Market may drift down further: Motilal Oswal AMC

Last few sessions have been tough for the global markets.  Domestic and global uncertainties have taken the Indian market well below the 5,000 mark.

In an interview to CNBC-TV18, Nitin Rakesh, chief executive office of Motilal Oswal Asset Management Company says, the market is going to drift down further. “Unless we see some real positive trigger, I think one will have to brace for fairly long winter in the market. May be not a very steep downside, but a fairly listless environment where you may not see a lot of activity and volume may dry up,” he asserts.

Also read: Nifty to breach 4900; sell on intraday breakdowns, says Sukhani

Below is the edited transcript of the interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: It’s been a weak stretch for the market and the macro and global have not helped. Do you see more downside in the near-term?

A: Clearly, it’s been one spat of bad news after another. Domestically and globally, we are not seeing any signs of positivity. So, clearly the market is going to drift down. Currency is not helping, and earnings have been mixed as expected. So, unless we see some real positive trigger, I think one will have to brace for fairly long winter in the market. May be not a very steep downside, but a fairly listless environment where you may not see a lot of activity and volume may dry up.

Q: How important a role is the rupee playing in all this? What is it that even equity guys feel may happen on the currency?

A: I think the equity managers are the last ones to predict what's going to happen to the currency. But volatility in the currency makes earnings projection for a lot of the businesses hard. It also has a big impact on the bond markets and hence the macro policies and the monetary policies. So, clearly everything starts to steam roll from there.

I don’t think the issue is so much that we have come from 44-45, eight-nine months ago, to 54 today. I think the issue really is the movements have been pretty sharp. We went from 44 to 54 back to 49 and now back to 54. So, I think it’s the unpredictability and the volatility that is going to spook the market much more than anything else.

Q: Can you see a positive trigger on the horizon?

A: If you go back historically, equity markets react to two main trends - one is interest rates and second is earnings. We are clearly in a cycle of easing, even though the market is not believing it. The 10-year bond yields are not letting us believe that we are actually on the easing cycle because they are still stubbornly stuck at above 8.50%. But we are in an easing cycle. The pace of easing is something that is up for discussion, debate and question. I don’t think even the RBI has a clear handle on what is going to be the pace of easing because it is all going to be driven by data that they keep seeing.

The second aspect is earnings. At this point in time, yes, crude prices are important because again that goes back to the whole macro situation. But at the same time, if we see global commodity prices stay soft or cool off a little more in line with crude then I think you start seeing a base being set up for earnings growth, probably maybe two quarters down the road. The market, trying to discount things that will come up in the future, will start seeing some positive trigger from that perspective.

Yes, crude prices are important, but microeconomic situation is equally important. In the last 18-24 months, it is not that earnings have not grown across the board, I think it has been a very selective market. Some companies have grown rapidly, 25-40% earnings growth, whereas there are others that have got hurt badly. So, at an aggregate level, we have not seen much growth, but there are sectors and pockets that have seen growth. So, I think we need to see that at a much more broader base. As these two things unfold, the interest rate situation or the monetary easing situation and potentially the global commodity cycle, we might see some trigger.

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Q: Sub-5,000 or 5,000 has usually been the breakdown point either in terms of sentiment or market performance. If you are saying we are up for more difficult weeks, what do you think should be a more reasonable range one should work with, while looking at the Nifty?

A: If you see from a valuations perspective, there isn’t that much more downside that one can expect. There will be volatility. So, you may see spikes up and spikes downs. We are at 11 odd times FY13, maybe 11-12 times. So, it’s not so much worry from a valuation perspective or a deep correction perspective.

We are not in 2008 where we were at very rich valuation and hence the downside was very rapid. So, I think the pain is much more that you will have to really struggle to find triggers. You may not see a lot of activity in the market. The volumes are going to be fairly listless.

Whenever you have a situation that the market is listless and looking for direction, triggers, it tends to test the patience. That’s what I really meant when I said it’s going to be painful to wait for the right trigger.

Q: Infrastructure has been, across the board, bad in terms of its performances this time around, whether its core stories like Punj Lloyd or GVK or even some of the ancillary stories like a Jain Irrigation or a Sintex. What is it that you guys are doing with infrastructure now?

A: The short answer is nothing. We have been fairly consistent over the last two quarters as people started looking at interest rates sensitives that we may not want to preempt what's happening on the turnaround story from an earnings point of view. So, we are just waiting and watching.

We want to see some real credible evidence that these guys are coming out of that bad phase. As I said interest rate movement will be key. At this point in time, there is still disbelief that interest rates will fall in any significant manner. The curve is still inverted and short-term is still everybody’s focus. So, as things progress on that front, we’ll start looking at what happens to order books and execution and cost of funding and then reevaluate.

Q: How are you doing this portfolio wise? Are you still going with defensives, which are quite expensive, or are you playing in a different way in terms of a sectoral call?

A: We are focused much more on consumption. That obviously includes consumer staples, some element of two-wheelers. We have pharmaceutical, private sector banking focus. So, clearly we are in a way much more focused on the defensives. But the way we are looking at it is we are focusing on where we see a reasonable certainty of earnings growth, reasonable certainty of quality of those earnings. From that perspective, we are not taking chances on hope for much more certainty in where we see earnings and growth.

Q: Do you see the broader market earnings remaining under pressure for the next many quarters because we have seen some accidents this quarter in some of the midcap space? Do you think in the current environment, with the currency etc, you should see the broader market earnings being under pressure?

A: We haven’t yet analysed the entire FY13 number from a revision perspective. We’ll probably do it in the next couple of weeks. But for the Nifty or the Sensex, we are still looking at high single digit, may be low double digit earnings growth at an aggregate level.

The broader market will probably be a little lower than that, even though, that said, I think it’s a lot more to do with stock specific consensus versus looking at may be the BSE 500 or something. So, I think our approach is much more bottoms up, when it comes to the broader market. There are atleast 20-25 odd names where you have a fairly good earnings visibility and you can construct portfolios that give you that insulation from the broader markets earning declines.