The outlook on the Indian market has worsened in the past few months due to macroeconomic concerns, which have been hindering the growth of the economy. Analysts, however, expect the market to recover at least in the second half of the year.
Speaking to CNBC-TV18, Neelkanth Mishra, head of Equity Strategy India, Credit Suisse, said that the market may continue to languish and next 3-4 quarters will be sluggish for market. “Expect Sensex to dip to 16,000 level,” added Mishra.
Below is a verbatim transcript of his interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee.
Q: What is your sense as sentiment is not great out here but do you expect a recovery any time in the second half or do you think this market will continue to languish?
A: I think the market is likely to continue to languish. Most people are negative on the market but my sense is that almost everyone expects second half recovery as if it would appear magically out of nowhere. Even globally the trends don’t seem very positive at all. We are all aware of the concerns in the US, we are all aware of the concerns around Greece and how it can become a contagion.
Credit Suisse has notched down our growth estimates for China as well and the fear is that the economy there you will see sluggish growth for the next two-three years so even globally the trends aren’t that positive and we aren’t really helping ourselves by slowing down legislation by not resolving many of the constrains that are slowing down the economy. I do not think second half will be any better.
Q: The question about this languishing of the market though is down to the fact of whether we will be punished within this range for the next few months again or whether this market has serious downside risk, something that people are not cognizant of at this point?
A: No. I think on multiples, we are still at quite reasonable level, so it is very difficult to justify material downside. Even six months down the line, you will see the market trading FY13 numbers, which look very reasonable.
The likelihood is that we will end the 12 month period with the market still being where it is or maybe slightly higher but in between as it dawns on us that we are in for a sluggish growth for the next 4 to 6 quarters at least and that there are several concerns emerging, it is quite possible that the market will see a dip downwards.
Q: That is an interesting point because that is one thing up for question how much of a downgrade we are looking at in terms of macro growth what is your expectation right now of the kind of slowdown we see on GDP and the flow through for something like the equity market?
A: Right. We were among the first to go sub 8, our economist cut estimates in November last year it was 7.8 they revised it and notched down this year to 7.5. My own fear is that there is downside to those estimates. I think the bigger disappointment, which will come out when we start looking at FY13 numbers because there seems to be an element of entitlement.
When we expect that we will keep growing at 8% plus growth is very hard to achieve. Very few countries have delivered that for a sustainable amount of time and the fastest growing emerging markets actually struggle to see that kind of growth. I think the medium term expectations are where the market may actually be quite a bit more optimistic than I am. This can also change.
In India things are really very volatile especially because there are so many things that are depended only on us. Our correlation to global GDP growth is the lowest among emerging markets. Our markets are also unrelated. A large part of inflation is unrelated to the world markets so a lot depends on what we do.
We should come to a consensus on various reforms passing important legislations, making the right decisions and on all three fronts so far we have been disappointed. If this changes over the next 6 months, then the medium term expectations start looking better and the market can actually do well. My own fear in the reason why I am saying more downside is I don’t expect any more changes in that front.
Q: What is this growth expectation tying in with your outlook both on what inflation does and how you would approach the rate sensitives then?
A: Inflation and growth in India aren’t really correlated, if you look at past 50 years also there is very little link between the two. Inflation in India is being driven by many structural factors; there is very rapid wage growth. We put out a note using labour bureau data where we showed that agricultural wages is about half of India’s working population, which saw a 45% jump in wages in the last two years. They have outpaced the CPI for agriculture labour for the first time.
So, there is lot of disposable income generation happening at levels where interest rates don’t really have an impact. So, I think inflation will be higher for longer, it may come down from current levels, if the globe really sees what the markets are showing. So if global commodities come down, we could see a dip down sometime later this year.
However, I think it will stay higher and much above RBI’s stated target. On the rate sensitives, we have already started seeing some impact. If you see auto sales coming off, my sense is that the marginal buyer who was buying with leverage, has started to rethink his purchase. The same thing is not happening at lower levels. For example, two-wheeler sales are still robust because leverage is a lot less important.
Q: What do you expect the flows situation to be over the next 3-4 months into India because we have had string of these global investor conferences, not too much money has come in post that, do you think the view on India will remain quite dim on a relative context for another few months?
A: That is the trickiest question and that is something that I grapple with continuously because it is very difficult to forecast. There are two different drivers here. Firstly, India is largely unrelated to what is happening in the world outside, the only linkage earlier used to be on the risk appetite and how much people wanted to put into emerging markets. However, after the fact that we have come out of the recession quite safe, I think even that linkage doesn’t hold any longer.
So, it is quite possible that people see India as a hedge to world growth especially as one-third of our inflation is linked to world commodity prices. So that is one aspect that as world slows we see more inflows. Secondly, is I think the medium term expectations on India and optimism on India is still quite high and my fear is, we will continue to disappoint investors on that front. So it’s going to be a mix of both which will only emerge as time goes by. My sense is that economic factors will play much larger role and as we slow market is more likely to have downsides than upsides.
source-moneycontrol
Steven
management trainee-fundamental analyst
DENIP Consultants Pvt Ltd
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