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Correction healthy for Indian mkt, expect more in Oct: IIFL

R Venkataraman of IIFL feels the correction recently witnessed in the market is healthy as Indian equities are gaining a lot of interest globally. Further, some more correction might happen towards the month of October with the results season coming in.

However, the market is in a cyclical uptrend backed by optimism that real economy will pick up. GDP will be in the range of 5.5 percent, while inflation will be under control, as interest rates will soften in Q1 of CY15, he says in an interview with CNBC-TV18’s Sonia Shenoy and Senthil Chengalvarayan.

He further shares his outlook on the auto space and where the market is headed hereon.

Below is the verbatim transcript of the interview:

Q: What happened in the market today, when we started off this week there were expectations of a correction, a consolidation but today it just took another turn?

A: First things first, clearly the market is in an uptrend. As we have been saying on your show before also, the cycle has turned a gear and we are seeing an up cycle. To put things in perspective, last two days we had the markets correcting and we saw the market losing some steam because of the assembly results that was contrary to most people’s expectations and because of the so called FOMC meeting yesterday night where people expecting some kind of hawkish stance by the Fed Governor.

Fortunately, the Fed statement that came off was quite benign and it looks as if the interest rate hardening overseas has been postponed by at least 12 months. If you read between the lines, there is more emphasis on job creation, labour market stability rather than keeping interest rates low to maintain those two factors. Coming to more specific factors in India, the correction is good and healthy for the markets and we are seeing quite a lot of interest in Indian equities.

Q: Are you saying the correction is over or are you expecting another correction which will be good for the markets?

A: We are in a cyclical uptrend and it is very difficult to pin point the micro movements of the market saying that there is a correction of 300-400 points. So, we would say some more correction if I can use the word ‘more’ that might happen towards the month of October when we will see results season coming in because as of now there is optimism.

Q: What is your view on valuations or are you saying that valuations don’t matter, you cannot argue with liquidity?

A: I would say both of these things matter. For any bull market to take place in some kind of sustained manner, you need two things. First is that you need liquidity to pull the markets up but more importantly that liquidity move taking markets up have to be supported by earnings momentum and earnings growth.

As of now, we believe that the earnings momentum will see some kind of uptrend happening but the results are not yet translated into quarterly numbers.

If you look at the so-called midcaps and most of the stocks have run-up significantly. There are stocks, which go up three-four times on a year-to-date basis. So at these values may be investors have to see real action on the ground to see whether these kind of valuations are justified by earnings number. On a very aggregate basis if you look at the markets, we are still trading at 14-15 times one year forward which is not into bubble zone or so-called inflated areas.

If you ask me to summarise what is happening on the market now, the market is on an uptrend. There is optimism that real economy will pickup, we will see GDP growth coming up and GDP will be in the range of 5.5 percent. Inflation is slowly and steadily coming into control and may be in Q1 of calendar 2015 we will see interest rates softening.

We are seeing one very big benefit that is happening because of crude oil softening. The alternate asset opportunity is available to Indian investors, that is real estate or gold is slowly and steadily losing sheen. So we have liquidity coming back into markets which will be a positive.

Therefore, we are clearly in an uptrend and correction. I think it is very difficult to predict when or what can actually trigger a correction. So my guess is that may be in the quarterly season when it is out, that will be a better time for a correction.

Q: The pocket that is moving the fastest this afternoon is the auto space in fact Hero MotoCorp  is the biggest gainer up 5 percent, Tata Motors  is up 3 percent and clearly this space has come to the forefront in the last six months. Are you still bullish on some of these large cap auto companies or do you think valuations have run far ahead?

A: As you rightly pointed, auto is in limelight and it is doing very well. However, that has to be put in perspective that for the last two years or so, maybe 18-24 months, this sector has seen a cyclical reversal. Two months ago we started seeing four wheeler numbers in the passenger segment showing some kind of up tick and commercial vehicles (CV) cycle is not yet showing any signs of sustained up turn.

So, as of now you are expecting that in the second half of this year we will see the economy picking up and if the real economy picks up then this sector – the four wheeler, two wheeler and the commercial vehicle are absolutely best suited to participate in the cyclical recovery.

The other way to look at the cyclical recovery in this segment is because this is one sector when the recovery happens and lasts for almost 24-36 months. So, I think people are investing in this sector for longer term recovery. So, at these numbers also stocks are good for investment.

Q: We have this global cue lined up later this evening – the Scottish referendum. I personally don’t think that either a yes or a no would impact the Indian markets at all but many people are getting spooked about the possibility of a yes vote, etc. Would you give a lot of importance to this cue?

A: First of all, I am not a expert on geopolitics or the UK politics to comment on the outcome of the referendum. However, having said that, I personally don’t believe that this would lead to a big turmoil or shake out in the Indian markets. If the extreme case is Scotland decides to secede and walk away from the United Kingdom then maybe there might be a knee-jerk reaction but more specific to India, the Indian markets are doing well because the economy is on the up trend.

We are seeing the benefits of a strong central government which is taking steps to put the economy in the upward or in the momentum spree. We will see earnings coming back into the reported numbers and we are seeing lots of liquidity not only overseas but also domestic. The reason I am saying about laying emphasis on domestic equity is because in 2007, 7.5 percent of incremental domestic savings moved into equities either directly or indirectly. The same figure in 2003 was 0.3 percent.

So, slowly you are seeing domestic money coming back into stock markets because alternate investment options which is gold and real estate are losing its sheen. So, even if something happens on the globe, domestic liquidity is also a factor which people have not factored in.


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