In a conversation on CNBC-TV18, Jyotivardhan Jaipuria, Head of Research, BofA ML warns that Indian market is vulnerable to global unease and the slightest of bad news may pull it down 5-7 percent. Speaking about poor earnings reported in the December quarter, Jaipuria told CNBC-TV18’s Udayan Mukherjee and Sonia Senoy that he had already warned that this could be the worst corporate performance in six quarters.
He sees the market remaining idle for a few months and then take a leap up to begin the next leg of rally. As interest rate cut kicks in, Jaipuria says there is a possibility that Sensex will meet the year-end target of 33000.
Below is the transcript of Joytivardhan Jaipuria’s interview with Udayan Mukherjee and Sonia Shenoy on CNBC-TV18.
Sonia: Earnings will catch up but the fact is that they have not done already and in fact the earnings have been weak this quarter for so many sectors like banks, could that hinder the upside performance for this market?
A: To some extent, that is what most of us were expecting. Before the earnings season started, we had warned that this earnings season is probably going to be the worst in the last six quarters. Earnings are going to be like low single digit in terms of aggregate earnings growth.
So, to that extent it is what a lot of us had factored in. My view is that the markets had a rally last year and we are in phase of consolidation, the market – we probably spend the next three or four months more or less doing nothing, just be in a very narrow band before we get ready for the next leg of the market.
Udayan: What is the downside to this market after looking at these earnings? Do you think the markets should give up some ground or do you think it has the strength to hold on to current valuations?
A: My view is that markets will end up being largely range bound so we can see 5-7 percent correction and a lot of it may be driven more by global than what happens in India because though earnings per se don’t look very good, like if we just step back and think of India relative to the rest of the world, earnings are not looking good anywhere in the world. There are not too many countries which are in a phase where you think okay the earnings are getting close to a bottom and we can see uptick.
Secondly, there are not so many countries where monetary policy is clearly going to get eased; interest rates are going to come down. So, to that extent people are willing to be more patient and they are looking at very dip as a buying opportunity. However, I am sure we can get 5-7 percent correction in the market at any point of time; with a bit of negative news you could see that sort of pullback coming.
Udayan: What about banks that is the one sector everybody is talking about. It has been the stand out performer last year and all of a sudden stocks have corrected 8-10 percent, earnings have not been great and there is a bit of a spotlight on the public sector and even private after ICICI Bank this quarter. What are you telling your clients to do there?
A: We still like the banks and bank is the sector which will do well this year and the next three years. However, what we had done at the beginning of this year is cut a bit of our overweight on banks and there were two reasons for that. One is the stocks had done very well so I said the margin for error is very low in them. There will be time before they start to recover again. So, NPLs will recover but NPLs are going to take 6-12 months before they recover.
Second is it is by far the most over-owned sector for foreigners. So, foreigners are massively over-owned in the banks. Both of these mean margin for error is very low. The stocks have done so well that even after they corrected 8-10 percent, nobody is panicking about it. For anybody who bough banks somewhere last year, he just thinks okay I have lost a bit of money, it just corrected a bit . So nobody is panicking
However, it is typical of the market when things have run up a lot, you now need a bit of consolidation phase because the actual recovery will take time to come whereas the earnings are or the valuations are pricing in some sort of recovery already.
Sonia: What about the interest rate scenario because the rally that we saw from the January 15 when that surprise cut came in was purely courtesy the move by the RBI. How many rate cuts are you expecting up until the end of the year and will it help in terms of earnings and the overall economy because none of it has been transmitted yet to the system?
A: We think that there will be 50 basis point rate cut this year and another 50 basis point next year. So, basically 100 basis point or more; it could be 100-125 basis point, somewhere in that range. I think most of the consensus is like looking at between 100-150 basis points of further rate cuts. Typically if we go into history, it takes three to four quarters after the first rate cut before you actually see signs of the economy starting to change. So, if you let us say take auto demand, truck demand or things like that it is like three to four quarters after the first rate cut that you see volume starting to pickup. At the same time the stocks start picking up much earlier. Stocks somewhere along the way start picking up because they start anticipating that there is going to be a change in volume. So, that is why the economic numbers are going to change but they will change closer to the end of the year. The market typically tends to anticipate that and the markets from last year has been anticipating a recovery, it played for that recovery and then we get into a phase where the markets do nothing much, they remain range bound for six to nine months till they see more visible signs of earnings come up.
So, this phase is nothing different from any of the old cycles. You go back to 2002, you go back to the 1992, 1994 phases, we have seen this sort of phase happening where markets have that first rally which is pure re-rating and then there is a lag and it is a range bound phase where markets wait for earnings to start picking up again.
Sonia: I was just going through one of your reports in which you suggest that you are overweight on the oil and gas space. We just heard that there could be a new subsidy sharing formula in place where the burden for upstream like Oil and Natural Gas Corporation ( ONGC ) could be much lower going ahead. Do you prefer the upstream space or would you still be interested in some of the oil marketing companies, etc?
A: We have been preferring the downstream, the oil marketing companies; and the logic for that is whatever happens and whatever they change with the subsidy formula, the chances are that for the downstream at least the margins will be much higher than what they have been in the past.
With the upstream, the risk is the subsidy number comes down but your core product is oil and if the oil price which you sell comes down a lot then you start struggling on what am I buying that stock for. So, that is the reason we have been preferring the downstream.
Udayan: What about infrastructure, this time too numbers from companies like Crompton Greaves, Alstom did not look great? Do you think investors will need to be patient, do you see meaningful corrections here or do you see consolidation and then a take off towards the end of the year even in infra and capex related sectors?
A: My view is infra is like a late cycle sector, it will do well probably over three years. However, we have not been very excited about it for this year. We are neutral to very slight overweight. The whole logic is this is a sector you have to keep a track on. Probably you want to be overweight this sector a year later, may be towards the end of the year is when you want to start playing infra because the whole infra cycle is going to take at least 18 months before it starts to pick up.
So, from the investors point of view if you get sharp corrections in them because results over the next two or three quarters is not going to be great, buy them and buy them with a thing that I am buying this because I think two or three years later this will do well. However, I don’t think in the next three, four or six months there is going to be any great positive news on the infra space.
Sonia: Coming back to the markets you have a year-end Sensex target of 33,000. Given that this calendar year could be a tough year as far as earnings, etc is concerned would you want to scale it down or would you hold that target now?
A: We are holding that target. In fact when we did our target, our call was that we will have tough year in earnings. A lot of earnings growth will be back-ended, in fact a lot of returns in the market also could be quite choppy where we have a phase in between where markets don’t do much and so you have some returns coming at the beginning of the year, some returns at the end of the year. For the market the key is towards the end of the year do we get signs that now we are entering a phase where things are going to pick up in the economy. And that is the bet we are making that as we move to the end of the year with a bit of interest rate cuts behind us, we will have signs that earnings are going to pick up somewhere next year. So, as long as that happens I am comfortable with the 33,000.