See 12-15% correction if PE multiple reverts to mean: BofA-ML

Emerging markets are rising on the back of strong inflows from global investors, and not necessarily an improvement in fundamentals, said Sanjay Mookim of Bank of America Merrill Lynch (BoFA-ML).

“Clearly valuations have become an issue we need to worry about and I would argue that this is not because the world has rediscovered India’s growth but it is just that there is a very strong wave of money coming into the EM,” he told CNBC-TV18.

According to Mookim, if price earnings multiples were to decline to their longer term averages, there could be a 12-15 percent correction in the market.

Though earnings growth has been much slower than what the market is expecting, Mookim recommends investors to stick with in liquid large cap names, particularly those companies where risks of operational surprises are lower.

Anuj: This market is making a bit of mockery of valuation both at index level and stock levels. What do you make of that?

A: You are right and clearly we have been saying in our notes that this is a very strong external lead flow tide and while we are very positive on India in the long term potential for the country to deliver economic growth and different from many other emerging market (EM) countries. This tide of money has lifted our valuations to very excessive levels.

If you look at aggregate Nifty and you ignore the rally you got in 2014 post election then we are already at post GFC highs. And earnings growth momentum is not turning price to book return on equity (RoE).

The premium to midcap is at an all time, as far as I can draw the chart pack. So, clearly valuations have become an issue we need to worry about and I would argue that this is not because the world has rediscovered India’s growth but it is just that there is a very strong wave of money coming into the EM.

Anuj: How high is the risk that if earnings don’t catch up for our market to have a significant correction in the second half?

A: It is a very simple thing to say that market is at 18-17 times plus earnings are riskier than when they were at 14 times earnings. I am therefore worried that there might be a short term correction. Nothing tends to go up in a straight line really and the unfortunate thing is that I can’t tell you the timing of it. So, what we have told our client is that at these prices you would rather prefer to be in liquid large cap names where you don’t see too many operational risks potentially. But to answer your question I don’t know exactly where it will happen. Second half looks like a good candidate but it does appear to be a distinct possibility, a correction that is.

Latha: So, what do you do in the mean time. Even at this time are you all buyers. Do you still expect that in the medium term or near term you could see higher levels for the Nifty. People have been talking very freely of 8900 and 9000. Will you be in that camp?

A: No, we are not. Unfortunately I would argue that there is momentum, you can’t deny that but if you go back to six months in February, markets was touching 7000 and everybody was saying 6500 is a done deal. So, everybody does tend to extrapolate whatever momentum is present in the market at that time. So, I don’t see reasons of fundamental arguments why the Nifty should carry on the way it is based on earnings and valuations. But you can’t deny the fact that there is very strong momentum and it could. So, there is no logical way that you could either argue that it can’t.

Latha: So, what exactly would you advice investors at this point in time, to take some money home itself or not that much but just stagger your buying, wait for lower levels to buy?

A: Our advice to relative investors or people who are benchmark is to say that look, please stay in the liquid names like I said earlier and buying the more expensive midcap stories in the hope that some sort of a turnaround will play out eventually maybe a very risky strategy at the moment. It is a little dichotomy that we are pointing out people by the more expensive stocks which are the consumption kind of names which are already expensive but we still argue in favour of them because those are the sectors where the risk of operational surprises are lower. At these prices like I said you don’t want to get into names where expectations can swing very quickly. So, you don’t see too much of swing in let us say consumption growth number but you could see a very sharp swing in the metal price forecast, for example. That is why we are saying look while the market is expensive we would stay with the sectors which are working which are unfortunately the expensive stocks in the first place.

Anuj: Among your top stock ideas you have names like State Bank of India   (SBI) and ICICI Bank   . And these stocks have rallied from the recent lows. Are you backing them for valuation comfort or do you see the book changing or the asset quality issues changing going forward?

A: We have been in the camp that asset quality issues for many of these banks has peaked and going forward there are many mechanisms which have been put in place to resolve the bad debt problem and over time you should see company performance improve now. The problem like you pointed out is many of these stocks have already anticipated that perhaps with the rally these are high beta names and have gone up a lot. So, in the very short term we are careful on the market. So, I don’t think you would want to add beta and these are honestly the beta names. But if you are willing to take a 18-24-36 month view then I do think that the operational performance of these companies can improve overtime. But you may perhaps want to look for better entry point really.

Latha: Again Asian Paints   or for that matter the staples. Asian Paints going at 50 times now. It is in your list. What is the attitude, would you want to take profit, would you wait for better levels to buy more?

A: I am going to hide by again talking about the relative investor and clearly our recommendation remains that you stay with companies which are delivering operational performance and clearly Asian Paints is one that continues to surprise quarter after quarter. So, it continues to stay in our list of consumption focussed names that we favour.

Now, honestly with multiples where they are for the market and for many of these companies you do tend to get a little nervous on buying at whatever prices they are at right now. But for a relative investor that is the basket of stocks that you would continue to add incrementally if you had more money to invest in it.

Anuj: I am looking at your Sense target of 26000 which of course implies a correction. Which pocket do you think is going to lead it there. IT has already fallen by the way side. Do you expect banks to lead this correction, economy stocks, where do you see the correction coming in?

A: Naturally with banks being the large weight that they are on index no correction can happen without banks participating on the downside and clearly the higher beta banks would possibly have greater correction as well. Some of the cyclical names have also gone up a lot and our worry is that the rally has been based on hope of change rather than actual delivery of change and what I would expect is that in any correction the cyclical names will also tend to underperform the market. But what you might see some sustenance of consumption names, some sustenance of names which are focussed in rural economy for example because monsoon really are better, because the pay commission is coming through. So, those are the sectors which could still hold up better in a correction but it is the beta cyclical sectors which will underperform logically on the way down.

Latha: What is the downside for this market? A correction could come, liquidity could turn on a dime. But where would you feel secure?

A: If you look at multiples and let us say Price-to-Earnings Ratio multiples were to go down to average today then you could get up to a 12-15 percent correction. So, on just a pure arithmetical arguments because we are expecting earnings growth in FY17 and FY18 if you give it time the correction would probably be shallower. But if it were to go to average today you are looking at 12-15 percent downside.

Prashant: First up from your perspective do you expect this to get done in this session?

A: Well, if you read the tea leaves it does look like we are getting close to some sort of a resolution, relying on media reports purely there seems to be progress politically and we are hopeful that the goods and service tax (GST) bill is finally put to vote next week and that post discussion it is approved in parliament, but this things are very difficult to call and it will happen when it happens really.

Ekta: What are the key details that you will be watching out for if indeed the GST is passed?

A: The obvious one for sure what is the standard rate of GST, what is the assumed revenue neutral rate if they mention in the legislation and of course whether the 1 percent central sales tax or 1 percent inter-state tax is applied or not, because that could have a meaningful impact on how logistical benefits accrue to company over time.

Other benefits to the economy, to logistics and to the tax to the gross domestic product (GDP) ratio will only be low over time, but clearly the rates will be very critical and that will impact how many companies benefit.

Prashant: Standard rate what you are expecting, the standard rate 18 percent?

A: We go by the latest report which suggests that 18 percent standard and that suggest that some consumer sectors, auto sectors amongst large caps could see potential reduction in net taxation and those should be the beneficiaries if they are able to retain some of the margin benefits as a result, but yes 18 percent seems to be the general wisdom right now.

Ekta: Which are the sectors which could see a possible negative impact?

A: There are some sectors specifically in the services industries which may see the net taxes go up particularly let say financial services the payment of taxes will become onerous. Today, let say they pay service tax directly to the central government, but under the GST they will have to pay service tax to all the states that they operate in and they will have to allocate and find rules to decide what portion of their taxes paid to which state and it will involve a lot more work, a lot more MIS and it can operationally become a little more difficult for some of those financial sectors service companies in the country.

Prashant: If the bill is passed, do you foresee any risks to implementation that it could actually get pushed out between a year to 3 years or so, because there is talk about that in the market?

A: I don’t expect that because the intent of the government seems to launch it by the April 1, 2017 if it is passed now, but there is a lot of work that will need to be done between let say an August and March. The constitutional amendment bill being passed will require at least half the states to approve the constitutional amendment, then every state and the centre will have to pass their own GST laws, the GST council will be formed which will frame the rules and regulations plus the IT network will have to be rolled out.

Now many of these things I suppose the government can implement by March. They have been preparing for a while. Many of the draft bills are already in the public domain, so it should not be a too difficult for the government to get it done by March if they put their backs to it. The trouble I thing will lie more in the corporate sector, many companies naturally have been unsure whether GST will be passed and in what form, so they are not prepared on their internal MIS and processing system to implement GST and I suspect that there might be a bit of a scramble especially in the smaller companies to implement GST.

Ekta: Well, you have a cautious view on the markets, do you think that the GST could in fact be a risk to your sensex target?

A: Well, I would see it as being supportive of the market in a relative context, because there is this big reform going through India as a market could do better than EMs, but many GST beneficiaries have already done very well. I would not expect a meaningful uptick again from this point if the bill is passed, but it would distinguish India in the EM pack because at least this is one country where the reform momentum will be strong.

Prashant: First up from your perspective do you expect this to get done in this session?

A: Well, if you read the tea leaves it does look like we are getting close to some sort of a resolution, relying on media reports purely there seems to be progress politically and we are hopeful that the GST bill is finally put to vote next week and that post discussion it is approved in parliament, but this things are very difficult to call and it will happen when it happens really.

Ekta: What are the key details that you will be watching out for if indeed the GST is passed?

A: The obvious one for sure what is the standard rate of GST, what is the assumed revenue neutral rate if they mention in the legislation and of course whether the 1 percent central sales tax or 1 percent inter-state tax is applied or not, because that could have a meaningful impact on how logistical benefits accrue to company over time.

Other benefits to the economy, to logistics and to the tax to the GDP ratio will only be low over time, but clearly the rates will be very critical and that will impact how many companies benefit.

Prashant: Standard rate what you are expecting, the standard rate 18 percent?

A: We go by the latest report which suggests that 18 percent standard and that suggest that some consumer sectors, auto sectors amongst large caps could see potential reduction in net taxation and those should be the beneficiaries if they are able to retain some of the margin benefits as a result, but yes 18 percent seems to be the general wisdom right now.

Ekta: Which are the sectors which could see a possible negative impact?

A: There are some sectors specifically in the services industries which may see the net taxes go up particularly let say financial services the payment of taxes will become onerous. Today, let say they pay service tax directly to the central government, but under the GST they will have to pay service tax to all the states that they operate in and they will have to allocate and find rules to decide what portion of their taxes paid to which state and it will involve a lot more work, a lot more MIS and it can operationally become a little more difficult for some of those financial sectors service companies in the country.

Prashant: If the bill is passed, do you foresee any risks to implementation that it could actually get pushed out between a year to 3 years or so, because there is talk about that in the market?

A: I don’t expect that because the intent of the government seems to launch it by the April 1, 2017 if it is passed now, but there is a lot of work that will need to be done between let say an August and March. The constitutional amendment bill being passed will require at least half the states to approve the constitutional amendment, then every state and the centre will have to pass their own GST laws, the GST council will be formed which will frame the rules and regulations plus the IT network will have to be rolled out.

Now many of these things I suppose the government can implement by March. They have been preparing for a while. Many of the draft bills are already in the public domain, so it should not be a too difficult for the government to get it done by March if they put their backs to it. The trouble I thing will lie more in the corporate sector, many companies naturally have been unsure whether GST will be passed and in what form, so they are not prepared on their internal MIS and processing system to implement GST and I suspect that there might be a bit of a scramble especially in the smaller companies to implement GST.

Ekta: Well, you have a cautious view on the markets, do you think that the GST could in fact be a risk to your Sensex target?

A: Well, I would see it as being supportive of the market in a relative context, because there is this big reform going through India as a market could do better than EMs, but many GST beneficiaries have already done very well. I would not expect a meaningful uptick again from this point if the bill is passed, but it would distinguish India in the EM pack because at least this is one country where the reform momentum will be strong.

ICICI Q1 net seen down 28%; slippages from restructured book key

Private sector lender ICICI Bank   ‘s first quarter (April-June) profit is expected to fall 28.5 percent to Rs 2,127.7 crore on yearly basis, according to average of estimates of analysts polled by CNBC-TV18.

Net interest income may increase 4.4 percent to Rs 5,342.6 crore in the quarter ended June 2016 compared with Rs 5,115.1 crore in year-ago period. Net interest income is the difference between interest earned and interest expended.

Key things to watch out for would be slippages from restructured book (which was Rs 2,724 crore in Q4), asset quality, management commentary on scheme for sustainable structuring of stressed assets (S4A) and watchlist (which was at Rs 44,000 crore in Q4FY16) for the quarter.

If slippages in Q1 come below Rs 5,000 crore (Rs 7,003 crore in Q4FY16) and gross non-performing assets below 6 percent (5.82 percent in Q4FY16) then that will be positive.

Slippage number will be key meaningfully lower than last quarter will keep the market cheery, says Ravikant Bhat, Research Analyst, IDBI Capital. “What is also important is how the bank’s retail business would pan out, particularly the current account and savings account (CASA) growth,” he added.

Backing Bhat, Hemindra Hazari says slippages less than 7000 would please the market. “Even if the numbers are great, ground reality is that corporate and the small and medium enterprises are in acute and distressed the situation,” he said.

However, ICICI Bank has an advantage over other banks. “The bank can shell some shares in insurance company to be listed,” Hazari added.

Arvind Sanger on market rally: How long will you ride the tiger?

The global economy is not exactly in fine shape but one wouldn’t conclude that having a look at equity markets. Analysts say share prices have been driven to multi-year or record highs globally thanks to easy-money policies pursued by central banks.

Comparing the market rally to “riding a tiger”, Arvind Sanger of New York-based Geosphere Capital says the European Central Bank and Bank of Japan, battling a slowdown in their economies, have “no option but to keep the liquidity taps open”.

In such an environment, the rally should continue at least in the near term.

Even still, Sanger continues to see opportunities in select Indian stocks. “We are still conscious of looking at long-term upside. Stock specific opportunities exist,” he told CNBC-TV18, adding that bank and cement stocks looked attractive.

However, even as one can make a money in the short-term riding the market, Sanger said a “great selling opportunity” will present itself when the GST Bill is passed — a play on the old Wall Street adage: “buy on rumour, sell on news”.

Anuj: It has been a strong liquidity driven rally and that continues unabated. Do you get a sense that this equity rally also continues in the month of August?

A: I think that it is hard to see getting derail because of any liquidity moves. So if anything given what is going on in Japan both the fiscal side and potentially the Bank of Japan (BoJ) upping the ante also, it seems as if liquidity is continuing to get pumped into the market whether its BoJ or European Central Bank (ECB), they certainly have no option but to keep liquidity caps open. The Fed is cautiously signalling that at some point it might raise rates again but I do not think a Fed rate rise in September is a very high probability. It is a probability and we will have to watch the data. Therefore, I would argue that for the near term the liquidity rally should continue and in a world of increasingly tepid growth and increasingly lower yields. The stocks that provide growth or they provide yield are likely to get to valuations which are fortunately-unfortunately are going to make historical numbers. On historical basis these stocks will end up looking expensive and that is one of the challenge as how long do you ride this tiger of this market rally, purely liquidity driven but as long as central bankers are riding this tiger of liquidity which they can’t get off because they are afraid that the economies will fall apart. I think this dance continues in terms of equity markets continue to remain well supported.

Latha: How are you tackling this challenge then? Since you look at it from the eyes of an investor, are you buying India at current levels?

A: I guess we look to buy specific stocks where we think that have lagged. And so, the reality is no matter what the index is doing, there are always stocks that are still good value in terms of any long-term historical perspective that we look at. So, it is finding those companies with growth opportunities that are not fully discovered.

If you were to look at some of the consumer stocks in India, you are not going to find value. You could argue that some of the IT stocks have fallen down enough to where there could be value there, but there the growth outlook is more uncertain. So, we have to pick our way through some of the midcap stocks and finding some non-banking financial companies (NBFC). Again, many of them have had great moves, but even there, there are some laggards and there are some opportunities as well as specific stocks in different sectors.

So, that is the way we are approaching it. We are still remaining conscious of looking at long-term upside based on a reasonable valuation framework and not letting the current index drive us away from our discipline but therefore, it requires a little more patience, but we are still stepping up and finding opportunities.

Sonia: I take your point that liquidity will be king in the near-term, but in the medium term, earnings slowdown at some point will come back to bite us. So, in that context, how have you read into the earnings season so far and how cautious would you be on that front?

A: Let us separate out two or three different things. Let us look at the banking sector. Let us look at the IT services and companies and I guess pharmaceuticals may fall into that category and then let us look at other companies and other sectors.

I would argue the biggest disappointment has come in probably the IT sector followed to some extent by a couple of pharmaceutical stocks, but I would say that the banks seem to suggest that while things are not getting better in a hurry, they are not getting substantially worse in terms of non-performing assets (NPA) and therefore, the earnings growth story for the non banking financial companies (NBFCs) and the banking sector looks like the clouds are gradually, or at least the sun is starting to become visible through the clouds although it may not be fully out yet. And therefore, I think there are opportunities there.

I think there are some domestic leverage stories. Cement is a sector that continues to show signs of life. There are other sectors in the commercial vehicles (CV), autos, where growth is relatively robust. Power demand has been relatively strong. So, there are sectors where there are still opportunities with numbers. Obviously, not all the numbers are in yet, but the numbers are generally not anything too shabby. There have not been big beats but I do not think there have been huge disappointments either. So, we are seeing macro data that suggests that some of the sectors are turning and over the next quarter we will see more signs of some of these domestic oriented plays are showing further momentum. Although again, the momentum, I will admit, remains somewhat slower to develop that we would have hoped by now. But nevertheless, the trends are positive and if the monsoons signs continue to be very supportive, continue to play out, then monsoon being good will also provide some support both in terms of inflation being a restraint and in terms of growth getting another leg from rural demand.

Anuj: The sector in India which is in an unadulterated bull market is NBFCs; do you get a sense that things are getting overheated here and some of the stocks now trading at three-four times price to book?

A: We have been fans of NBFCs for a while, but some of the NBFCs are getting to those territories where a lot of good news is being discounted. So, the challenge is finding companies that are still struggling. You could take an example, not the one that we own, but Mahindra and Mahindra Financial Services had a tough quarter and the stock has sold off last week. And again, one has to examine whether stocks like that or others where the performance over a period of time has not been that good whether there is a turn or an opportunity in stocks like that. So, I would say that not all NBFCs have run up but some of the more popular ones with the more visible growth have clearly done well.

And so, the challenge is to find ones that are still lagging and seeing whether they deserve to lag and will continue to have problems or whether some of these might see a turn for the better. So yes, as an asset class NBFCs will be one of the best performers on the market and one cannot blindly go and by NBFCs and expect that you are going to find value or make a lot of money over two-three years. But there is still growth and there are still companies with not as extreme valuations.

Latha: Yesterday, we spoke to the CLSA Head of Research and his argument was that this tactical liquidity driven rally could well have more legs. But, over a one year timeframe, he meant over the medium-term, I would not be surprised if returns from now are flat. Do you have those fears?

A: Yes, you could make a lot of money in the short-term because of the liquidity rally in a broad based index sense, but there are many risks along the way. There is an Italian referendum coming up in October, there are major elections whether in the US or in France or Netherlands next year, any of which could result in an outcome in which the new leadership or the new President or the new Prime Minister turns out to be or makes statements or does stuff that causes risk to come off the table whether it is anti-trade or it is anything else that causes.

So, there are a lot of political risks, there are some financial risks, with the European Bank’s stocks melting down, whether there is a crisis blooming there. So, there are risks out there and we cannot take our eye off that. They may not be India specific risks, but they are global risks which could cause Indian market along with other global markets to take a big hit. So, the risk remains that in buying stocks and in buying the market, one has to keep an eye on these risks and to be prepared to take defensive action if any of these risks come to fruition.

Sonia: The big positive trigger at least for most of the market participants is the passage of the goods and services tax (GST) and in that context, we seem to be getting closer to the finish line now. If it does come through, then do you think that will be a big market driver in the near-term?

A: Frankly, if all the other stuff we were talking about not happening, I would say that GST bill passage would be a great selling opportunity because you are going to get a lot of brouhaha about how great it is and I do not disagree that it is going to be great over two-four year period or maybe three-five year period, but over the next one-two years, the implementation, the devil is going to be in the details and it is going to take a while to implement it. And the reality is with all the guarantees that the central government is giving the states. There is a possibility that the fiscal deficit could actually go up as the centre may not be able to get all the money right away in GST collection that has pay out.

So, there are risks so I would say that an euphoria caused entirely or only by GST passage, should probably be faded. But again, it provides more visibility into the long-term. Even for the medium-term one-two years, I do not think it provides much of a help, but in the long-term it provides more support to the India story for those of us who are playing long-term and buying some of the midcap companies which have long-term growth trajectories that are pretty attractive.

Liquidity can take mkt to new highs; pharma a dark horse: Ambit

After a build of expectations because of good monsoon and government reforms, this quarter has been disappointing in terms of corporate earnings, says Pramod Gubbi, Director Institutional Sales, Ambit Singapore Pte. Ltd.

Speaking to CNBC-TV18, Gubbi said abundant liquidity can take global markets to new highs, as major central banks are persisting with their easy money policies.

However, Gubbi cautions against buying shares at current levels as he feels the market has run ahead of fundamentals. The risks are more on the downside, Gubbi says.

On the banking sector, he says private sector banks are clearly taking the market share away from its government counterpart. There are a lot of structural reforms required for the public sector unit (PSU) banks.

Gubbi sees the pharma sector as a dark horse.

“It has had continuous negative news over the last year; the space is (now) beginning to see reasonable valuation, ” he says.

Sonia: It has been a hit and miss sort of an earnings but more misses than hits this time. What has your reading been?

A: Yes, after a spurt of some positive hope in the last quarter this quarter has been a bit disappointing to that extent because expectations had gone up that there is some sort of a recovery and that will show up in corporate earnings and clearly that hasn’t transpired. I would agree it has been more patchy but from an expectations standpoint it is more disappointing.

Anuj: The other piece of the equation and that is continuing unabated. This month we have seen more than USD 1 billion from Foreign Institutional Investors (FII) in cash market, so much buying in index futures. Do you see that propelling the markets to all time highs?

A: That has been in – it is very difficult to answer as long as the central banks of the world are maintaining their position. That will clearly continue to fuel the rally until the next big macro shock comes in but we have seen in all sorts of shocks being dealt quite deftly by the central banks and the asset markets continue to look the other side. There are quite a few events coming up later in the year which can feed those shocks but the question is can the central bank continue to deal with these by pumping in more and more liquidity. It is very difficult to answer as to when that will end. So, simply put the answer to your question is yes, the liquidity can take these markets to new highs.

Latha: Now we also have central government liquidity from various governments don’t we?

A: Absolutely. Today’s another event we are all watching out for in Japan while we keep hearing it about helicopter cash being the last resort but there is still some more room in terms of monetary policy action where asset markets     can get happier with more liquidity. So, yes, it is a very interesting world we are living in. So, I am not sure if anybody has the answer to when this will end.

Latha: But therefore how are you approaching the Indian markets? Since there is always this danger about liquidity driven rally do you continue to buy or would you say for an investor this is a better time to stay away?

A: It is better to stay away because given the lack of support from fundamentals or valuations the risks are more to the downside. Perhaps six months ago you could have said that valuations are still attractive. There is hope of recovery. Now, we have seen the hopes of recovery being dashed or at least being more realistic now and at the same time valuations are too punchy.

So, you don’t have that support anymore to justify staying in the market. So, at the market level you are better off taking money off the table before the next shock hits you. But there could be interesting opportunities from a bottom up perspective which is something that we have maintained for long where you can see earnings visibility and some semblance of valuation attractiveness.

Sonia: So do you think bond funds will give you better returns over the next 6-12 months since you are recommending getting out of equity because there is this hope that there will be more rate cuts as well. So, investors love affair with bond funds has grown a little over the last 3-6 months. What is your own view?

A: Our own view is yes, bond markets are already factoring in some sort of rate easing and in fact in our view overlooking any sort of upside risk to inflation. We have already seen both consumer price index (CPI) and the wholesale price index (WPI) inch up and looking ahead perhaps in the second half of the government tenure there are some interesting elections coming up. This is when we typically see the governments loosen their purse strings in terms of spending and so on. So, those obviously have a betting on inflation to the upside. So, I am not sure bond funds provide any better alternative compared to equities given what they are already pricing in and potential risk to inflation.

Anuj: The stock of the moment now is Asian Paints, up 3.5 percent. So, their market cap has only gone up to crore 1.05 lakh crore. You have thoughts on this stock. It keeps surprising on earnings. The most valued stock right now maybe in the index.

A: I would resist talking about specific stocks but this is a sector that we have liked where we think there has been a significant movement the unorganised to the organised sector and the branded players with strong brand and distribution continue to chug away in terms of market share despite macro and that has happened over many years and we don’t see why that should stop going forward as well.

Valuations like you said are a different matter. It is very difficult to justify those punchy valuations but for top class franchises the market is willing to pay that.

Sonia: This news is just hitting us right now. Many of these auto companies have generated so much wealth for shareholders. What would your view be on two-wheeler makers like Hero MotoCorp?

A: I won’t comment on a specific stock but this has been a sector, not just in India but globally which has created significant wealth for shareholders time after time, different periods of history consistently. So, clearly this is a sector which demonstrates clear sources of competitive advantage in terms of brand and distribution and there is always consistent demand growth. Particularly in India there is enough in terms of long term growth potential given the penetration levels and growth in disposable income. So, in fact all segments of the auto sector are structurally positive in our view and particularly in India some of the companies have demonstrated really strong competitive advantage to drive that long term growth. From a short term perspective we might see some cooling off in demand unlike what we saw perhaps a year ago or over the last 12-18 months. Having said that for those with a longer term view this is a sector to stay invested in.

Anuj: Let us talk about the overall market texture a bit. Where is the leadership now? Of course we have seen banks do phenomenally well but some of the banks have now moved much higher than their – some of them are at peak valuations now in fact. IT has fallen by the wayside. Pharma we keep hearing some bad news here and there. Where is the next set of leadership going to come from. Do you think it remains with banks?

A: Yes, banks continue to be totally levered to the economy. Any sort of recovery will have banks but again time and again we have highlighted that. Within banks it is more of the private sector banks taking market share from the public sector undertaking (PSU) banks story. The PSU banks have got some sort of a run up in the recent past but there is a lot more to go in terms of structural reforms for you to get structurally invested in that segment. Having said that if you look at where the broader economic recovery is happening consumption continues to lead the way. While we might have some valuations challenges but it is one sector with some degree of earnings visibility.

Pharma again could be the dark horse here. It has had continuous negative news flow over the last two years. It is about time we are beginning to see some sort of recovery in that where again valuations are reasonable. So, that could be one sector which could achieve market leadership.

Latha: At the moment you said you are not a buyer but if there were to be some global liquidity glitch what is the downside for this market?

A: It depends on what sort of ammunition is left within the central bank. If you reckon they are going to raise their hands and give up on their ability or their desire to stem the asset markets. I guess the downside could be quite significant. Remember we are at all time highs for most equity markets globally other than Europe and these can correct quite significantly given there has hardly been any sort of earnings support or underlying economic support.

I won’t even hazard a guess as to what could be the downside in that situation. If it is just an aberration yet another shock, maybe Italian referendum in October perhaps you have something to look up to in terms of the sort of downsides we saw earlier this year in January – February. The Brexit related downside was too short and to use that as a reference point but the January-February correction is perhaps an indicator of how much downside the market could have. But if it is more about whether central banks totally give up, then the downside could be much lower.

EMs gaining from asset switch, but expensive now: Morgan Stanley

Emerging markets are right now benefitting from an ‘asset allocation switch’ as investors are moving their money out of Europe into emerging markets, says Jonathan Garner, Managing Director and Head of Global Emerging Market Strategy. He says almost 70 percent of the funds pouring into emerging markets are from exchange traded funds.

In an interview to CNBC-TV18, Garner says the challenge right now is that emerging markets are fully priced at around 14 times forward earnings, compared with their long-term average of around 11 times.

Garner is not bullish on growth opportunities in China. As for the US, he says the economy there needs more of a fiscal stimulus than monetary stimulus to boost economic growth.

Garner sees India as a fast growing market and expects the growth to accelerate further in the coming days. He says it is among the bright spots in the post-Brexit world. He is bullish on consumption, industrial and cyclical plays.

He sees private sector banks faring better than state-owned banks as economic growth picks up because state-owned banks will take some time to fix their bad loan problems.

Anuj: My mind keeps going back to the conversation that I had with you when you were in India for your Morgan Stanley Summit. You were quite bullish on emerging markets, but are you surprised by the ferocity of rally even post Brexit?

A: We have emerging markets as our number two favourite region globally behind the US but well ahead of Europe and Japan and we are definitely seeing asset allocation away from Europe towards emerging markets right now. India is a bright spot in terms of growth acceleration, so is Indonesia and to a lesser extent, we expect a move out of recession in countries like Brazil and Russia.

But there are still significant issues, so we are not bullish on growth outlook in China, we do not think commodity prices have much further to rally if at all. We are still below consensus on earnings growth. So yes, it is our second favourite pick, but we are wanting to pare that off versus our cautious view on Europe and Japan.

Latha: At Morgan Stanley, do you have some worries about the way in which central banks and governments now are pushing in stimulus? Do you think that this is going to create asset bubbles?

A: Certainly valuations on global equities are moving higher. For the All Country World Index, we are about 20 times trailing price to earnings (P/E), which is around the 90th percentile of the 10 year range.

But, in terms of the stimulus, we are of the view that in terms of affecting the economies that the monetary stimulus is increasingly less effective. So what we are arguing is that there is a need for increased fiscal stimulus particularly in the US, Europe and Japan.

Sonia: I was going through Morgan Stanley’s key portfolio and within that, you have been bullish on a couple of paint companies like Asian Paints   . We were just speaking to the management of Asian Paints and they indicated to us that the domestic growth looks much better, so rural markets are picking up. Do you think this should be the strategy of investors to look to more domestic stories in India, to more consumption stories? Would you continue to be positive there?

A: We recommend consumption and industrial investments, cyclicality and the portfolio in India. I cannot talk about specific stock names because we are not preapproved to do that on your programme. But in general, we see India as a market where growth is accelerating and it is going to be the fastest growing of the major economies going forward, which is quite exciting and in the rest of our portfolio, we have much less cyclicality and we are much more into high dividend yield, high free cash flow yield stocks.

Anuj: How high is the risk of the exchange traded funds (ETF) or hot money chasing stocks and creating a bit of a bubble in a couple of pockets in emerging markets?

A: I answered that in the first appearance on your show. We certainly are seeing this rotation away from Europe where we took our growth numbers down towards emerging markets where there is more resilience including in countries like India.

Again, on the valuation point if you look at emerging markets overall, we are on about 14 times our numbers for forward P/E which is not cheap and the long run average is around about 11. So, that is the challenge in terms of overall index performance that the valuations are relatively full.

Latha: Now, we are on the anvil of a huge fiscal stimulus from Shinzo Abe and perhaps, tomorrow we are going to get another dose from the Bank of Japan (BoJ) as well. What are you expecting from the BoJ and would that change fund flows with more money going towards Japan, any impact on emerging markets (EMs) at all?

A: Japan along with Europe is our least preferred region, it is about 10 percent downside to our Tokyo Price Index (TOPIX) target price which is 1,190. So, the growth challenges are very immaterial. We are factoring in some additional quantitative easing (QE) from the BoJ tomorrow and indeed some fiscal easing. But it is in the context of very weak global growth and domestic growth. So, our overall view is that you will see additional QE from the BoJ tomorrow, but as long as it is in line with our base case view, it does not change our outlook for the equity markets.

Sonia: Drilling it down to some more sectors then, you did mention that you are positive on consumption related themes. I also noticed that you guys have recently added HDFC Bank   to your Asia Pacific ex-Japan focused list. We were Geosphere Capital just earlier in the day and Arvind Sanger was telling us that now, perhaps the worst of the banking problems seem to be behind us. Would you concur with that view about the Indian banks and how would you approach this space as a whole?

A: The Indian banking sector is interesting in the sense that you obviously have the private banks and state-owned banks. There is the strategy for addressing the problems in the state-owned banks. But our view is that that will take some time to come to fruition. The private owned banks are benefitting substantially from a market environment that has improved cyclicality in terms of the upstream we talked about earlier and they are also in an environment where the household sector is not particularly highly leveraged in India. So, in terms of the ability to grow earnings double digits, they are much better positioned than the average emerging market bank.

Latha: You have spoken about banks but the standout performance in the finance space has come from the non-banking financial companies (NBFC). Notable names like Bajaj Finance   and even yesterday, Shriram Transport Finance Corporation   numbers were good. Larsen and Toubro Finance was not bad. Does that space attract you? There are the smaller boys like the Ujjivan Financial Services and the Equitas Holdings   who have been just recently listed.

A: They tend to be too small for our global clients to show a lot of interest in. But they fit within this overall story that I have been telling you about which is improved economic growth and with a cyclical upswing and a credit system that is not particularly highly leveraged. In fact, most of the last 10 years or so, the credit growth in India has been very muted.

Sonia: When we started the conversation, you did mention to us that you are noticing a lot of fund flows increase towards emerging markets. Is it the more sticky money or the long only fund interest that is picking up or do you think that more of that tactical money is coming into India?

A: In emerging markets overall, it is about 70 percent ETF flows that tends to be related to asset allocation, which is away from Europe towards emerging markets and there is relatively little money that is coming into actively managed funds. So at the moment it is more of an asset allocation switch.

Japan unveils $265bn ‘aeroplane money’ stimulus; will it help?

Japanese Prime Minister Shinzo Abe today announced his government would compile a 28 trillion yen (USD 265 billion) fiscal package, including stimulus measures such increased government spending and loan programs.

In an interview to CNBC-TV18, Michael Every of Rabobank said that velocity of money will be as important as the quantum of spending announced and that for the stimulus to be effective, the Japanese government should go out and spend.

“Do they actually have projects ready to spend that much money on over the next 12 months, if they don’t it is a paper figure and the bureaucrats who just sit there for ages working on how to spend it and it does nothing to the real economy,” he asked.

Terming it as “aeroplane paper money” as opposed to the helicopter money term that is increasingly being used for ballooning government spending, Every said that in the short term, it could push down the yen and boost Japanese equities.

Geoff Lewis of Manulife Asset Management said the government should coordinate its fiscal stimulus with monetary stimulus expected from the Bank of Japan Friday.

“But at least we are moving away from this emphasis on fiscal austerity combined with monetary expansion,” he said.

Latha: How have you read this, is it good enough to give a further boost to both the Nikkei and to other Asian stocks.

Every: We will probably get a short term boost because if the stimulus is as is same and is rolled out rapidly, which is questionable because you have to think do they actually have projects ready to spend that much money on over the next 12 months, if they don’t it is a paper figure and the bureaucrats who just sit there for ages working on how to spend it and it does nothing to the real economy, but with that caveat if it is ready to go then yes short term that pushes down the yen, short term that pushes up the Nikkei.

I do think it is interesting because Japan has sworn the line they won’t do helicopter money which is basically the central bank financing government spending or government deficit spending, this I guess wouldn’t qualify as helicopter money but is probably paper aeroplane money if you will and when moving in that kind of general direction they are just choosing to call it something else, but until we get a firm pledge or at least a nudge nudge, wink wink from Japan that they are going to be increasing the fiscal deficit continuously going forward and that will be supported by Bank of Japan (BoJ) until we cross that rubicon really or we get a short term blips in the currency and a short term blips in the stock market.

Reema: What about a coordinated effort. Do you think Bank of Japan is likely to join Shinzo Abe and announce monetary stimulus as well, because all the past measures taken by Japan have not really helped in reviving the economy. Now if you get a combination of a fiscal as well as the monetary stimulus at the same time and this coordinated effort, do you think is enough to revive the Japanese economy.

Every: No, not unless it is sustained as I just said and they are already buying a ludicrous quantity of Japanese Government Bond (JGB) every month. I do think they will probably have to further tweak the policy they have got increase the buying from a ludicrous to a ridiculous level and at the same time possibly play around with the negative interest rate that they have got, maybe in terms of how that passed through to the banking sector and on to businesses and consumers for example.

But unless there is a pledge to make this a sustained effort all we are looking at again is a one year and then we go back to normal again. It won’t permanently changed the equation until people see that you have got fiscal policy and monetary policy lined up permanently rather than just the 12 month, I mean if 12 month from now the government says okay now we have to start raising taxes again in order to try and balance the books what you have achieved, absolutely nothing.

Nigel: We are just getting this news in terms of some stimulus at least coming in, is it enough or are you expecting some backup to come in from the Bank of Japan later this week and what’s your reading?

Lewis: I think it is good news that we are seeing movement on the financial front though I agree with the comments of the earlier speaker this should be coordinated, it should be on greater scale, but of course it is impossible to reach those kinds of agreements, but at least we are moving away from this emphasis on fiscal austerity combined with monetary expansion. We will get into towards the limit of monetary expansion, so I think is good news Japan is going it alone, but also we will see more reliance on fiscal policy whoever wins the next US election.

We are already seeing the ditching of austerity by the new government in the UK, so I think politicians are finally waking up that when interest rates are so low, when there is a big deficiency in global demand it makes no sense just to use the monetary policy lever. When I used to work at the UK Treasury, we always looked at the monetary policy, fiscal policy mix. We discussed things with the Bank of England, which didn’t act in isolation so this is good news.

Latha: The global equity market risk assets almost since February have been having an uninterrupted rally and it has only picked up in the last 4 or 5 weeks. Do you think now we are going to see further highs in all risk assets, the Wall Street indices touching new highs, Emerging Markets (EM) indices like us for instance the Nifty is just within shouting distance from that 9,100 mark that it touched couple of years ago. Do you think now all risk assets will head towards new highs?

Lewis: Well, I don’t think it is going to be off to the races. Our thinking has always been the global economy will show some improvement, the US will get back on to its feet and that returns in 2016 would tend to be backend loaded, so they are coming sooner than we thought which is a little bit surprising, but it is the direction that we had anticipated. There are conditions for big rally.

It is not going to be off to the races with the market, I don’t think but the economic news has picked up to the economic surprised indices to the G10 economies and now well into positive territory. Monetary policy still remains very, very accommodative so I think the background is improving for risk assets and that has been reflected in markets. So I think it is a rationale response, but I don’t it is the start of a big bull market.

Valuations stretched but mkt will stay afloat on liquidity: CLSA

Indian market valuations have started to look stretched given the run that has taken place in prices and only a moderate bounceback in earnings.

But CLSA India Strategist Mahesh Nandurkar says that given the easy liquidity situation, the market screen is likely to stay green in the short run.

“The global liquidity environment will continue to remain conducive,” he told CNBC-TV18. “In a liquidity rally, it is difficult to tell when the market will turn.”

But over a 12-month period, CLSA expects the market to post flattish returns. “One cannot hope for these unreal valuations to sustain forever.”

Overall, he expects earnings to grow in single digits this quarter and about 12-13 percent in fiscal year 2017.

He also discussed his view on various sectors saying he would prefer IT to pharma. “Results from the cement sector have been encouraging so far.”

CLSA re-iterates its underweight call on telecom and select overweight on real estate, he said.

Anuj: The question we have been asking for last three or four days is liquidity versus valuations. Liquidity is supporting the market, valuation wise the market is at top 3 or 4 percentile. What wins from here?

A: I completely agree with you. The recent market run that we have seen is largely driven by the liquidity factors and the sentimental factors. However, this is something that has not happened only in India, it is a global phenomenon which has been unfolding in the entire emerging markets world. And a lot of people get surprised when they see that despite the big run that we have seen here in India. Indian markets in US dollar term have actually underperformed the Asia ex-Japan or the Morgan Stanley Capital International (MSCI) emerging markets. So, it is basically liquidity driven. Therefore, to answer your question where from here, one has to look at the same factors in terms of the liquidity events and how it is going to unfold going forward.

My own sense is that the global liquidity environment should continue to remain conducive. In fact there are certain factors within India as well such as the expectations of a dovish Reserve Bank of India (RBI) Governor and therefore more rate cuts in India, a possibility of the fiscal deficit targets also being revised upwards by the government. So, my sense is that the valuations are in a stretched category but it can sustain at that level given all these other factors.

Latha: Sometimes this begins to feel like the 2006-2007 period and while those periods were perhaps supported by growth this period is being supported by almost uncontrollable stimulus. Just heard about 27 trillion Yen or above stimulus from Japan may come later today itself and aside from that Kuroda by Friday may announce an additional 20 trillion Yen in terms of stimulus, the Fed will not hike, everyone is almost confident about that. Is there going to be a disjunct now then that the trader will have to respect the screen and go ahead but inventors could get bitten badly in the medium-term, if they bought now?

A: That is really a possibility. The thing with a liquidity driven rally is that it is difficult to really pin point when things become to turn adverse. As you rightly said now it feels like 2006-2007 and six months ago we were feeling like 2009 when the market was down like 10 percent. So, we are clearly getting into a phase where the market cycle times are very short and these can be the risk going forward.

Therefore, my sense is that a lot of focus is also getting towards the fact that the global fiscal stimulus. So, far over the last nine or ten years or so since 2009 we have been focussing on the global monetary stimulus by the various central bankers and now the market expectations have moved towards fiscal stimulus and with the possibility of a fiscal stimulus coming in from the US after the elections and maybe from UK etc. So, that is next phase.

So, so long as the market has something to look forward to this liquidity environment can sustain, but one has to clearly keep in mind that this can’t sustain forever.

Sonia: The fundamental pillars of every bull market is the growth in earnings and in that context there is a lot left to be desired at least in this quarter’s earnings so far. How did you read into the events up until now?

A: We haven’t really seen that many companies reporting so far as yet, but as a broader trajectory I feel that the earnings growth is under the recovery stage here in India. Last two years were almost zero percent earnings growth. This quarter maybe in low single digits, but possibly as we go into the third quarter and the fourth quarter helped by the base effect the overall earnings growth would get into a healthy double digit and for the full year FY17 we should be at about 12-13 percent kind of an earnings growth. So, it is a steady improvement although still weaker as compared to where the consensus expectations are but on an absolute basis, a positive trend.

Anuj: The stock that we are discussing since morning is Dr Reddy’s Laboratories . I wanted your thoughts on the pharmaceutical space. Have the analyst community got it wrong in terms of a couple of stocks here. Dr Reddy’s and Biocon   , even CLSA for example for the longest has a sell call on Biocon but we have seen such a phenomenal run, Dr Reddy’s on the other hand is a favourite for lot of analysts but we have seen such a marked disappointment in that one. Where do you stand on this pharma space as of now?

A: I will not be able to comment on individual stocks, but pharma space has clearly taken a beating in terms of the investor sentiments. The big volatility in earnings has clearly eroded the multiples that it should trade at. My sense is that going forward the investor community will probably have to weigh the pros and cons of pharma versus IT which both are probably export oriented and our house view is that we are more inclined to go with IT than pharma at this point in time.

Latha: Overweight on IT despite the kind of results we got?

A: The thing is IT sector is still one space where I see the valuations still in the reasonable zone. Yes, the results have been bad and also there is this headwind about the Brexit fears spreading to the rest of the Europe and possibility of some disruption there as well. But I feel that on an overall basis the value versus growth equation still looks quite reasonable for many IT companies. I don’t say for everyone but there are certainly definitely some bottom up ideas where the value seem to be emerging.

Sonia: What is the reading of the cement numbers that have come out so far because they look exceptional especially for the likes of Ambuja Cements   , UltraTech Cement   , HeidelbergCement India   do you think this is a multiyear up cycle that we are looking at in cement and how are you guys positioned here?

A: On cement some of the result that have come up so far have been encouraging no doubt and we feel that this is one of the sectors that we will clearly see when a long term improvement both in terms of the pricing power, volume growth and the earnings before interest, taxes, depreciation and amortisation (EBITDA) per tonne. One headwind here once again as is the case with the rest of the market is clearly going to be the valuations. But I feel that given the fact that ultimately if you look at from the overall government policy perspective and given the fact that the importance of job creations I feel sooner rather than later the government will have to take up some policy measures that would essentially help the housing sector because that is really the biggest job creator and any place on housing sector including cement we should continue to do well for a long period of time.

Anuj: Two calls that have worked for you, one is underweight on telecom and the other is overweight on real estate. Would you carry forward these calls at current levels?

A Yes, I would sort of go ahead with these two because I feel that the telecom sector is going to undergo a big disruption with a potential new big entrant and that will keep the investor sentiments at a little bit subdued levels at a little bit subdued level for some time to come and on the real estate side I won’t really say that the sector as a whole looks interesting but there are certain bottom up ideas which look interesting which also fit into the theme that I mentioned earlier which is the focus of the government on housing will return at some point in time and also there are some other factors like the expected rate cuts and the expectation of a dovish RBI governor etc.

Latha: So, what are you factoring in by way of earnings growth and more importantly multiples for this market. What could be market returns in a 12 month period?

A: Multiple is something as I said is a clearly in a difficult to map kind of category and as I said one cannot hope for this unreal valuations to sustain forever. So, if you will ask me for from the point of view of the next 12 months or so there could be periods of better returns but over the next 12 month period we have a very cautious view on the market. I feel that over the next 12 month period the market could just be about flattish.

Sonia: As far as the next trigger for the market was concerned a lot of people were hopeful of GST coming through but now there seems to be a lot of issues that still need to get ironed out. If the GST bill does not get passed within this session itself then would that be a big dampener for the market or do you think the market has moved on to other things like earnings?

A: No, if that doesn’t happen it will clearly a dampener. I don’t think that the market has moved on. We still get a lot of questions, lot of queries from a lot of investors. So, there is still a lot of interest in that but yes, apart from that some of the other triggers that the market would be looking forward to would be, let us say, who the next governor is, what his policies would be, what kind of rate cuts could be expected, what would be the type of fiscal roadmap the government adopt. So, there are something else as well. But yes, if GST does not happen I would still believe it would still be a negative.

Anuj: In case we see withdrawal of funds in the second half or maybe next year what is the base for this market? The last low of course was 6,800 or near about 7,000 on the index. What is the worst case scenario right now at the index level?

A: I would say that Indian story still continues to look pretty attractive in the global context and especially in the emerging market context. So, I feel that there is going to be buyer support that is going to come through if the market were to sell off from the current levels. So, at this point in time I wouldn’t envisage a more than let us say 7-10 percent kind of downside.

Latha: If it is flattish equity return over a 12 month period should we be putting money in fixed income and actually fixed income has returned very well over the past four-five months?

A: Yes, I feel so. I feel that over the next 12 months there is a good probability of getting better returns from the fixed income than from equities. I must sort of add a caveat to that is that a big factor that we are still debating at this point in time is the global liquidity factors and it can sustain for a longer period of time but as I said my base case will not be to play that. Although in the near term it could still very well play out.

Moving to GST regime will be beneficial for economy: DBS

Moving to a GST regime will be beneficial for the Indian economy on multiple counts, and though its impact on growth will be negative in the short-run, it is expected to be positive in the long-run, says a report.

Hopes are high that the long-standing Goods and Services Tax (GST), which has been pending for more than a decade, will be passed in the ongoing monsoon Parliament session.

“Failure to pass the Bill in the ongoing monsoon session could puncture some of the recent positive sentiment,” DBS said in a research note.

The GST Bill, which intends to convert 29 states into a single market through a new indirect tax regime, was earlier planned to be introduced from April 1 this year, but the deadline was missed as the legislation to roll it out remains in limbo in the Opposition-dominated Rajya Sabha.

According to DBS, GST has growth, inflation and fiscal implications. I

mplementation of GST is expected to lead a temporary rise in inflation, which will typically last a year.

The impact on inflation will wear off as these prices enter into the base, softening inflation the year after.

Similarly, on the growth front, the GST impact on growth will likely be negative in the short-run but positive longer-out given the benefits of a unified taxation regime.

Moving to a GST regime will be beneficial for the economy on multiple counts. While a single-rate system would be ideal, it could prove difficult to pass, the report said.

The government faces a fine-balancing act , as it works to reach a consensus with the state governments and opposition parties, whilst also ensuring higher taxes don’t impinge on growth/ incomes.

The odds are high that the authorities initially adopt a multi-tiered and diluted version of the GST.

If so, a move to a single rate remains possible over the medium-term.

Either version is preferable to the current VAT, DBS said.

Economy would’ve benefited if Rajan had stayed: Subbarao

Terming Reserve Bank Governor Raghuram Rajan’s decision to not seek an extension as ‘surprising’, his predecessor Duvvuri Subbarao says the economy would have been benefited immensely if he had continued.

Speaking to CNBC-TV18′s Latha Venkatesh, Subbarao said Rajan had done a great job as RBI governor. “He [Rajan] has done a great job and our macro-economics would have benefitted immensely if he had continued but that’s not to be,” he said.

Rajan’s stint as RBI governor has generally been hailed by most as positive but it was percieved to be marked by simmering tensions between the RBI and the government on issues of monetary policy and the outspoken nature of the central bank chief.

Subbarao spoke to CNBC-TV18 soon after releasing his book Who Moved My Interest Rates, in which he also touched upon his own sometimes-frosty relation with finance ministers in the erstwhile UPA government.

Calling for “more understanding” between the RBI and the government, the ex-governor said there was a need for the two to discuss more.

“There should be greater understanding on both sides and there should be more discussion at all levels between the government and the RBI so that their differences are understood, discussed and if there is disagreement, it is based on professional grounds,” he said.

In the book, Subbarao made references to instances in which he thought UPA finance ministers Pranab Mukherjee and P Chidambaram were directly or indirectly pressurising him to cut interest rates.

He also said he believed FM Mukherjee did not want to grant him an extension, something that was given to him on the intervention of then Prime Minister Manmohan Singh.

Liquidity is king in short-term but earnings worrying: Udayan

Speaking to CNBC-TV18 Consulting Editor Udayan Mukherjee believes that Axis Bank   ‘s poor numbers have been muted. He believes that in a different kind of a set-up, the bank would have fallen badly. The bank should trade below Rs 500, he said, adding that there are wrinkles in the bank and HDFC Bank   ‘s numbers.

He believes liquidity is king and traders will be best served by focussing on it. Earnings will have to demonstrate some kind of power. “Otherwise the near-term strength will fail,” he said.

This earnings season, the IT numbers have been poor, he said. “Last quarter was good and it had raised hopes in terms of earnings.” The market expectations of earnings have been in the range of 16-17 percent.

If private banks and IT have to be marked down in earnings, then 16 percent eranings growth is difficult, he said.

He also spoke about the Cairn – Vedanta   merger terms saying that there is an arbitrage opportunity. “Most of the upside may have played out already,” he said.

The market had an inkling of the merger terms. Now, it becomes a play on crude prices and zinc, he said. “It is a sell on news that is happening now. It doesn’t happen in a firm bullish groove.”

Talking about global news, he said that trigger will be the Fed meeting slated for this meet. He sees the Nifty at about 8700 this week. “It is a risk-on, technicals play,” he said. It is not instructive to talk about macro headwinds now, he added. “Focus on cash,” he said.

Sonia: After a long time we are seeing some increased stressed loan formation in Axis Bank. How do you think the market will react to that and do you see the spirit of the private sector banking sector get dampened because of this?

A: It is technicals versus fundamentals out here. Had it been a different kind of a set up with not so much of liquidity sloshing around, you have seen Rs 4,000 crore of Foreign Institutional Investors (FII) inflows last week that tells you that there is a serious amount of cash commitment in the market and therefore the reaction to Axis Bank’s poor number and they are unequivocally poor has been fairly muted. In a different kind of a market set up Axis Bank might have fallen 10-15 percent very quickly after those numbers. So, that holds true for most of the market.

The fact that we are sort of buffeted by fairly significant liquidity at this point in time but some of the fundamental numbers which have come in the first 10 days of the earnings season actually have been fairly disappointing. Axis Bank itself every quarter we speak about how private banks have ring fenced the problem and we have brokerage reports coming out and saying maybe the stock could double because the worst of the problem is behind us and then out comes a quarter where they actually add significantly to the slippages. Now, I don’t buy this argument that it was an expected problem because if it was an expected problem it was an spoken you would have spoken much more about it or heard much more about it but what we hear is actually from private banking that the problem is behind them and therefore the stock should get rerated and this quarter’s numbers from Axis flies in the face of that.

So, as you guys were discussing earlier it is not just Axis Bank there are wrinkles in the Kotaks and HDFC Banks of the world too in this quarter’s numbers and this is about your strongest set of companies in the system. The Kotaks and HDFC Banks and even Axis Bank more than ICICI Bank. So, disappointing set of numbers. Axis deserves to now trade at less than two times book after these numbers with earnings being marked down quite significantly I imagine. So, I don’t think it deserves 2.2 times book, it should trade below Rs 500 for sure.

Latha: As you say there is this tussle between liquidity and valuations that is being played in the macro markets itself. How does a trader approach a situation like this when individual news still tends to be bad but you can’t argue against liquidity?

A: The trader has to follow liquidity. In the near term that is king. All of us have seen it many times before. You can cry till the cows come home about wrinkles in fundamentals and valuations but in the near term cash will always win over. With an accent on in the near term – I keep saying this – eventually earnings will have to demonstrate some kind of power otherwise this near term strength will fail. That is the way of the market. But as a trader if you are looking at the screen and watching those FII numbers into emerging markets and into India there is no point fretting about what is happening with valuations or any disappointment with earnings. This market or the screen has not taken a single false step over the last few weeks, last week included. So, the trader will probably be best served by ignoring all of that and focussing on liquidity for now.

Sonia: But the question is where the leadership can come from next. First, it was the IT sector that disappointed in earnings. Now it is some of the marquee private sector banks. On IT particularly, how did you react to the numbers?

A: They were very poor. That is the problem, last quarter was so good, it raised so much hopes in terms of earnings, I got very hopeful too, I hope it is not – maybe by the end of this earnings season you will also talk in hopeful tones again but the start has been very poor. IT plus private banking is about 40 percent of the market and you have not had good news from that. Typically it is the other way around. IT and private banks actually start off the season well and you say, oh, very nice season and then towards the end you see some of the skeletons come out. This time the season has not started well. There are seven or eight disappointments in the first 10-12 numbers which have come out from the Nifty companies.

IT has been disappointing and it is basically saying if you analyse what the large companies are saying out there, they are saying that they will grow this year by no more than 10-12 percent with some kind of slippage in margins. That does not make for very good news in terms of earnings growth that you should be pencilling in. All of us are expecting 16-17 percent earnings growth this year and if IT has to be marked down in terms of earnings and if private banks have to be marked down in terms of earnings then it is a bit of a stretch to get to 16-17 percent earnings.

So, IT there is no case for upward rerating. Right now if you have to have IT in your portfolio you have to avoid the weaker players in the transition because all these companies are trying to transit into more digital oriented businesses and some of them will make the transition over the next four to six quarters but during this phase the most pain will be felt by the weaker companies in the last year which is your Wipro’s of the world. In the past you have seen that in transition phases you don’t do very well and you want to stay out of midcap IT companies which have vanilla commodity kind of businesses. This might be painful year for them.

Sonia: How did you react to the other news flow which is the Cairn-Vedanta deal and individually on both those stocks the rally has been very good up until now. But do you see further upsides?

A: Difficult, there might be a little bit of arbitrage which Cairn might reflect later because of the sweetening of the deal. So, there could be some arbitrage upside there but that is a pure trading opportunity. As you said most of the upside might have played out already. Lot of people in the market probably knew that the sweetening of the deal is going to happen because of the sheer price performance that we have seen in Vedanta. The stock was Rs 60 in February and now it is Rs 180 or Rs 170. So, the stock has trebled. So, you can’t tell me that this market did not have some inkling of this kind of a deal happening. So, the price upside has taken care of a lot of the good news which was expected to come in on Vedanta. Now, it becomes a pure play on two things, crude oil prices and zinc prices and that is the best way to look at Vedanta when crude goes up or prices stabilise globally or go up you will find that Vedanta is performing.

I know a lot has been said about how it helps their balance sheet now with more cash coming in or access to cash coming in all of that might well be true. But Rs 170-180 captures most of the upside and that has been another significant thing about this market and it is perhaps the only mild wrinkle on the screen which one can see which is otherwise displaying very bullish tones for a trader. It is that most of the stocks that are actually not going up after the news is announced you see today Cairn and Vedanta actually not moving higher post the announcement of the news. You saw the public sector undertaking (PSU) banks slipping after the announcement of recapitalisation and I hope that does not happen if Goods and Services Tax (GST) announcement comes through as well. It is a bit of sell on news which is happening after good news coming in and that typically does not happen in a very firm bullish groove which the screen is suggesting at this point in time. So, while it is true that the market is dispensing with bad news with greater ease because of the liquidity this aspect of stocks actually coming off on good news is a little worrisome.