Nilesh Shah of Prudential ICICI says that the euphoria seen in the markets on Thursday over the Fed chairman's statement was a bit over exaggerated. He says that the market has not read the statement carefully, as it signals that the movement in interest rates will be subject to that in inflation.
But he doesn't think that the Fed's actions will determine the FII flow in the markets. Going forward, he is hopeful that the market will attempt to go back to 11K.
Excerpts from CNBC-TV18's exclusive interview with Nilesh Shah:
Your take on the earnings, what you have seen so far?
Earnings have been a mixed bag. The cement and top-end IT companies have delivered results, which are ahead of market expectations. But the results of two-wheeler companies are below market expectations. We could distinctly see a scenario, where the companies are feeling cost pressures.
The margins are coming under pressure and maintaining growth in profitability is going to be difficult going forward. The impact of oil and interest rates is starting to get reflected into the margins.
How would you say they would sit in terms of the valuation of the market at this point; Q1 earnings versus the levels we are at?
That is the trickiest question. The banking results are not expected to be good. But that is reflected into their prices. The tech results are expected to be good, which is reflected in their prices. So, we are having a scenario where markets are fairly priced.
Whatever the results that have come and whatever are expected that is fairly well discounted into the prices. Hence, we don't see a big mismatch in the earnings expectancy and the pricing or the valuation today. Most of the things are fairly or evenly priced.
How do you read the global news on which markets have rallied across the world, the possibility or the prospect of the rate stopping there in the US? How did you gauge the market reaction, which seems to be nothing short of euphoric?
If one reads the statement then somewhere he is saying, 'we will be driven by the data and that if the data is conducive then the Fed rate could be paused but if the data is not conducive then Fed rate could continue to go up'.
The priority looks like inflation targeting. If one goes through the statement per se and not with how analysts are interpreting that statement, then it doesn't give an impression that Fed is committed to pause in August.
I think the options are open. My suspicion is that over a period of time maybe either because of the data or because of the second interpretation of the statement, people will come to realise that Bernanke has not committed in terms of pause. All he continues to say is that depending on data he will take a call.
If inflation is robust then interest rates will have to be raised. My suspicion is that markets have kind of reacted euphorically without actually reading the statement.
If that is the case, how do you expect liquidity to move from here into markets like us?
The amount we have been receiving is $5 billion to $10 billion. But those are peanuts in the global standard. If we divide the investor base there is approximately $18 billion worth of India dedicated fund and maybe around $7-8 billion could come from the BRICs kind of India allocation.
Then may be 3-4 per cent allocation is coming out of Asia's emerging market funds and maybe 1-1.5 per cent is coming out of global emerging markets funds. So these are all small numbers and a significant change in US Fed rate could probably impact that. But a marginal change in the US Fed rate could not impact that by a significant margin.
As of today, the FII behaviour is also in a kind of indecisive mood. Meaning for 3-4 days, they are buyers then for 3-4 days they are sellers. Sometimes they are big sellers and sometimes they are small sellers. So I don't think so that they are reacting based on the fund flow. They probably seem to be reacting more in terms of valuation and in terms of their portfolio compulsions. My suspicion is that the flows will not be impacted irrespective of what the Fed rate is moving or where the Japanese interest rates are going.
What is your sense of the market because we have gone up to almost 11,000 and came back to 10,000? We have pulled back a bit today. In the near-term, what kind of a band do you see market oscillating between?
I think in the absence of any catalyst, the earnings will drive market. As regards earnings, the current trend is that it is sometimes giving positive signals, and sometimes giving negative signals. In that kind of scenario, one foresees market moving between 14 times earnings to 16 times earning, which in numerical terms will translate to somewhere around 9000 to 11,000 odd level of Index.
What is the sentiment like from retail and HNIs? What kind of swings are you seeing in money flows when markets go to 11,000 and come to 10,000? Are you seeing any churning of cash away or into funds at all at certain levels?
The activity levels are fairly normal. At this time retail as well as HNI investors have really behaved maturely. They haven't withdrawn money at 9,000 levels and haven't rushed to put in money at 10,500-11,000 levels. We are seeing a normal activity going on although there is no big appetite coming in at lower levels. Nor are there big redemptions coming in at higher levels. It is just the normal course of business. But no significant money is coming in either.
What is your sense? Will we just move around this 10,000-11,000 kind of band or do you see the market attempting up moves after the earnings season is over?
I think the market over a period of time will start attempting to go up because one will be willing to discount March 2008 earnings.
Second, one will also have more clarity on the monsoon, which has been doing pretty well even though the earlier expectation was bad.
Third, the oil prices have started cooling off and hopefully the Middle East Crisis will blow over and it is not going to escalate from current levels. And like other commodities have cooled off, oil also will cool off at some point in time.
The hurricane season has begun in the US. This time around we are expected to get seven-hurricane vis-à-vis 12-14 last times. So, hopefully the hurricane interruption on oil prices will also be limited.
Most of the foreign fund managers will be back from their vacation in July-August and they will also be willing to experiment with high beta ideas or take some risk to generate return towards the closure of the year. All these things put together will give hope and comfort to the market to start attempting to go back up to 11,000 odd level.
Do you feel the midcaps space will move in tandem with what the frontliners will do then?
No, I think the characteristics of market is that first the largecaps will move and then slowly once people get the comfort that the market has stabilised, the focus will come back on midcaps. So the upward movement of the market has to be carried away by the largecaps stocks. The midcaps will move later on, but not immediately along with largecaps.
Do you think that mutual fund guys like you will be looking at the bond markets to buy bonds? Do you think an 8 per cent annual return is looking more attractive than what you will get from equity markets?
No, I do not think equity markets time has become that bad that we have to look at 8 per cent return. It's the comparison of tortoise and hare. The tortoise is fixed income. They will move steadily and slowly and probably give 7-9 per cent return. But the equity still is the hare. It may slip up for sometime but eventually I think this time hare will beat not the tortoise.
The bond market is poised at level, where one keeps contemplating to invest. We still think that the rate cycle is on the upward move. There is still pressure on the supply side because of the continuous auctions and the developments on the PDs. The market is not sitting pretty heavy.
But on a ten-year yield, the upside maybe for 25-30 basis points. But eventually that will result into higher carry. So from an asset allocation point of view it's time to look at debt funds, though maybe for 1-2 months, you will still have negative returns because of rising interest rates.
There are couples of sectors that have spearheaded today's widespread rally. Banking stocks, will you take a second look?
Definitely, I will take a look at banking. There is no doubt that the banking results for this quarter will be under pressure because of the tight margin and the impact of rising interest rates on the treasury portfolio. But today's valuations are almost discounting as if banks are going into NPA trouble, as if they are going to wipe off the treasury portfolio.
Most of the mid to largecap banks are available in the range of 0.75 to 1 time price to book. That is a very attractive level. Today's upward movement was probably a kind of relief rally. I hope that it gets sustained based on the valuation comfort.
What have you made of metal earnings not the ferrous space, but the non-ferrous space?
Metal is very difficult to predict. The earnings have come in line with expectation. The metal prices had remained on a fairly strong ground in the last quarter on the non-ferrous side. That is reflected in the results of Hindustan Zinc or Sterlite Industries.
But the future is more important. Will the metal prices continue to remain as strong as they have remained in the last quarter? If the whole call is that the global growth is going to slow down and that's why Fed is going to give a pause then this commodity prices cannot be sustained.
Probably the next quarterly profit could be little less than the current quarterly profit. Thereafter, the profit could accelerate or start coming down. So non-ferrous metals will be tricky. If you see historical valuations, they have appeared extremely cheap. But if you see forward-looking valuation, they look fairly priced
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