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Broader mkt to do well; dip in FII inflow not a worry: CS

The recent rally in the Indian equities was more because of supportive global cues than domestic factors, believes Neelkanth Mishra, Head of Equity Strategy – India, Credit Suisse.

In an interview to CNBC-TV18, he says that since the market is now more driven by global cues, disappointments on the local front may not mean much for the market. He expects the broader market to perform well in the next six months.

The investment of overseas investors into the Indian equity market hit a seven-month low of Rs 5,100 crore in September, but Mishra is not too worried about this decline in FII inflows.

Speaking about the upcoming second quarter India Inc earnings which will kick-off from October 10, he says that FY15 earnings growth is likely to be in 10-12 percent range. He remains overweight on the Indian IT sector and expects tech companies to post good performance in Q2FY15.

On macros, while India’s growth should be higher than other emerging markets (EMs), he doesn’t see sharp recovery in India’s GDP data.

Below is the verbatim transcript of Geoffrey Dennis’s interview with CNBC-TV18’s Latha Venkatesh and Reema Tendulkar

Latha: Are you getting fresh growth scares that Tata Motors commercial vehicle number was none too good and is that giving an indication that those green shoots that we have been waiting to see in the Indian economy are not quite shooting up?

A: We have always held a view that the growth won’t accelerate and that the worst is past. There were lots of factors which were dragging down growth including things like the great failure of 2012, the problems with iron ore mining, some of them are still continuing but hopefully the worst is past. There was the issue of the creation of Telangana which was holding back investment in a very large state of India, there was a fiscal drag.

Lots of these issues had brought down growth to artificially low levels and I think we have seen a bounce back from those. Now on a year on year basis if you look at monthly numbers sometimes they can mislead. We were also of the view that the 5.7 percent growth that we saw in the June quarter, the GDP growth, was slightly overstated given seasonal effect that this year the monsoon was bad, last year the monsoon was pretty good. So July saw much stronger construction as well.

But we have seen some of that come back to normal. So if you look at cement demand growth for example for the whole quarter it was just 6-7 percent. So I don’t expect the GDP growth to accelerate to very high levels. From that perspective it would be nice and tepid recovery, I don’t think we will see very sharp move. So I am not surprised that some of the numbers have started to normalise.

Reema: What does all this mean for the equity markets? In the month of September we were meandering, in the next six months how do you expect the Indian equities to perform?

A: This is where it is useful to look back and see why the market has done well. We have consistently held the view that it is global factors which are helping the Indian market much more than the local issues. There were two very isolated, I would say focused tail risks. One was the government and the second was the currency which would have prevented someone from taking a longer term positive view on India and both of these have been mostly addressed.

So, the tail risk of there being a crisis and the government not being able to manage it, I think is well and truly addressed and the currency aspect is more or less sorted out. So, with both of these risks gone, the fact that India is miles behind other emerging markets, there are lots of low hanging fruits. The growth in India can be much stronger than most other emerging markets. It means that the broader market should continue to do well.

The view that people have that with the change of government that drove up the markets is not completely true. If you look at India’s PE premium, MSCI India’s price-to-earnings multiple and if you measure the premium of MSCI World price-to-earnings that has barley moved up. It used to be much higher just three years back and it has just bounced back from very low levels.

I think the global factors matter a lot more. I don’t expect the local disappointments to mean much. From that perspective we are going through a period of readjustments. So, we put out a note just before we went into the long weekend where we showed that while the Indian market and the Indian currency are looking relatively stable, there is significant turmoil in many other parts of the global markets. So, markets in Australia, Brazil are down 17-18 percent in a month in dollar terms; not all of it because of the currency.

Local markets are down a lot, all commodity exporters – South Africa, Canada, Brazil and Australia have seen a very significant weakening in the markets in September. Their currencies have fallen as well. Partly I think and this is narrative that we have to put on some of these isolated data points which I think is because of slightly weaker views coming through on medium-term outlook for China.

There has also been the strengthening of the DXY, the trade weighted dollar and that has also led to some currencies which had not, the economy let us say like Turkey which had not seen an improvement in the current account, their currencies have come down sharply. We have not seen that in India, so, we think everything is normal but out there in the world there are lots of adjustments happening. So, far this is a very orderly adjustment. So, there are very few contagion risks. However, we need to stay watchful.

If any of these contagion risks snowball into something which is uncontrolled say a bank failure or some large company going down and there being significant counterparty risks which slows down trade, etc. Those risks right now, if they don’t emerge, so to answer the question if that does not happen I expect the market will keep doing well. I expect that the earnings growth in India for the index will be 10-12 percent at least if not higher and on a six months basis 6-7 percent. Price-to-earnings can still improve from here. It is not very high. I think broader market will continue to do well over the next six months.

Latha: You don’t fear a drying up of liquidity do you the manner in which we have seen funds evacuate commodities, they have almost fled from a large number of commodities as well emerging markets (EMs) didn’t get too much money. So liquidity drought is not something you are factoring in which might therefore have collateral damage on India?

A: Not really. One fact is that the quantum of foreign institutional investment (FIIs) flows historically had very little correlation except for very isolated pockets. It had no correlation with the direction of the broader markets. So we shouldn’t worry too much that if there are two months of no flows the market tanks. I don’t think that is going to happen.

I think part of the reason the commodities have corrected is supply and part of the reason is demand. So for example in oil we may have seen lot of these news items talking about the cartel potentially breaking up. Not breaking up meaning for good but at least the price discipline, the production discipline in oil seems to have broken up may be because there is a big producer may be the US which is coming and the demand projections have been revised down. The same thing is happening in iron ore and this is where the financial investor plays a very small role.

The financial investor plays a much bigger role in smaller commodities like aluminium and Zinc. In aluminium there is 45 million tonnes, USD 90 billion of annual consumption, USD 2-3 billion that come in which is pittance in the global markets and suddenly aluminium starts moving up. In oil that consumption number is USD 3 trillion. In iron ore there is very little financial involvement. We have seen in iron ore as well weakening of Chinese demand. You may have seen the world steel cut, their growth in estimates for 2014-2015 mainly because of China and this is happening unfortunately for the iron ore producers at a time when there is a lot of iron ore hit in the market, and it is very low cost iron ore as well. So these are factors which have brought down commodity prices.

There is somewhat of a tempering of the view even on the nonferrous metals where financial interest was high but broadly it is not yet view of lower risk. See if it is risk aversion then India is at risk but that is not the case yet.


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