Mkt won't fall as much as expected; bet on metals: BP Singh

Index probably may not correct as much as anticipated especially when compared to the grappling economy, says BP Singh, executive director and CIO - equity, Pramerica Mutual Fund. "Fifty-Sixty percent of the earnings of the index at this point is in forex earning, hence it goes up when the rupee depreciates," he told CNBC-TV18.

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He feels that rupee depreciation has been rather overdone and this correction is making India more healthy now and will bring growth back into the system over a medium to longer term. Further, weak rupee will help metal companies to increase prices marginally and valuations are also in favour of investors, he added.
Given the current market scenario, he does not think FIIs will be sellers since they usually sell when their underlying economies are in difficulties. "The flows are shifting from bonds to equity and in that context FIIs will continue to come, " he added. Below is the verbatim transcript of BP Singh's interview on CNBC-TV18 Q: What is the take in terms of the bottom that the markets can put? Is it 5200 or do you think these markets are going to show some seminal breakdown?
A: When we take a call on the market we are focusing a lot on the index and there are two different things. The entire market is behaving differently as compared to index. Today index consists of large number of stocks that over the last 4-5 years have become dollar or the forex revenue earner companies and so therefore what index does would be different than what the market is doing and in fact the rupee depreciation which we have witnessed over the last three months, the market almost anticipated the problems in the earlier three years and that is the reason why you noticed that the midcap index or the broader market was in difficult times.
However, when we focus on the index and we notice that the index is not correcting as much as the changes which are taking place in the underlying economy. The fact is that the large number of companies and approximately 55-60 percent of the earnings of the index is at this point in time in forex earning and which actually goes up whenever the rupee depreciates, so from that angle if you notice the index probably may not correct as much as most of the people are anticipating keeping in mind the kind of difficulties which they are witnessing or noticing in the underlying economy. So we believe that the indexes might correct, but it will correct only to bounce back very sharply the moment things stabilise. Q: What have you made of the metal rally? Would metals benefit because of rupee depreciation allowing them a higher import price or do you think they were beaten down? Where do you stand on that space now?
A: The stock performance is a combination of two things, valuation as well as the future business opportunity. Obviously with the rupee depreciation that has taken place these companies will be now be in a position to go ahead and increase their price marginally. At the same time the valuations are now in favour of the investors. So if you combine the two yesterday's rally has a leg in it and probably it can surprise people and the under-ownership of the sector is also reasonably high.
The kind of doubt which we have started having because of rupee depreciation in my opinion is overdone, in fact this was quite overdue and we have been advocating that the manner in which we are carrying our economy we were slated for this kind of correction and this correction is actually making us more healthier now and that in our opinion will probably bring growth back into the system over a medium to longer term. Rupee now will actually help us in those sectors which are right now reasonably undervalued.
_PAGEBREAK_ Q: So far we have not seen any major Foreign Institutional Investors (FII) selling. A lot of FIIs are still holding onto good quality names, ITs, the Fast Moving Consumer Goods (FMCG) of the world as you mentioned. Do you fear that we could see a big pullout even from these names by FIIs as we head into the next couple of months?
A: When we analyse FIIs we always assumed that FIIs are one investor, actually they are multiple investors. Some who had already invested, they had taken certain view and some who are sitting on the sidelines. Depending upon where they are, their reaction is going to be different. For example, an FMCG investor, because of the inflation which is going to be in the economy now will be sustainably there in the economy, because of the fact that rupee depreciation will takeaway some amount of health effect, so you will find that in some of these sectors they will be selling. At the same time, sectors where earning potential is improved or if you put this among those FIIs who have not participated in the market and for them it is an opportunity because of the valuation they will make an entry. If we combine the two, we do not think that FIIs are going to be a seller.
Let us look at when they sell and when they do not, they actually sell when their underlying economies where they operate from are in difficulties. So in 2008 when India still did well the FIIs turned seller for sometime, whereas if you look at the current scenario the equity inflows in the funds are increasing. The flows are shifting from the bonds to equity and in that context FIIs will continue to come. However, what that will result in is a huge amount of volatility in the market because there will be a lot of churning, shift towards better quality companies and they will become costlier, whereas moving away from companies that are going to face difficulties in the current context and so therefore you will continue to see substantial amount of volatility in the market. Q: Equated Monthly Installments (EMI) are going up, that is what ICICI Bank and HDFC Bank have signalled to us yesterday. How would you play this? Would this mean that you are going to see a bit of a hit on auto and housing stocks as borrowers become increasingly wary that things are going to get worse from hereon?
A: We took it for a fairly long time when we kept our interest rates artificially low which is the reason why we found that the saving rates came down in the economy. We found that the wealth effect resulted in the situation where low capital formation took place in the economy over the last few years. When the change takes place the decent rupee depreciation will probably result in the cost of capital remaining higher. Cost of capital was anyhow higher. It is just the interest cost now which is going to go up and there is going to be reorientation and it is going to be more of an investment-led growth which will take place in the future.
I am not making a call that it will start happening from tomorrow. There is still a lot more to happen in the coming days in order to reach there. We have not reached a stage where the weaker players have started exiting from the economy or from the market. We will have to reach that capitulation stage where the weaker players whom we have supported a lot in the last few years start exiting from the economy and how we handle that situation will result in the emergence of a new scenario where the investment will come. In our opinion the next three to five years will be an investment-led growth in the economy and that is where the movement of capital both from the stock market perspective as well as from the underlying economy will take place.