Raamdeo Agrawal, joint MD, Motilal Oswal Financial Services, talks about the triggers for the market, pledging of shares, valuations and the stocks to invest in an interview with Krishna Merchant. Edited excerpts:
Is there a possibility of the Sensex dipping to 15,000 levels in the near-term?
The probability is more than 50 per cent as the economy is expected to slow down. The market participation is very low and the mood is pessimistic. The markets could react negatively if the inflation does not ease. Investors have options to put money in equities or bonds, so look at earnings-to-bond yields. Currently, the one-year forward P/E (price-to-earnings) multiple is around 15x and the earnings yield is around 6.3 per cent. However, the bond yield is around 8.3 per cent. The monsoon forecast has been lowered, that may stoke inflation. There are expectations bond yields may climb and the earnings yield will get impacted with the rising interest cost.
What will be the trigger for the markets to turnaround?
The turnaround may come from lower inflation. Even if the bond yields do not come down, markets will start rallying far ahead of the actual change in the interest rate regime if the inflation comes down.
Is there any similarity between the markets now and the fall that happened in 2008?
In 2008, the interest rates were also going up and the markets were rising. The momentum in the global and local economy was very different as the government was also responding. Things are different now. Inflation is out of control and confidence is low. The government is not responding and there are concerns on the Lok Pal Bill. Much pessimism in the market is depressing the current volumes.
How is the broking business getting affected because of falling cash market volumes?
The broking business is all about sentiment and confidence. Since the road ahead for the market is cluttered, the confidence to buy or sell is getting affected. Retail withdrawal is high and institutional participation is low.
In the past quarter, gross margins were low as companies did not exhibit pricing power. Do you expect the companies to raise prices going forward?
In a weakening demand scenario, the companies may not raise prices to save the volumes. There will be very few companies that will pass on the cost increases. The pricing power will thus weaken.
There are many stocks that have taken a beating as the promoters or financiers are selling pledged shares. Is this a major concern for the markets right now?
This is a big concern because the pledging of shares has become rampant and the guys who do not know the underlying risk will face problems. We may see similar mishaps ahead, specifically for companies facing foreign currency convertible bonds (FCCB) redemption. All the lenders will try to cover their back. Retail investors should find out what is compelling the promoters to pledge, before investing in such companies. Also, the markets would have already punished the weak companies by now.
What are the stocks or sectors you prefer in the current market ?
The market valuation seems reasonable at the current level. Some value is emerging in the midcap and smallcap pack and many stocks are available below their book value. I like the telecom sector, even though it is capital intensive. I like Nestle from the fast moving consumer goods (FMCG) pack.