See 5-10% earnings growth in FY17; global outlook fragile: Ambit

Sonia: Good times for the index, the Nifty is virtually at 7,600 levels now. What is the sense you are getting about the market. Do you think that this is still a sharp bear market rally that we are in or have the fortunes changed in favour of the bulls?

A: I am not saying that the fortunes have changed in favour of the bulls. I think where we were from two months ago, is that the fears about global recession have ebbed away and we are now thinking that is more of a concern over profit recession where valuations get taken down, which is what we saw in the first few months.

Obviously China's central bank now being little bit more articulate in terms of what the government is trying to do there. I think that also showed a bit of confidence in that that they are not going to go for this big depreciation that maybe people thinking in the first part of the year. So that is just shored up everything and our market had fallen quite sharply along with global markets. It is just a rebound from there.

I think now we are going to go back to looking at the fundamentals globally and my concern there is what Draghi said, the European Central Bank's chairman, in terms of that. He told us that there is nothing more in his arsenal in terms of lowering interest rates. So this has to work. The market will be watching to see how the European economy picks up and certainly the by-elections in Germany over the weekend do not show very well for chancellor Merkel. So could there be worries about her leadership going forward.

There are few things out there which we ignore today but they are out there and those are the concerns.   

Latha: You guys at the Ambit Arbitrage Fund did not believe this rally in its early stages. I remember one of you telling me that you all were in cash, but now since several resistance levels have been broken, are you all getting in? Are you net long, short, cash?

A: We still have a high level of cash in the Ambit Alpha Fund and not in Arbitrage Fund.

We are starting to deploy cautiously but if anything we are keeping a high hedge at the moment because of some of those concerns I have outlaid in terms of worse, market have had a good rally, we go back to the fundamentals and the fundamental coming from China is not very strong. We will see what the Japan central bank has to do in the next few days, but I was more concerned about what Mario Draghi said which is a bit unnerving for me.

Latha: The International Energy Agency (IEA) telling us that non Organisation of the Petroleum Exporting Countries (OPEC) producers are cutting output faster than and they anticipated earlier, crude appears to have put a bottom, metals are putting a bottom. Doesn't all this translate into you buying some stocks in India?

A: We have been. It is not that we have not been buying. It is just that we have kept high level of cash because the global outlook up until Mario Draghi came out with his arsenal of support for the market, still looking a bit fragile and it still does. So we will be cautious. It has been a good run in the past two weeks and that might well continue. However, that said what we need to think is, is this just a profit recession or is it a global downturn. We are in a camp that has more of a profit recession at the moment but there is still a lot of moving parts out there which could drag global growth down.

The shocking thing to me about what Mario Draghi said was that inflation, their target in December 2015 was 0.9 percent and by early March is now 0.1 percent. So that tells you the deflationary aspects of what is happening and we are underestimating the cost of all these migrants across Europe. I think that is going to cause lot more problems going forward than we have been thinking about. I am not trying to get overly negative here but there are few negatives out there which we are just ignoring for the time being. So I am a bit more cautious and don't forget if you take few months, we are still down the most of this year already.

Sonia: The resumption of a bull market at the end of the day will hinge on a recovery and earnings and after the poor December quarter earnings that we have seen especially for some of the public sector undertaking (PSU) banks, not too many people are optimistic. What is the sense you are getting. Are we staring at another push back to earnings recovery?

A: We think earnings can rise this year between 5-10 percent and it is a wide range because a lot of the heavy lifting still has to be done by the government in terms of spending and that is still very patchy unfortunately. There is no industry which is picking up and if you speak to most corporate, they are still saying that they are not seeing any real pick up. It is again very patchy in terms of what they are seeing. I think 5-10 percent earnings growth is where we are at the moment which wouldn't be a bad overall outcome and that would accelerate in the second half of the year but the Budget itself whilst it looked okay from fiscal deficit standpoint, I didn't see a lot of incremental new spending in terms of growth from the year before and if you think about oil prices recovering, the fiscal math has to be thought about as well. I think it is above USD 40 per bbl at the moment but these things, we tend to forget but it will put some pressure on both the government and the Reserve Bank of India (RBI). However, RBI under pressure now having said that the government has done so well, our expectations are that it should reduce interest rate. So, there are quite a few good things out there but unfortunately the global setup is still a little bit patchy and we think that could turn down and that will come back in the next week as the enthusiasm of Draghi's measures tend to die down.

Latha: Is there any specific pocket in India that is accelerating. I take your growth concerns, the Index of Industrial Production (IIP) numbers were reminding you that a large part is still not growing. What would you buy?

A: At the moment we are continuing to look at the more stable side of domestic India - that is where we think you are going to get the growth as the economy hopefully starts to consolidate, if not accelerate. We have been more towards four-wheelers than two-wheelers in the past. We have switched now more towards two-wheelers, where we think the growth trends are looking up. So that is where we have been putting more incremental money in the recent few weeks but as we come towards the end of this months and towards the earnings season, you are going to have two tier India, the good and the bad and the bad make up more than the good at the moment. So I think we are going to be light in terms of taking any real sector bet at this stage because the global factors just do not allow us to do. We had a sharp run in the market and whilst I do not say that will continue. I just feel that we are ignoring some of those global factors which have not gone away; they have been elevated by a little bit more sense than there was in the first two months of the year.