Mkts to see sharp decline in Q1 ‘09: Vibhav Kapoor
Published on Tuesday, December 30th, 2008 at 8:21 AMAuthor: admin (5507 Articles)
Vibhav Kapoor of IL&FS said today’s market rally today was expected but feels the rally is just getting set up for a fairly steep and long decline in the markets in the months of January, February and March. He expects the Indian as well as the global markets to retest their October lows. “That is when the results for the next quarter will come in and the market will really get to assess how bad things are as far as corporate profitability is concerned, and which sectors are doing better and which are not doing so well.”
Here is a verbatim transcript of the exclusive interview with Vibhav Kapoor on CNBC-TV18. Also watch the accompanying video.
Q: What have you made of today’s move? We have got that pullback from the November lows at about 2,700 and it went to 3,150 and then fell to a bit of supply pressure last week going into expiry. Where does that position us now at about 2,900 with this pullback: are we still in no man’s land or do you sense there is more traction in this rally?
A: Absolutely, I think today’s move is just a random move or a pullback move to the decline that we saw in the last four or five days. Typically, as we all know, at that end of December, the markets moved up all of every year in the last six or seven years during the last three-four days of the year. So, it is nothing surprising that has happened today particularly because we had a four-day decline. But on a broader basis, we are just getting set up for fairly steep and long decline in the markets in the months of January, February and March. That is when the results for the next quarter will come in and the market will really get to assess how bad things are as far as corporate profitability is concerned, and which sectors are doing better and which are not doing so well. The news on that account is not going to be all that good and while a lot of that has been factored into prices, there could be negative surprises.
Second, the global recession is not showing any signs of turning around or bottoming out at this point in time. If at all things seem to be getting worse than they were sometime ago and if that trend continues, markets globally, as well as in India, will start to decline once again and could go back to touch the earlier bottoms, which we saw in October.
In fact there was one very interesting statistics there that if GDP of US, Japan and Europe declines by 2% next year, the BRIC (Brazil, Russia, India and China) countries would have to grow at 11% for the global GDP to remain at zero levels. So, I think there is a distinct possibility that you might see a decline in global GDP in 2009 that can be really bad for all the stock markets.
Q: How bad do you see things shaping up in Q3 in terms of the results, how much of a fall in earnings are you expecting? Where does that leave you on the best and the worst-case scenario for 2009, in terms of levels on the index?
A: The Q3 results, I think, are going to be very negative. There could be a decline of about 10-15% in earnings and going forward in FY10 when I think there could be decline of 5-10% over FY09. That obviously means that the market is probably trading at something like maybe 10-11-12 times ’10, which is not very expensive. It is the lower end but given the fact that things can turn out to be ugly for at least another couple of quarters, you might see lower levels.
So, as the situation stands today, you could probably be seeing the market retesting the lows that is about 2,200, which it did in October and on the upside at least for the first three-four months of next year — till March or April or during the election, the top is 3,000. In fact, we have been maintaining this for the last two or three months, ever since October, that the market is going to be in a range between 2,200 and 3,000. That is largely what it has been doing so far and that is going to continue for the next quarter. Now the markets will see a decline towards the 2,200 level.
Q: Coming back to stock-specific stories, the Satyam saga doesn’t seem to be ending. Everyday there is some development or other happening on the stock, given the fall we have seen in the stock over the last two weeks. Today of course there was talk about how pledged shares were being sold on account of margin calls being triggered. What do you make of it all and the kind of ramifications that it could bring on the sector, as most of these companies sit on very heavy cash balances and valuations for each one of them have dropped considerably?
A: As far as Satyam is concerned, obviously the developments in the last few days have had a very adverse impact on its valuations and we have seen the stock drop very sharply. But at some levels maybe Rs100-120 something like that even in the worst of conditions, it becomes a reasonably attractive stock for the medium and long term. Also, given the fact that we don’t know what sort of developments will happen; there could be a change in the management at some point of time or you could have some strategic investor coming in. So, there are all sorts of possibilities. I think at lower levels of Rs 100-120, this stock has discounted all the negative news that is there and that is why you are seeing a lot of buying happening at those levels, because of which the stock is tending to get pushed up from those levels.
Q: How material is this second phase of the fiscal package in stimulating the rally? Do you sense that a lot can be done in terms pumping in more money because we have that fiscal situation going on and even the duty re-jig that we may get and the CRR cuts, do you sense it will have a material impact or will it be a sell on news sort of event?
A: On the monetary side, it does have an impact. So if there is a further reduction in CRR and an aggressive reduction in interest rates – that’s obviously positive for the market and will have some beneficial impact. But as far as the fiscal package is concerned, I don’t think that’s really going to matter too much because as we have said earlier, fiscal packages take a very long time to have any impact and more so in India where projects taking off the ground after getting clearances is a really long process and where anyway lot of ministries and departments have not spent their budgets for the year. So it is almost not going to have an immediate impact in my view.
All in all, the market has already built in some expectations for this whole package. So when the package comes, you might have a little bit of a sentimental upmove but it will peter out very soon and then will be back to normal.
Q: Where does that leave asset allocation for the market? How are you distributing your portfolio across asset classes right now and what do you make of the kind of appetite there is building for debt instruments particularly commercial paper?
A: Debt is still reasonably good investment at this point of time. If you look at some of the debt funds and even if you look at for example the 10-year bond yield, it is set to go down further over the next few months from here significantly. So there could be still good amount of money to be made in the treasury side – both on the long as well as the short side in commercial paper. Also, the spread between the private sector bonds and the government treasury yields is still 300 basis points. So, over a period of time that could come down. That’s another place where one could allocate money. So overall, bond funds are still an asset where one would like to put in a substantial part of your money – maybe 20-30% and of course maybe another 10-15% in liquid funds because they always give you a risk-less 6-7% return.
You should put in money in equity in spite of the fact that we are negative for the next three-four months. But we have been maintaining for the last three months that the longer-term outlook is certainly getting better because of falling oil prices, interest rates going down etc. So one has a horizon of 18 months or two years, one should be starting to put in little money every month from now onwards maybe for the next six or nine months. I would say allocate maybe 10% of what you want to put into equity every month for the next eight or ten months and build up a portfolio as you go along gradually.
Q: What are the themes you would bet on for 2009 and at what levels would you enter?
A: For 2009, we would wait in the first quarter, apart from the long-term investors – as I said who can put in 10%. But if you are fund manager or if you are not really having a two-year time perspective but you are looking at shorter-term time period, wait for the next three months. Equities are not the place to be in right now. We see a fair amount of risk at this point of time with the markets declining back to those 2,200-2,300 levels by the end of March. The only sector that we like at this point of time is banking where one could allocate some money at the markets go down. But again don’t be aggressive, don’t chase these stocks and buy at higher levels. Sectors to avoid are commodities i.e. metals and cement, software, engineering and capital goods. These are the sectors to avoid for the time being and look at them only when the market has come down at least to 2,500 or lower levels from here.
Source : MoneyControl
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