alluded to? I mean so far the Indian markets are down 5.5 percent this year already. What do you see the upside as say in the next 6-12 months?
A: It is hard to see much upside from a short-term perspective given the number of moving parts that we are dealing with. If we leave aside the global macro and just focus on domestic earnings growth -- I guess we are looking at an earnings growth of somewhere between 5 percent and 8 percent and that is the sort of upside we should see for this market at best.
However, the other critical variable in determining the upside which is the multiple that global investors would be willing to ascribe to a market like India which clearly despite all the positives falls in the middle of the emerging market asset class, which is not a favourite in today’s world. So, that multiple could be in danger and could cap this upside from these 5-7 percent levels as well.
Unless and until the biggest change that could happen is domestically where we are seeing some significant action by the government to boost the investor sentiment and also some sort of investment activity, which can boost profits going forward.
Latha: If we are going to get clubbed with emerging markets and with the China sword hanging and data continuing to disappoint, do you think that the 7,500 which the market touched twice and bounced back is not all that sacrosanct. We can pierce it, what is your sense about the downside?
A: Absolutely, I don’t think anything is sacrosanct given the way things are moving in markets globally. I don’t think 7,500 is anywhere near the base. Things can get uglier as we go forward if data points such as today’s continue to come through from this part of the world or the Fed rate hike decision is not seen particularly well by investors then the sort of turmoil that we can see for risky asset classes like emerging markets could be bad.Despite the sort of immunity that we have, we don’t think we will escape that sort of downside. So I would sense it could go much below 7,500.
Latha: Do you think we are going to see a huge development? How would you approach this as an investor at all, is MCX the only stock you will play?
A: Having a more capable or rather experienced regulator is definitely good for an asset class. You could have built the case for this several years ago given the integration of securities market and commodities market. It is definitely positive not just from the market perspective but also from the broader economy given it gives an option to genuine investors or traders to hedge their business risks. So to that extent, there are many ways to play this.At this stage, I think MCX is a more relative straight forward opportunity.
Sonia: You were telling us earlier about the fact that this market could have a deeper downside below that 7,500 level as well. Which are the one or two sectors that you think could lead at there?
A: The cyclicals, rate sensitives are going to lead the charts there as investors try to find safe havens in more defensive sectors. So, any sort of downside risk will have to be led by financials or industrial names where we are still struggling to see any visibility of earning growths.
Latha: There is this huge digital India push that the Prime Minister is giving and his presence in Silicon Valley as well has attracted all the big, best and the brightest in Silicon Valley. Does that change the list of stocks you are looking at -- IT itself or the digital play, how should an investor approach this whole event?
A: IT is perhaps the first level thinking in terms of implications from this development. This development is much broader than the just IT. There are several examples in different sectors which are implementing digital initiatives and reaping the benefits through efficiency gains and flowing through return on capital (RoC).
Banking particularly has a huge role to play here. The use of technology can reduce their operating cost quite significantly and also enhance their market breadth. So, this is not simply restricted to IT, the economy in general will benefit from it. The more advanced companies, which can use these technologies ahead of the curve, will definitely benefit more than the others.
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