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Last Updated : Sep 29, 2016 10:18 PM IST | Source: CNBC-TV18

Market led not by liquidity alone, eyes good earnings: HSBC AMC

It won't be appropriate to say that this market rally is just a liquidity driven one, says Tushar Prashan of HSBC Global AMC.

From the lows in the February, Indian equity benchmarks have made a stellar comeback and have been trading range-bound, near all-time highs.

Nifty has gained more than 1700 points as of today, since its low point of 6976, back in February 11, 2016.

It won't be appropriate to say that this market rally is just a liquidity driven one, says Tushar Prashan of HSBC Global AMC.


In an interview with CNBC-TV18, he said that the market is anticipating a better earnings growth going ahead, on the back of which it has rallied.

He said that the market has stayed resilient over the last two years as bond yields have dipped 200 basis points and does not see a major rate cut going forward.

The interest or bond market is more volatile then equity at the moment, he added.

On the sectoral front, he said that IT companies are unlikely to see a repeat of the last 20 years growth and added that the space needs to reinvent itself and find new growth areas.

Below is the verbatim transcript of Tushar Pradhan’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Anuj: The big question for the market is how much more room for this liquidity driven rally? Off late we have seen some tempering of flows, some tapering of flows, do you think that is just a temporary phenomenon or do you think there are risks to the market now?

A: Every market has risks and I don’t think there is any time that the markets will not have risks. However, having said that, it may not be appropriate to just call it a liquidity rally. I think it is more to do with also the fact that the market is kind of anticipating the kind of earnings growth that we expect our market to turnaround as well as the economic turnaround that we are talking about.

So, in a sense we do believe that there is going to be something which the market is discounting at the moment. If you just attribute that to liquidity, I think that will lead to a lot of noise and volatility. I frankly have no idea how to estimate those flows. However, I think when you look at what the market might be discounting for which the market level today is, might be that the market is looking at the future and the kind of earnings growth that it seems to be thinking that is likely to come.

Latha: Commodities options getting launched, commodities actually now in the hands of a professional capital markets regulator for the past one year, is that a theme you play at all?

A: I am frankly not really conversant with how that part of the market works. However, I know that having been around for a bit in terms of how the development of markets does happen worldwide, it is very important for us to understand that all markets are actually interlinked. So, when you have liquidity flow through and access which is probably for some time not available for many players, when that access becomes available then you find that there is a lot more science to the price discovery.

So, just to give you an example, if you had the ability to really play through the commodities cycle by having access to these products which can either hedge your exposures in anyway, you are actually pretty much linked to what happens to the listed universe as well. However, if you are in the listed universe, either as an investor or as a company, and you have no access to reduce your risk then there might be pretty significant moves which you cannot do really anything about.

So, I think more than just a direction of the valuations going to these companies, I think it is more to do with just the fact that it is becoming more of a liquid market, it is becoming more of an integrated market where everybody knows that the more information available for any market player, the better and more efficient the market is. So, I think it is just a step in that direction.

Anuj: Let us talk about some larger themes then. The big legs for this market in terms of this rally has been banking and consumption, the discretionary consumption that is autos and couple of others in that bracket. Do you see leadership staying with this space, do you think there is enough earnings momentum here or the earnings momentum will catch up in some of these sectors going forward?

A: Difficult to estimate at this point of time because whenever we look at a market or a stock going forward, we always have the benefit of hindsight. I think in the last two years, we have seen some sort of tepid growth and most of the expectations rely on what has been achieved in the last couple of years or so. However, if you are talking about an economic turnaround, if you are talking about the last five years of economic gross domestic product (GDP) growth touching between 5-5.5 percent or so suddenly moving up to 7-7.5 percent and earnings growth which has been absolutely negative to flat for the last three or four years, suddenly turning into mid teens and then slowly going on to higher teens as well going forward, who knows -- we really may have just scratched the surface in terms of where the price movement can be.

It all depends on the momentum; it all depends on the speed at which the economy turns around. We all know that there is a lot of latent demand in our economy and that has been curtailed by either lack of significant economic growth or the fact that interest rates have been really high in our economy. So, when all of these things start to change, what is the volume, what is the degree of what the economic turnaround is likely to be? It is really for us to guess. So, I would be skeptical about just writing it off and saying is that it, is there anything else out there as well.

Latha: What is your in-house view on where the 10-year can trade, the GILT, are you seeing it at 6.5 percent in a quarter or so and how does that influence your stock picking? Would you be incrementally in public sector banks for instance?

A: That is a good question and I think you will allow me a little bit of a clarification in terms of how we view the market. I think over the last two years, one of the reasons why the stock market has remained pretty significantly resilient is the fact that we have seen almost a 200-250 basis point decrease in bond yields and that is very significant. If you say that my market was trading at 16-17 times two years ago when the bond yields were close to 9 percent, and today when the bond yields have cracked 7 percent and my multiple is either the same or slightly higher, then I would think that the market is cheap relative to what it was two years ago. So, the discounting factor clearly plays a huge role in valuing equity stocks.

Now, your other question of where we view the 10-year to go? I think we have to understand that whatever has happened with the inflation trend as well, I think there is clearly some bottom to where we think the yields will fall to. I don’t think we are in an environment where there is tremendous amount of liquidity which can either come domestically or from the external world to kind of feel that we will be headed towards very low interest rates in India. So, we will continue to be deficient in capital in that sense and we do have that sense that interest rates will fall a little from here but I am not expecting a huge crash there.

As the economy turns around and the demand for credit starts to pickup, then you will also see some sort of flattening. I am still not saying that interest rates will rise from here but the fall that we have seen has been fairly steep, that has led to the equity valuations where they have gone as well and going forward I think we should see some flattening out of the curve as we start going up and as demand starts picking up and it depends on how liquidity pans out at that time. So, interest rates I think are anybody’s guess. If you look at volatility, I think the interest rate markets and the bond markets are more volatile than the equity markets.

Anuj: How are you positioned on IT; that is the other important space because on that the opinion is split. Some expect more de-rating because the business is going through challenges and others are looking at the historical price to earnings (P/E) valuation and saying that stocks are available at cheap valuations. Which camp are you in right now?

A: I would like to sit on the fence on this one because on one hand as you mentioned, it is more to do with the fact that the fundamental model of this business really which has had a dream run in the last 20 years or so, I think is undergoing some significant changes. On the other hand, there is no alternative, there is no replacement as such in the sense that if not this, what else. However, one should also be wary that the kind of growth that this industry has seen in the last 20 years is unlikely to be repeated and I am not saying a big thing, it is just the fact that these companies will become extremely large and to kind of expect that they will continue to grow at that pace that they have grown in the last 10 years, is a little unrealistic.

So, all of those headwinds really tell you that maybe this business as we see it, has matured but as we go forward, the IT industry has surprised us with kind of re-inventing itself over a period of time and we see and we hope that they kind of re-invent themselves and get out of this funk as they have fallen right now into and who knows they lead us into some other sort of growth area that we don’t know right now.

So, I would kind of be neutral, our portfolios also represent that position. We are cognizant of the fact that they are very significant part of the market and significant part of the India story. However, the excitement that we saw in the last few years, in terms of the growth and the sustained cash flows, I think that will need to be tempered a little bit just like any other industry.

Latha: This is a thematic question, which do you think will perform the best in the next one year, HSBC Equity Fund, I mean the largecap fund, HSBC Midcap Equity Fund or the India Opportunities Fund?

A: I will try to caveat the fact that I will not be able to speak about my products but generally as a theme if you ask me if midcaps will do better than largecaps, I think the valuation differential that we see between midcaps and largecaps has actually come close. They tend to trade at a discount at most times because they are smaller companies, higher risk. However, in the last one or two years we have seen midcaps really do very well and for good reason; it is just not because they are midcaps but it is just that business fundamentals for them have been very robust.

However, one has to be aware of the longer term valuation differentials; that points to now that there is some opportunity in the largecaps versus the midcaps. However, if you want to deep dive and make a more fundamental decision, then I think even quality midcaps which are trading at substantial premiums than they were ever in the history, one should relook at them because now they are not the same companies as they were when they were trading at lower multiples. They are larger and they have significantly more robust business fundamentals. So, I think it is more of a one-to-one case that you would like to look at the more individual midcaps but as a whole I think valuations clearly are significantly more richer in the midcap space than the largecap right now.

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First Published on Sep 29, 2016 10:31 am
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