With the euro zone crisis getting worse, Ambit Capital’s head of equities, Saurabh Mukherjea, talks about its effects on the Indian markets in an interaction with Puneet Wadhwa. Edited excerpts:
What is your analysis and interpretation of the problems in the US and euro zone? Should the Indian markets brace up for more downside?
The West has clearly entered a phase of structurally weak economic growth. Furthermore, Western governments have run out of firepower to pump-prime their economies and that is the single most important factor spooking equity market investors globally.
India is far from insulated from these developments. From the perspective of the real economy, India’s economic growth process remains critically coupled with the pace of economic activity in the US economy through the investment demand conduit. The relationship between the fate of the US and India extends to equity markets as well which have been moving in lockstep over the past few years. Given that the West is entering a multi-year slowdown, equity markets there and in India seem likely to head lower between now and December 2011.
Moody’s recently cut SBI’s rating. Was this on expected lines, or has the rating agency been too harsh?
While much of the world’s attention had been centred on the catch-up provisioning that SBI had been undertaking, we have been highlighting the impending incremental stress on SBI’s books.
We believe Moody’s rating action has been driven by the lower-than-adequate capital to absorb the current higher-than-normal delinquencies – two metrics that are unlikely to change for the better for SBI in the near-term. We do find the non-performing asset (NPA) scenario built into Moody's assumptions (assuming 12 per cent gross NPAs) a little extreme. If such a scenario was to be contemplated, we expect the government to accord the highest possible priority to SBI's recapitalisation. That said, this environment does pose serious challenges for SBI on the asset quality front.
How do you expect the earnings season to pan out? Any sector/company that could spring a surprise on the positive or negative side?
On a year-on-year basis, we continue to expect Sensex EPS to grow by five per cent. I think the main thing that will move share prices down in this earnings season is not the earnings per se but the guidance that companies give for FY13 and the amount of distress they communicate vis-à-vis their funding position.
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Could there be earnings upgrades over the next two quarters, with commodity prices softening and most economists expecting RBI to pause its rate tightening?
There is possibility that the scale of the global dislocation will lead to commodity prices falling over the next six months. However, for this to help Indian companies, crude oil would have to fall 20 per cent, creating headroom for RBI to ease the process of monetary tightening.
What is your near-to-medium term outlook on the rupee?
We subscribe to the school of thought that the Western world is entering a multi-year slowdown owing to the structural faultliness in the edifice of those economies, we think frequent flights to safety will mean a deprecation of the rupee.
How should one re-balance one’s portfolio, given the macro-economic headwinds and the outlook for the equity markets?
Given that the Indian economy has entered a multi-year slowdown, banks that have increased their risk exposure in entering the slowdown and are trading at high P/Bs look exposed to us.
Besides the sector-specific themes, investors should trim their earnings in companies with political connects and simultaneously focus on stocks with high ‘quality’ of earnings, given India’s politically charged climate.
