Mkts will rally before earnings turn around: HSBC AMC CIO

The Indian earnings story has been delayed inordinately and may take another two quarters at least to come through but markets will start discounting them before that, says Tushar Pradhan, CIO at HSBC Global Asset Management (India).In an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, Pradhan said that investors with a two-year view should pile into economy facing stocks and that valuations of so-called "defensive" stocks, such as FMCG, were not really defensive.Speaking about the Federal Reserve's upcoming meeting where it will decide whether to hike interest rates for the first time in nine years, Pradhan said the US central bank should hike rates but do so with an unambiguous dovish language."It will remove uncertainty from the markets," he said.Below is the transcript of the interview on CNBC-TV18.Latha: What is your guess or your firm's guess from the Fed and what is the post Fed scenario likely to be with a hike and a second scenario without the hike?A: That is where we are -- on the horns of this dilemma whether they will do it or not. If you take conventional wisdom, they have to bite the bullet, they have to take it because that will remove a lot of uncertainty in the markets. But on the other hand, if they think the only big reason where they will hesitate is that inflation data in the US is still very low and unless inflation starts to pick up, interest rate hikes don’t make that much sense from a more macroeconomic perspective.So I think they will have to take a call at some point of time. If they do not do anything at the moment and they kind of defer it, it will be very important to see the language. Even if they do hike, it will be important to see the language. If the language is very dovish saying that look we have done this, it was in the wings for a long time and that we believe that we will now have to wait and watch or something of that nature. If that happens then it is a big positive to the market, a huge overhang across the globe will just go away and I think we will see a significant upswing in terms of at least people's expectation in terms of what is in for them for the next few months at least. However, if they do not do anything and if the language is not very clear, I think we are in for another set of uncertain periods.Latha: A hike with firm guidance would be the best scenario for the markets?A: Absolutely.Sonia: What kind of an upside do you see for our market from hereon because this year was supposed to be the year of the bulls but look where we are, the market is down 5 percent year-to-date (Y-T-D), from now for the next 12 months what kind of an upside do you foresee or is there any upside at all?A: Whatever upside we were looking for is not delivered. So in one way, it is good because it is yet to be delivered. I think the upside has not been delivered for a very simple reason that earnings have just not come in. The expectation of FY15 has not been met, the expectation of FY16 is now severely downgraded growth. If you don’t have the denominator moving at all, I don’t think the market is going to go anywhere. However, on the other side, people think that because the earnings are not where the price to earnings (P/E) is expanded and that is the reason for it to fall but that is not the case. I don’t look at it that way because two consecutive years of flat earnings growth -- if you look at the macro for example, it has completely reversed. So for the first time you have a fiscal deficit which is well under control, you have a current account deficit which is not likely to run away again because of very strong commodity headwinds driving that thing down, you have inflation which is trending low and has stayed low for so long, you have very positive intent from the government. So while they have not been able to do something, it doesn’t mean that they don’t want to do anything. It is just that it has caught in red tape or it has caught in some issues.Sonia: But all of that is just not translating into earnings so how long do you take for earnings to pick up?A: The actual number in earnings will take even longer but we don’t wait in the market for all that long. You said what will the next 12 months do? I think by the end of the next 12 months it will start discounting what is likely to happen. So the market is going to wait for the earnings to come before it starts to move.Latha: So the earnings don't come for 12 months?A: I would think that the earnings will not come at least for the next two quarters. However, what will happen -- because we have had this delay -- is that when they come, they will come very strongly. So the percentage expectations will not form any part of this linear analyst spreadsheet expectations, it is going to be quite non-linear when it comes.More to come.