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Fundamentals strong, sentiment weak

July 19, 2006 18:22 IST

Surjit Bhalla of Oxus Investments says that he is worried about the equity markets as despite good earnings, stocks are refusing to go up and investors are using rallies to sell.

He further says that fundamentals remain solid, growth rates have been strong and growth rate from China is at all time high, so there is nothing wrong with the fundamentals.

According to Bhalla, there is something wrong with the sentiment now, especially when growth and earnings are solid and yet the markets refuse to go up.

Excerpts from CNBC - TV18's exclusive interview with Surjit Bhalla:

Are you worried with the kind of news flows that you have heard in the last couple of weeks or do you think the equity markets can take it in their stride?

I am worried. There is one way to look at the Middle East tension and that is like in the olden days there were skirmishes in Palestine and they did not really affect markets. This excursion into Lebanon is a bit more serious and can have ramifications beyond localised areas of the Middle East. To answer directly, I am worried and it is worrisome for the equity markets.

What do you expect it to do to global emerging markets' sentiments? How badly could it scar equity performance and crude oil performance in the foreseeable future?

Last year everything was looking very rosy. Emerging markets and equity markets looked very buoyant, I think we would have had less of an impact, if this skirmish in Lebanon had taken place then.

Given that the same event comes in after the Fed has raised rates, we are now in a high interest rate regime than we were before. After the correction of May and June, which is rather severe by any standards and oil prices, which is obviously at a high, this will impact equity markets at least in the near term.

Last time when we spoke, you were quite optimistic about going into earnings season, are you saying that because of this global developments, you are somewhat more circumspect about global equity performance and Indian market performance in the near term?

When we last talked nothing in Lebanon had happened and we were anxiously awaiting what would happen with global equity flows, with the earnings results. Indian earnings results have come out as predicted, which is spectacular or certainly above the norm and the market has not taken it very well. So therefore, we now enter into a realm of sentiments rather than fundamentals.

The fundamentals remain solid, growth

rates have been strong, growth rate from China are at all time high, so there is nothing wrong with the fundamentals. But there is something wrong with the sentiments especially when growth and earnings are solid and yet the markets refuses to go up. That is bothersome and that all the investors should recognize.

What sort of impact do you see of the geopolitical concerns on liquidity and on increase in risk aversion that is globally?

There are two points. First, it is not as if emerging markets are not going to be the favoured destination of portfolio investors around the world.

The second is whether this happens in the near term. In the near term, I think given that this could spill over into Iran and so on and so forth, the uncertainty cloud is extremely large.

Over the short term, it is bound to have an impact on flows into India and emerging markets and even flows into developed markets. I just saw some news about how there has been withdrawal of money from the US itself, so I think everybody is bringing home the money.

This is a period of caution; we will have to wait until the next set of really good fundamental news, which will have to be in the form of growth rate in the US, which is really much lower than what people think. Given this, the next move by the Fed might be to ease rather than tighten.

Until that time these political concerns will dominate and I am afraid at least from our point of view at Oxus, this is not an environment where you can look. I fully admit that this is radically different than my bullish outlook just two weeks ago, but international concerns are international concerns.

What might be the worst-case scenario in a situation where market such as ours will be caught in a range or do you think that the collateral damage might be higher?

That is hard to tell. as all forecasts can be either right or wrong. But the forecast is that the pressure is on the downside. One will have to look for technical support levels, clearly 10,000 is a major level, perhaps add another 5-10%, it should be contained around 8,500-9,000 levels.

But the upside is smaller as one would have seen that despite good earnings, stocks are refusing to go up and people are using these rallies to sell. So I think that is the caution word, do not look for any upside surprises very soon and even if they come they may not hold for long.

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