 Suresh Mahadevan, head of research, UBS Securities, said markets could rally ahead of the elections.
What is your own assessment of corporate earnings here on?
Mahadevan: We are in the first half of fiscal year 09... earnings are growing at a slower pace... if you exclude oil and gas, I think earnings grew by around 12% for the second quarter... earnings might grow slower going forward given that we are in cyclical slowdown but I think the markets are probably discounting it... markets have come off significantly...
I agree the consensus numbers may come down... I think for FY09, probably earnings would be around 12%... if you look forward to FY10, the main driver there is Reliance with gas production....
Is that the kind of returns we can expect from the index as well?
Mahadevan: The markets may have been discounted the bleak outlook but there are four things which drive the markets in our view: One is obviously valuation, second is earnings growth, third is liquidity and the fourth is sentiment... if you look at this four, I think, valuation clearly we may not be very far away from the floor because I’m assuming the market probably bottomed out at around 8,000 we saw in October... but that in itself may not drive the market... the market can stay here for a while, which is what our view is...
When we look out at the couple of next quarters, we don’t really see any tangible positives that could happen to the Indian market today... so, in the next six months, the market may probably be quite range bound...
On earnings growth, as we discussed, the consensus is coming down... the market may have already discounted but there is no positive momentum there definitely for the time being.
The third thing is liquidity.. in any slowdown, the rule is get out of emerging markets... that is what has been happening not only in India but across the emerging markets. For that to reverse, you need positive tangible catalysts.
Fourth - sentiment... it has been quite negative.. we are still in negative zone. So, we are probably stuck to a range of 9,000-11,000 over the next several months. If you look at the medium-term perspective, say 18 months, we think the economy will revive, and we think stocks should also relate to it. So our Sensex March 2010 target is around 15,500, which indicates there is a good upside from current level... it’s almost like a 50% upside from today’s level.
Is there a larger role for domestic institutional investors in this market?
Mahadevan: Domestic institutional investors have a role to play I think.... they have been buyers but not to the extent to offset FII outflows but I think there is a very high cash level of anywhere between 15-20%... I don’t really think they are seeing huge redemption...off late, things may have reversed a bit... so, definitely, domestic institutional investors have a role to play.
What is your own sense on GDP growth (from 9-9.5 % to 6%)... are we really slowing down that fast?
Mahadevan: It is clearly an economic cyclical slowdown.. our own forecast call for 6.5% GDP growth for FY09 and 6% in FY10... as I said, again, you know lot of thing will come together may be in the second half of the calendar year or the next fiscal year when you will have political uncertainty clear... the economy will slow down, then start reviving and that might also coincide with the recovery in corporate earnings... from there, we can potentially see a rally...again, the markets tend to discount these things may be 2-3 quarters in advance...in times like this when there is lot of pessimism, I think the markets may be looking one quarter ahead.. so probably the second quarter calendar next year may be interesting times to look at the market behaviour, which is another four-five months from now.
How important is the stability of the local currency to the overall macro environment at this point?
Mahadevan: I think it is a factor... clearly, we are not very much export-driven like some other countries but it does affect sentiment quite a bit and lot of positive things... people are not talking about currently because we are in a pessimistic zone, for example, weak oil and global commodity prices are definitely big positives for India and nobody wants to talk about it because we are in very negative sentiment.
Our view of the rupee is it might have little bit more of a depreciation to go in the near- to medium-term... over all, it could potentially strengthen, and that is our view...
Has inflation as a threat both with respect to India and globally receded?
Mahadevan: The focus has definitely shifted away from inflation whether it is India or other developed markets. If you see some of the central banks' actions and government actions, whether it is India or abroad, I think at least in India I can talk about where the central bank has been friend to ensure that we have a soft lending, to ensure we have enough liquidity... this is also a crisis of confidence where people are not ready to lend... so, inflation is the least of the concern right now.... the most severe concern is economic slowdown.
What about RBI and what could it possibly do to address growth at this point of time? Do you think we are pretty much done with interest rate cuts? Or is there some more in offing?
Mahadevan: There is more probably ammunition left... credit growth is still strong... what we have to see is going forward how it pans out.. there will be little more of interest rate cuts whether it is in the form of repo or even reducing CRR or SLR requirements... so whether it is the central bank or the government, they are watching closely and trying to react very fast or very pro actively, which, I think, is a very encouraging sign.
How do we stack up on a relative basis as far as valuations go?
Mahadevan: On a relatively basis, if you look at it from the pure valuation basis, I think we are still expensive... the issue here is the crisis of confidence.. so people are unwilling to believe the growth forecasts...once the growth number cannot be relied upon by investors then India looks relatively expensive... having said that, there is confusion among investors what the global slow down will do to India... people are yet to get handle on that.. what is interesting to note is sentiment and liquidity are quite co-related... so my guess is as more data points emerge out of India, I think India will look more attractive because we will slow down less than other export-oriented nations... from that perspective, I think things could change because once people get few data points they actually heave a sigh of relief and say, look India is still growing its economy at 6% and relatively looks good.... I think India will fare better than some of the negative views out there in the market... that is our view.
As we approach elections, could that be a significant event from the equity markets stand point? How do you address the issue of regulations in so many of our sectors that have bearing on the stock markets?
Mahadevan: The India growth has been pretty secular in spite of the government interventions and regulations... my guess is that elections are due by May 2009.. I don’t really see a lot of policy changing stuff right now... my guess is, markets don’t like uncertainty in any situation but in times like fear kind of dominates, the ability to price uncertainty is quite limited... as we approach closer to the election day, what we see is markets rally, and some of the uncertainty may be resolved. So, markets could rally ahead of elections....
What about the entire global situation? Do you think the worst is largely behind us?
Mahadevan: Generally, the risk aversion is very high now... normalcy to return in terms of sentiment, liquidity etc will take time... people are quite skeptical right now and we need some good positive data points... clearly what we have been seeing is when the Sensex went deep down intra-day below 8,000, I think fear dominating to a large extent... the volatility we are seeing - at least 5% move a day becoming very routine, and that suggests the nervousness of the market... obviously these things don’t prevail for a very long time... I think the data points, hopefully, will convince investors of certain countries (India) and certain sectors could do relatively well, and they realise that the slowdown does not affect so much as they thought.
Some of that fear is also attributed to the new US President who will take over early next year especially with the noise made about outsourcing and the impact that could have on the IT services sector in India. Do you think that some of the concerns are valid?
Mahadevan: Our view is - we are selectively positive on the IT sector... for example, we like Infosys right now and Satyam Computer as well...
Our view on outsourcing as a trend is that it is bound to increase... any country or company needs to be competitive at the end of the day if outsourcing or offshoring is part of getting the competitive edge in terms of lower cost... that is the hypothesis...in the short-term because of the global slowdown some big orders, some decision leaders are unwilling to pull the trigger... my view is that the market must have already priced it in....what we need is either the IT sector or other sector or market in general that reverses all this.. whether it comes in data points or the political uncertainty in India or the economic revival or may be even the combination of all these, that is what will help. |
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