See new highs in 9 months; like IT, pharma: Pramerica MF

The RBI policy and US Federal Reserve policy meeting which are scheduled in mid-June are unlikely to have any significant impact on the market. The key event which can boost investor confidence now is normal monsoon, says BP Singh, Executive Director and CIO - Equity, Pramerica Mutual Fund in an interview to CNBC-TV18.

Redemption pressures have become acute in a market that has failed to reach new highs despite several attempts. Domestic traders have been big sellers in the market and will continue to be so unless market decisively sees a new high. However, Singh is hopeful that sustained foreign inflows over the next six-nine months will lead to a new high through an uptrend.  Singh is bullish on software companies given the fall in rupee and the pharmaceutical sector in the near-term.  He advises staying away from banks and remains underweight on the sector from a long-term perspective. “Rate cuts may not have any positive impact on banks. Market is building too many expectations. The last rate cut by RBI is yet to be transmitted,” he elaborated. Meanwhile, fourth quarter earnings were disappointing as EBITDA and sales for most companies were in single digits. Singh expects 14% earnings growth for FY14. "Even a five percent depreciation in Indian currency would result into four-five percent earnings growth. We have seen what happened in Japan - how earnings for Nikkei improved the moment yen started depreciating. Also, companies will benefit from easing raw material prices given the fall in commodity prices," he added.  Below is the edited transcript of BP Singh’s interview with CNBC-TV18 Q: How do you feel the rest of this month is going o pan out with two extremely important liquidity events pitted in the middle of the month as also a market that is increasingly looking nervous now? A: The rest of the month is going to be reasonably good for the market. There are going to be two liquidity events, but these events are going to come and go and will hardly have any impact on the market. The event which is going to have a major impact on the market is monsoon which is now slowly setting in and that’s something which will actually increase the confidence of investors in the market. There are lots of expectations from both the liquidity events. On one hand there is fear of what the United States will do and there is an expectation what the central bank in India will do. But, both these events in my opinion are going to be practically non events. Q: What’s your sense of how domestic players have approached the market though? From the highs the market saw in the early part of May, does it look or does it seem like redemption pressures actually accelerated with the market moving to higher levels? A: In the domestic market, redemptions are reasonably at a higher level. Once people have seen previous stops and they also seen that a couple of times, the market has made an attempt to break from that particular range, but it is not succeeded. So, that has definitely resulted in decent amount of redemption across the market. So, domestic traders are definitely big sellers in the market. I believe that particular trend will carry on for some time till the time this market actually makes a fresh high. Q: When you say that the market will have a reasonably good trajectory in the times to come, do you think that it can trek back to its fresh all time highs or do you believe that could be a tall ask given the kind of economic problems that we are dealing with currently? A: Not only that market will get back to the previous high, but in six-nine months, the market has the potential to make a fresh high and go beyond that. Right now the fundamentals do look reasonably uncomfortable, but those are the structural issues, those are the long term issues which one needs to handle. I am sure the government of the day will continue to focus on that. If one looks into a shorter period, one will notice that besides the monsoon which is going to have a positive impact, the recent decline in the commodity prices are also going to play an important role. The most important thing happening across the world right now is sharp currency depreciation. Today, most corporates are globalised and have reasonable chunk of their businesses outside the country and these kind of depreciating currencies help improve corporate profit. _PAGEBREAK_ Depreciating currency may not be good news for the economy, but it definitely helps corporate profit. We have seen what happened in Japan - how the earnings for Nikkei improved the moment the yen started depreciating. Those themes are likely to play going forward. Also, with the developed market bond yield going up, there is a switch taking place between dividend yields to high growth stories or slightly riskier assets in the equity component and that’s where the emerging markets definitely become one of the options. So these are the four factors, which will result in our market getting a fresh impetus both technically as well as fundamentally. Q: Tactically, how should one be positioning if you believe that this market is on its way to make a new high? What are the sectors that would lead it there? A: They are going to be driven initially foreign money coming to the country. Also, it’s more of a technical change which is taking place. So logically, the companies which have higher exposure to the overseas market and get higher share of their businesses from there are going to be the winners. Secondly, companies who are reasonably cash rich, have strong businesses and are not too much exposed to the forex leveraging at this point in time are definitely going to be successful. The sectors in which we are quite focused on and we believe that are going to deliver decent return are IT in India and some pharmaceutical companies. Some companies from the auto or capital goods with a higher share of their businesses coming from overseas may do well. Q: How have you approached banks after the recent weakness and any reason to change allocation over there? A: We were underweight on banks in last fortnight and banks have really corrected reasonably. There is a kind of trading opportunity available in the bank though we are not changing our complete view in the long term because we do not believe the rate cuts are going to have a substantial impact. The market is building too much of expectation on rate cut but I would just like to remind that the last rate cut by the central bank is yet to be transmitted to the consumer. So there is no reason to believe that the next rate cut will actually get transmitted so easily. Therefore, we are not building a substantial fundamental change in terms of our position on banking but there is definitely an opportunity to have trading positions in the short period. Q: Eventually it is earnings and the growth in earnings that drives the market fundamentally higher. In that sense, Q4 did not throw up any inspiration. What was your key takeaway from earnings season and the trajectory we might see as we head into FY14? A: Q4 was not very encouraging because sales and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) growth was still in the single digit. However, the market always takes a forward looking position. Just a 5 percent depreciation of currency can result in an improvement to the extent of around 4-5 percent. The Indian rupee has depreciated in the last couple of months against the dollar, but it has appreciated vis-à-vis other currencies. Keeping that factor in mind, the potential for the currency to continue to remain weak in our opinion is high and that will have an impact. Secondly, the commodity price decline is also going to impact certain sectors. Finally, the monsoon and this being an election year, will result in a rural demand going up. If we combine all the three factors, we are looking at around 14-15 percent earnings growth for the coming year. This market is yet to reach 2008 levels. Between 2008 and today, earning growth is roughly in the region of around 55-60 percent. If we put that, it is already a de-rated market, which is promising 15 percent growth in comparison to the various other economies which are struggling to do that - that aspect will provide the market to go up. Many a times when the liquidity is not available, good earning growth story also gets ignored. But fortunately for us, it looks like in the next 12 months liquidity in the global market is going to be comfortable. If we have an improving earning growth story, the combination of the two has a very good chance for the market to make a fresh high.