Worst of earnings not behind us; IT safe haven: Geosphere

Despite a good start to second quarter earnings season, Arvind Sanger of Geosphere Capital Management is still circumspect about the financial performance of India Inc and warns that the worst of earnings season is not behind us yet. 

Meanwhile, he does not see this Indian market rally extend itself. According to Sanger, this can be a relief rally since the US debt default risk has gone away in the short-term, but global macros continue to witnesses some tailwinds. However, he added that no QE tapering is expected in US Federal Reserve’s October policy. Quarterly earnings, RBI moves and economic policies are likely to determine Indian market’s moves going ahead, he told CNBC-TV18 in an interview. In current market scenario of high volatility, Sanger suggests hiding in technology stocks. The valuations of IT companies can continue to trend towards higher levels, they are clearly safe haven now, he elaborated. Below is the edited transcript of Arvind Sanger’s interview with CNBC-TV18 Q: Do you think with US cloud, at least passed for now for the next four months and with foreign institutional investors (FIIs) flows continuing to be strong, the current rally in India has more legs? A: The current rally in India is certainly not going to be truncated by anything coming out of the US. So, in that sense at least the US is not going to be a negative surprise in terms of anything coming out of the fiscal or other situation in the US. So, there question becomes how is the earning season shaping up. So far, we have seen that the results have been reasonably good especially the IT companies have been good. The rest of the sectors are still early although the results are so much mixed on the banking sector maybe moderately positive but mixed. A lot of earnings are ahead of us. So, it’s too early to talk about much of a rally from here other than maybe a relief rally on the fact that the US risk has gone away in the short-term. I think beyond that it is going to depend now -- we have to look at the earning season, we have to look at what happens in the Reserve Bank of India (RBI) policy decision at the end of the month. We have to look at how the political landscape is shaping up and how the economic growth or slowdown is looking. So, we now switch back to India specific focus and look at the next couple of weeks as a lot of Indian news flow both from companies as well as from the RBI. Q: For the Indian markets for the rest of the year what kind of a trajectory are you hoping to see. Do you think because the two important factors; earnings as well as the rupee are seeing some signs of stability maybe the market could build up and see higher levels? A: I would be careful about getting too excited about earnings because we have seen the US facing earnings come so far. Let us wait for the India facing earnings to come before we start getting excited about the earnings outlook for Indian companies. The US international facing IT companies had eye popping results. I would be somewhat more circumspect about the India facing businesses which is large portion of the companies in the index and see how those shape up. So, that will determine whether worse is behind us or whether this quarter is worse and the next quarter is going to be better. I remain somewhat uncertain on that. Let us see how much the inflation data is suggesting RBI, which way is it leaning. Is it going to be tightening further repo rate or are they going to be able to standstill. It certainly does not look like they are going to be able to cut any right now in terms of repo rates. My crystal ball suggests that the market has enough uncertainly that I do not see any easy case to be made that the rally is ahead of us. But if you go back to the global macro factors, the continued issues in the US have ensured that at least the US fed at the end of this month will not be a problem. In the sense that tapering out of the US in the October Fed meeting is almost close to a zero probability given that there is no economic data that has been put out in the last few days. Q: After the very ugly inflation number that we got earlier this week, consensus is shifting to not just one repo rate hike but perhaps two from the RBI maybe even before 2013 is out, at any date before the fiscal year ends. Your reactions to that if that were to happen. Also, one of the papers has put out or based on their survey an increasing chance or at least an increasing popularity for Narendra Modi and the Bharatiya Janata Party (BJP). Do you think that will keep people from selling in the hope that the elections could throw up something very pro business? A: In response to the previous question too I would say that the biggest catalyst short-term for the market to move is not going to be that the Indian economy is going to suddenly start roaring back to life or the RBI is going to supportive, in fact the RBI is likely to be headwind. The biggest cause of the rally would be if you get state elections showing clear strong BJP wave, which would be seen very positively by the market because the market is ruling for Narendra Modi to be the next Prime Minister of India. If that looks more likely then that could become a reason for the market to continue to stay strong and maybe even rally into year end. The more likely that seems, the more investors are going to be willing to look through near term economic weakness. One of the terms that I have heard people throw about is talking about a dream team of having somebody in the Prime Minister’s position who is seen as much more pro-reforms and pro-opening of the economy or at least removing some of the slowdown that has happened in the last few years and having RBI Governor that market thinks very highly of and that could be backdrop that investors might be willing to pay a down payment in terms of market rally into year end and if that starts to look more likely.