See Sensex at 12K by Dec-end: Kotak Institutional Equities
Published on Sunday, January 4th, 2009 at 11:12 AMAuthor: admin (5507 Articles)
Sandeep Bhatia, Executive Director and Head of Sales, Kotak Institutional Equities, does not expect the markets to hit new lows in 2009, barring a big event. “The markets are likely to consolidate in the current trading zone for the next 3-5 months.”
He sees a Sensex target of 12,000 by year-end. “The downside is seen limited at 8,500-9,000.”
Commenting on earnings, Bhatia said markets will probably face the most dire earnings season in January. “The market could gain 10% if there are no major negative earnings surprises.”
He feels elections will be the main trigger this year. However, was quick to add that a weak third front-led coalition would add uncertainty.
Prashant Jain, ED and CIO, HDFC AMC, also shares this bullishness.
He feels the aggregate Sensex earnings may not grow, and may decline a bit. He feels markets are undervalued, and dividend yields are approaching bond yields. “The index may not do well, but broader markets can do better. We may revert to 15% structural earnings growth in the long-term. But over the next 2-3 years, our view is that the upsides should be significant.”
According to Jain, in the medium-to-long-term investments should give good returns.
Here is a verbatim transcript of the exclusive interview with Sandeep Bhatia and Prashant Jain on CNBC-TV18. Also watch the accompanying video.
Q: What’s your sense? How much will this fiscal and monetary policy or monetary packages do you think?
Jain: The more significant part is monetary. The interest rates are headed down significantly. It has been a very sharp fall and over longer periods that is what will help revive the real economy. That is what will ultimately help the equity markets also because a gap between earnings yields and bond yields is close to at an all-time high and I don’t think this kind of gap when bond yields are 5% and earnings yields are 10% are sustainable in the long-term.
Q: Two-questions on the monetary policy bit before we move on. How much more do you expect from the RBI because bond yields are already at 5% and we have seen a succession of reverse repo cuts and repo rate cuts – do you think the RBI can do anymore or it is probably spent most of the bullets in its gun? Also, how swift do you see the transmission into the banking system from what the RBI is doing?
Jain: Bond yields have come down quite sharply and I would not expect them particularly the G-sec yields to come down materially from these levels. There is room for corporates to come down. There is some more room for corporate spreads to come down. There is some more resources left with the RBI but probably it would be wiser to wait for some time to see the impact on this and if need be act again but after some time.
Q: What’s your sense – do you think the fiscal and the monetary stimuli call for any major rally in the market or is it in-line with expectations?
Bhatia: The market has already moved up through December despite the fact that we will probably face one of the most dire earning season in January. The markets have moved in anticipation of very strong movement by the government. To that extent on the back of these cuts I don’t think there should be a strong rally.
I think the markets now have to pause. The markets have to evaluate the numbers which come out in January. The markets have to try and understand what signals they hold for the 2009 calendar year. So clearly in our view at this point in time, we wouldn’t see a big rally going forward. If there are no big surprises by large measures in the manufacturing sector and by that I mean negative surprises then the markets will probably hold these levels and can see 10% upside till April-May and ofcourse the real event for this year will be the elections and the shape of the government after that.
So till then I think we should hold course and maybe head up 10% till the elections.
Q: What are your thoughts on the fiscal front, how much will that achieve because it doesn’t look like there is any huge plan expenditure which is being laid out, small stimuli put through non-banking financial companies (NBFCs) etc. Do you think that is particularly relevant in changing the whole infrastructure landscape?
Jain: There is only so much which fiscal policy can do and clearly we are running a reasonably high fiscal deficit, so one is constrained on that front. I think longer-term the economic revival come from basically easy availability of credit and lower asset prices with that I mean basically housing. These two should help the economy next year significantly because lower asset prices and lower mortgage rates are a very powerful combination for a significant improvement in home loan transactions and house buying, which I think should happen at some point of time next year as and when people get a feeling that real estate is affordable and also close to the main correction in real estate price is over.
Q: What is your view from what you have seen of the fiscal package, does it appear that it acts as any major stimuli for the infrastructure sector or not quite anything very meaningful or material?
Bhatia: No, I don’t think we have major room on the fiscal front. To be fair if anything major would have been announced, I would be very doubtful that in the next three months, the spending and the impact of that on the economy would take place. So clearly we are in the phase right now where we are going to see the effect of what has happened last six months especially from September onwards. So the negative effect of that is going to play out from January to May-June and then it is probably a new market with a new set of triggers and events that will influence a shape of the market for the second half. So this is just a residual of what happened in the last three-four months which is going to impact in Q1.
So I don’t think we should be expecting too much from government policy.
I think we could see some movement on the monetary policy probably one last shot before the elections are announced in February-March and that is the only thing that one can maybe get and other than that we are done for the financial year.
Q: There was one hope that the markets might put in a strong countertrend rally which might rally in the face of weak earnings throughout January, do you think that is a possibility?
Bhatia: I think if a rally happens, it will be not because of earnings, it will definitely be because of what happens in the US and what kind of policy announcements happen post the takeover of the new President and his inauguration on January 20. So we would definitely see a lot of big announcements happening in the US now and this would rally global markets and if that does so then the Indian markets will rally which will not be for the earning season. The earning season if anything will be a dampener and as I have said probably we should go by without any major incident and that is the only hope we can have.
Q: What is your sense going into this earning season, broad expectations are that it will be bad but is it in the price?
Jain: I think so. I was about to say that equities are forward looking assets and I think equities has become overly pessimistic. Yes not just one quarter but for maybe next year because of the global cyclical downturn in maybe metals and petchem and refining, the aggregate earnings of the Sensex may not grow at a very moderate rate for a year. but we also have to focus on what are you paying for that. After next year I think we should revert to a longer-term 15% structural earnings growth and today what we are paying is very less. Your earnings yield is 10%, bond yields are 5% and I don’t think – the last we had this kind of a gap was in 2003 which points to severe undervaluation of equities. But of course one cannot time that whether equities more up or down over one month or three months but I think if one takes a one-two-three year view, in my opinion the upside should be very significant.
Q: Is it your belief that the worst price damage has been done; it is just the question of spending time right now?
Jain: That is always extremely tough to think and in my opinion even on the way down at 12,000, I had felt that markets are fairly valued. But I think that at this point of time particularly with the sharp fall in interest rates, markets are undervalued significantly. There are a number of stocks where dividend yields are approaching bond yields and these dividends are not going to disappear. These are not cyclical companies. So I think it is a matter of time before markets do well and I would particularly say for individual stocks because the Sensex has a significant component of cyclicals – the commodity companies which are in a downturn because of global economic slowdown. Therefore I think the index may not do great but because of the heavyweights of the cyclicals in it, the broader markets can do much better.
Q: What is your sense, do you think the worst is in place or do you think a retest of our October lows or even a breach of that is likely in 2009?
Bhatia: No I would not think that we will hit new lows in 2009. The lows that we hit in 2008 would hold barring a very big unforeseen event which no one can predict. So barring any unforeseen events we have hit the lows. It is just a question of lying low and spending some time in this trading zone before we see further clarity. I think the real issue also is that if you ignore the elections very soon we will probably see the reverse of what we have seen to play out in 2008.
We will see probably rupee start appreciating with close to zero interest rates, it is very likely that the dollar will start depreciating at some point in time and probably continue low growth in the US region. To some extent if a dollar starts weakening, it would be actually positive for commodity prices. So this is still in the realm of fiction but I think these things can easily play out in the second half of 2009 which would be countertrends to what happened through most of 2008. So that would be interesting to watch post June.
Q: What is the kind of indicative range you are looking at then for the Sensex?
Bhatia: Our target for the Sensex is 12,000 by the end of this year and I think that is something which should easily be achieved even if nothing of the sort which I just pointed out about the dollar depreciation happens. 12,000 on the Sensex is fairly achievable by the end of this year.
Q: On the way up, on the way down what is it capped at?
Bhatia: On the way down probably 9,000 or 8,500 at best, so it would require clearly a very big disappointment but yes that is where we see it capped.
Q: The one sector which has been pinning the market back has been IT and there are lots of concerns going into IT results starting week after, are you underweight on the sector or do you have apprehensions on that score?
Jain: I think we are very close to market weight in this sector. I would agree with Mr Bhatia that rupee should start appreciating probably in my opinion not because of dollar depreciation but more importantly because of oil prices where they are. That should impact the balance of payments (BoP) in India.
Along with the prospects of rupee appreciation, the main customer the US economy is looking extremely bad and expectations of volume and pricing are not good as we go into next year but if you look at the multiples that these companies are trading at, I think they are close to all time lows. We cannot ignore the fact that this is a very successful, well –proven, globally competitive business model. Yes one-year earnings may not grow or may even moderately degrow – but if you think longer, I think even this sector appears to be quite reasonably valued even if the earnings don’t do well for a year or so.
Q: Last time when the market hit very good valuation levels in 2001, it stopped falling, but then it recovered meaningfully for about 17-18 months. Do you suspect something like that might happen, a long period of sideways movements or looking at the fundamentals and valuations, prices could also start recovering this year?
Jain: I think that is always extremely difficult and I am of the opinion that to time the markets is quite impossible. Two years back no one said it will go to 21,000 and at 21,000 no one said it will come to 10,000. So, I believe that it is difficult to try to time the markets.
But in my opinion the markets are at these levels significantly undervalued. I think investments into the markets over the medium to long-term should bear very good returns.
Q: What is the central risk or biggest risk to this assessment that these are reasonable levels to start accumulating? Is there a threat or an outside chance even in your eyes that this global bearish phase extends to beyond 2-3 quarter, which starts affecting us and earnings over a more prolonged period of time?
Jain: It is possible. We must appreciate that the Indian economy is one of the most insulated economies from global developments. Our exports to GDP is one of the lowest amongst all emerging economies. Our dependence on capital inflows as a percentage of total capital formation is just 15% odd.
Lastly, I think the most important point is that India is one of the main beneficiaries of a fall in oil prices. I think if you look at the positives for the economy of a fall in oil prices versus the negatives because of an economic slowdown globally, in my opinion, I don’t think we are worse off with oil at USD 40 per barrel and with the world economy in a slowdown, because oil at USD 100 could have been very negative for our economy longer-term.
I think the positives of oil at these prices will show up next year as in my opinion, our fiscal deficit, current account deficit, interest rates, inflation are all peaking out in the current year. So, as we go into next year, our macroeconomic indicators will all start looking a lot better, which I think is very good for the period.
Q: What is your assessment now from the facts that you have at your disposal that you have seen the worst price damage of this bear market, and from now all successive years are more or less positive or constructive years?
Bhatia: What we are going to see is probably a consolidation in the next three to five months as I have said and then wait for new triggers.
The only thing that can bring down this market essentially is if China goes through a major degrowth or a slow growth phase. Now that is a risk that cannot be entirely ruled out. There have been pressures building up because of exports, there are pressures building up in the banking system.
So, if we see some kind of a blow-up in China that would be the one event that is not something that is priced into this market. The general expectation is that the BRIC countries will continue to grow especially China will lead the growth across the world.
If that does not happen, then we have another leg down. I have no special insight to offer on that front on the Chinese economy but I think that is one risk that is not priced-in.
Other than that, for India-specific factors, it could just be a very weak third front led coalition. If we see other than the BJP or Congress comes into power, then we’ll probably have a short-lived government, led by the third front and that would add uncertainty and negative sentiment in the market.
So, these are the two big possibilities that could ruin 2009. Other than that we should basically start moving up especially after a strong government takes charge in May-June.
Q: What sectors or what is your model stock portfolio for 2009 looking like? What are you bullish on, what are you staying out of?
Bhatia: If you look at the way we are positioned in our portfolio, we would essentially be looking at the banking sector. The banking sector, especially big public sector banks, would be a very big beneficiary of what has just been announced, which is repo rate cuts.
So, this kind of falling yields on G-Secs will help them and will also be a big cushion for the possibility of NPLs coming through in the second half of the year. So, banks are where we are positioned positively and overweight.
Other than that, we are neutral in tech and possibly wanting to go down if the rupee starts appreciating and go further underweight in tech. On the other big sector that is oil and gas, we believe that the oil prices will actually start rising in the second half of the year.
So, we like ONGC both as a defensive in this kind of environment and on the belief that the longer-term oil price trend would be closer to USD 75 per barrel.
If you look at oil prices at the end of 2009 they would at least be USD 25 more than what they are today, which actually presages a good recovery globally. So, if that happens, we like ONGC too.
Q: What are your biggest overweights as fund manager going into 2009 from the existing portfolio?
Jain: Our biggest overweights are basically in banks and consumers, FMCG, media and pharmaceuticals.
Q: PSU banks or private banks or both?
Jain: We have decent exposure to both.
Source : MoneyControl
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