Mkts not out of woods yet: HDFC Sec
Published on Thursday, September 4th, 2008 at 5:43 PMAuthor: admin (5507 Articles)
Sanju Verma, Executive Director and Head-Institutional Business, HDFC Securities, feels the markets are still not out of the woods yet. “Cues from the global and domestic front are still mixed. Dark clouds are still hovering on the macro front. So, I don’t see too much of an upside in the markets.â€Â
She expects inflation to settle between 8-10% by December or February-March 2009. “Inflation may go to 13-13.5% by October. However, it should get sorted out by November-December.”
According to her, crude should come down to USD 85-90 per barrel by year-end.
Exclusive interview with Sanju Verma:
Q: How do you read the market now after Nifty’s rally to 4500?
A: We are still not out of the woods. The markets still continue to vacillate because cues from global markets and closer at home have been a mixed bunch. On one hand, second quarter GDP numbers from US stand revised upwards all the way from 1.9% to annualised figure of 3.3%, which is excellent when we are talking of UK. Eurozone is facing worst ever recession in two or six decades.
Closer at home GDP fell to sub-8% levels for the first time after nine-quarters, which is not something to feel cheerful about. Inflation at 12.4% has fallen by 23-bps from the preceding number and is certainly on the higher side. We might end the year FY09 with a current account deficit of 2.1%. So on the macro front, lots of dark clouds are still hovering around. But there is more than one silver lining.
The biggest positive on the macro front which has not been given due credence, is the fact that consumption still continues to grow at 10% or thereabouts and accounts for 55% plus of the economy. So that’s a huge positive and the other big positive is that despite a perceived slowdown in investment expenditure to 9.50% from 13% in the month of July, gross fixed capital formation still stands at a healthy 32%. Our in-house view for quite sometime has been that inflation should settle down to between 8-10% by December 2008.
Oil should come down to between USD 85-100 per barrel by December this year. We will certainly get there because you cannot be talking of a Eurozone recession or a US slowdown and rising oil prices in the same breath. Something has to give in and this time around, oil prices have given in. That’s amply reflected in the fact that it is not only oil but also commodities across the spectrum from wheat and soybeans to aluminium, zinc, nickel, everything has corrected between 10-30% or 40% from their highs in February and March this year. The trend will continue which certainly is good news for commodity importers like India.
Q: How are you feeling about this change of sentiment towards rate sensitives specifically the banks?
A: Rate sensitives will not look up immediately because rates take some time to percolate down both on the positive and the negative. Rates will always have an impact with a lag. Inflation should come down by December. We can expect the number to go up to 13-13.5%. It will peak out only by October because October 2007 saw an inflation number of 3.1%. So, the full impact of the base effect of last year has yet to play itself out, which means that there is certainly a little bit more of bad news on that front. Things should sort themselves out on the inflation front by November-December and rate sensitives will start looking up then. That has already started happening.
10-year benchmark yields had risen all the way up to 9.5% and now they are at a more sanguine level of 8.61%. That is the reason that banking stocks are looking good even in otherwise volatile markets. In the first quarter of FY09 results, one area where most banking stocks took a big hit was in their bond portfolio. They took a huge depreciation loss on their bond and investment portfolio. So, if inflation comes down and yields stay between 8.6-8.7% then things can only look up for the banking sector, which is obviously most heavily correlated in terms of being very interest rate sensitive.
Q: If the markets do manage to pull back a little bit by the time we are done with this series, in which pockets would you start trimming some positions or start taking some profits off the table?
A: Real estate will be one sector. We are particularly bullish on some of the auto stocks barring Hero Honda. A lot of auto stocks are expensive even at these levels despite the fact that some of them have corrected stupendously from their peaks. I would certainly go underweight on the auto sector. Within the consumer discretionary space, both HUL and ITC are trading 20 times plus one year forward earnings. I would still stick with HUL and continue to book profits in an ITC where the earnings visibility is nothing to write home about for at least another 18-24 months.
So to that extent, profits will be shaved off more from individual stocks than sectors. For instance in commodities, I would still go and buy Tata Steel. Their numbers were spectacular and will not be all that great in the third and fourth quarter. The stock is available at less than five times one year forward. I would increase my positions in Tata Steel by selling into the strength as and when a rally occurs in a JSW or even in some of the other metal and mining majors like an Austral Coke, which recently got listed and certainly does not deserve to trade at the crazy levels that it is trading at. It is 11 times one year forward when you can buy a stock like Gujarat NRE Coke at 9 times. Austral has a market cap of just Rs 600 crore vis-à-vis Gujarat NRE Coke’s market cap of Rs 3,000 crore and trading at one-fifth of the multiples.
Source : MoneyControl
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