Share Bazaar News India

Jyotivardhan Jaipuria, Head of Research at DSP ML believes markets will go back to the lows of January, in the next few weeks by April. Beyond that he expects the correction in terms of time because valuations need to come off. Earnings will grow, but at a much slower pace, he said.

Devina Mehra of First Global is of the view that it's more likely the beginning of a bear market, because in a bull market, one would want to buy at every dip. It's just more like a sell at every rally instead. Along with downside on the fundamental side, she also sees earning’s downgrade, she said.

Excerpts from CNBC-TV18's exclusiveinterview with Jyotivardhan Jaipuria and Devina Mehra:

Q: What’s your sense, do you reckon there is more downside to the market?

Mehra: Last time when I was on your channel, the question had been raised that whether we are looking at a correction in the bull market or we are looking at the beginning of a bear market and going by what has happened since, the market has been extremely treacherous.

It's my view that it's more likely we are looking at the beginning of a bear market, because in a bull market, you would want to buy at every dip and it's becoming more like a sell at every rally and there is downside on the fundamental side, you will see earning’s downgrade and there is definitely downside on the market side as well.

Q: If you were suggesting that this is a bear market which has begun, you would think that the 4500 Nifty which most people reckon is the bottom of this market, will not hold or will get retested at least?

Mehra: My view is that it’s the beginning of the bear market but let's see, the immediate targets would be possibly about 10% lower, Sensex maybe about 15,800 and similar things for the Nifty. But my real concern is that things are not looking that good fundamentally, if you look at the Q3 results, if you look at just the aggregate numbers, they seem to look okay that you have a PAT growth of 20% but you net out the other income components and companies that weren’t listed last year and then look at it, then you have a PBT of other income growth of 9%. I don’t think people have people have realized that about single digit PBT growth and the base effect of last year’s Q3 was spectacular and it was more difficult to grow, but the fact is that there is a definite slow down and there is a slowdown on the general GDP numbers also and this slowdown doesn’t have to be very dramatic.

If I am a banker or a credit analyst, I would say fine, if the GDP growth instead of 9% goes to 7.5%, there is no disaster, but from the corporate earnings point of view and the market point of view, there is some slow down, there is margin compression. On top of that you will see multiple compressions, so things start to look much worse then they would look for a banker.

Q: What’s your sense, Devina says that it’s a possibility that we could be in a bearish kind of a market or a bear market, and do you reckon there is more downside here?

Jaipuria: Markets will go to the lows at least to what we saw in January, we will probably get that coming in the next few weeks possibly by April, beyond that, I would expect the correction in terms of time because you need valuations to come off. Earnings will grow but at a much slower pace, so to that extent, valuation compression could happen if markets do nothing for the next one year, and remain in this range, you will get a valuation compression coming through. That’s what I would really expect in the market.

Q: What kind of downside do you expect if there is more price correction along with the time correction that you speak of?

Jaipuria: We will get it going down to at least the 15,000-odd, which we saw in January, and then we have to see how the global scenario pans out. If things continue to remain very nervous, then you could see downside being further than that or you could get markets drifting in the range. We need people to get less bullish on the market; people have made so much money in the last 3-4 years, that to some extent expectations have shot up, so we need them to come off, this whole complacency which was there the market will keep giving a return of 30%, that has to go away and probably that’s when we will start seeing the fluff go out.

Q: How soon is it before you think a real downgrade starts happening in terms of earnings, because this quarter, people haven’t downgraded too much on the many large caps and visible midcap companies? Do you think it will start at the coming quarter or the analyst will be slow in downgrading earnings and will be surprised by actual earnings?

Mehra: That’s hard to say, because you are asking me to take a call as to when analysts will realize what’s really happening on the ground, but my call is that the downgrades have to come. Whether they come this quarter or at the beginning of the next quarter is not that material, because the fact is that earnings have slowed down, and the aggregates also tend to skew a lot, because there are a few large companies with large earnings like ONGC or IOC which can skew total of that matter or PE ratios. But even if you look at what an average company has grown by, it's not disastrous yet, if you look at EBIDTA growth, the average company has about 12% as against 15% same quarter last year, so it's not disastrous. But there is a significant slowdown and I don’t think that’s factored in to the earnings numbers yet which is why the valuation ratios don’t look that bad.

Always in an earning’s slowdown, as a general rule it is the midcap which see a bigger slowdown, it's just that the nature of the business is.

Q: How much of your skepticism or caution on the markets stems from the global space, do you see things getting worse in the global arena or do you think the January bottoms will hold for most markets?

Jaipuria: I guess again it’s the same thing. Basically the US is slowing down and US is getting into a recession, for the real dramatic slowdown, the last time we saw this was in 2000. Infact it could be worse than what we saw in 2001 and it could be more similar to what we saw in 1991 and this is coming on the back of 3-4 years of a very strong expansion in economies across the world and this is coming on the back of a very strong performance in stock market. So for lot of people, lot of the youngsters they have not seen a bear market for ages, so they don’t know what a bear market is.

So to that extent things could probably get worse and analysts may not forecast till it is too late and that’s my worry that all of us keep looking at this as a bottom, do we buy the market because in the last 4 years every dip in the market has seen much sharper rallies few months after that. So most people are still wanting to buy at every dip rather than sell a rally. So only this couple of short-term rallies don’t sustain that people will start getting worried and will say okay, there is a problem with the market.

Q: How worried are you about the global situation, for equities this year?

Mehra: Our view on equities overall globally also is not looking too sanguine and the India view really ties in with that. Infact the best asset class currently is looking to be the interest rate linked classes, which is the T-bills and the bonds, so interest rates world wide have been headed down so that appears to be the best place to be.

Equities are not looking too hot and within that India is also looking like an under performer at least as of now. This calendar year India has been even among the emerging market, even among the bottom performers, that is part of the story. We participated in the global rally and now the things are slowing down globally, you would see an impact here.

In terms of the fundamental linkages, India is not as export-oriented as many other emerging markets, so the fundamental linkages on the economic front are not as strong and infact it’s been our call since December that the rupee had topped out and you would see rupee depreciating. We like some of the export oriented sector, especially the IT sector among the large sectors that is looking better than the market as a whole.

Q: How long do you think this bearish patch could remain because even people who admit or concede that things are not looking good, say that we might have a 2-quarter bear market and by the end of the year, we’ll be fine. Do you agree with that in terms of time assessment?

Mehra: I think that’s more hope speaking than anything else. If one looks at a long-term snap shot of the market, you will see that in 4-years you had gone up about 7 times or so. So a down year is not really out of something that you should expect, so it cannot come as a great surprise or absolutely unexpected.

Q: What’s your assessment of the kind of time this difficult patch might last?

Jaipuria: If we look at the market on a 12 month basis, it’s still giving you a 25% return, which is still very good. The markets in the last 6 months is giving more than 20% return, so to that extent we are still seeing returns that are decently healthy. I guess 2008 is going to give a negative return overall. The question is really how much lower than the January lows will be seen in the markets. My guess is probably we may end the year around the January low’s levels.

Q: Do you see significant scope for P/E compression for this market, given what your expectation from earnings are in 2008?

Jaipuria: Lot of negative returns we get this year are going to be because of the P/E compression and this P/E compression will be relative to the beginning of the year, because at the end of the year, we still expect this year to give an earnings growth of around 15% for the market. So what we are going to see is the whole 15% getting compressed from P/E plus a bit more of compression because markets will give you an negative return. So from its peaks, P/Es will be compressed quite a bit but they’ll be much higher than what they were 3 years back.

Q: How do you play interest rate sensitives now because PSU banks have started cutting rates across the board much that the RBI has not spoken about it, but banks have fallen, real estate stocks are down. What is a good way to approach rates and rate sensitives now?

Mehra: PSU banks has been right on the top of our buy list or the outperform list for the last couple of quarters, because our bet was that if the interest rates were headed down and the yield curve was going to become much steeper which is very different from where the yield curve was last year when you had short-term and long-term rates almost equal and that is disastrous scenario for banks. Now you have the yield curve becoming steeper which essentially means that the banks can borrow at the short-end and lend at the long-end and there is a differential between the two. Yes they have started cutting rates now after this huge bout of outperformance, you would see more likely market performance from banks because a lot of it is already in the price.

So we do not see as banks being very outstanding performers hereon. For the others like autos which are typically classified as interest rate sensitives one has to see how much of this slowdown was really only due to the interest rates and how much was it actually due to the otherwise demand compression because we are seeing demand compression not just traditionally classified autos and things like that but other sectors like cement and construction we see even steel dealers saying that receivables are getting stretched. So there is something more to it than just the interest rates being where they have been.

Q: Interestingly, bank stocks have actually come off this week after they started cutting rates-they cut rates for the second time, how would you explain that?

Jaipuria: Yes, what we have seen is lending rates coming off, but deposit rates have remained where they are. That will effectively lead to a compression in margin for the banks and that is why banks came off. My guess is that as we move into the year at some point maybe probably in April or something we will see banks starting to cut deposit rates also, which is where their margins will go back to higher levels and that is when bank stocks should start performing.

The other reason that bank stocks have come off is partly to do with fears that are in the Budget, they may ask to give some relief for agriculture loans, which I think probably is not going to happen to a large extent.

Q: Do you expect the Budget to be a big event for the market at all or it will come and go and two days after that nobody will talk about it?

Jaipuria: I do not think Budget will be a big event. Because policy level in some sense now has got crystallized, it is more transparent so people know what to expect. Many reforms of the government have to come outside the Budget and if we see no tax rates, they have not come down to levels where you cannot have dramatic changes in tax rates. So to that extent I think the Budget and its impact on market has vened over the last couple of years and into the future it will keep vening. So it is just one of those minor events which historically people have paid lot of attention to, so they would continue to talk about it.

Q: Are you expecting any sweeping tax changes corporate tax or personal tax which could change the mood of the market this time?

Mehra: I think the Budget should not be a mega event as it had become over a period of time because this is really only a statement of account for the country. I think in this Budget in particular, being an election year etc no news will be good news. The real changes that I would want from the Budget is on the administrative reform front, which is whether on the implementing the Kelkar committee on tax reforms or if you look at the part A of the Budget on better utilization of the funds that we keep allocating to various good causes but not much of it manages to reach the people that it is intended for. But I doubt whether great strides are going to be made in that direction because I think administrative reform is the area where the government should be focusing on.

Q: Do you track JP Associates at First Global that stock has collapsed almost 50% following that controversy, which came up after a conference, have you had a look at that one?

Mehra: I have not had a look at it lately.

Q: What is all this talk about potential HDFC Bank and Centurion Bank merger, if it were to happen hypothetically speaking how would you look at it?

Mehra: This is not something I have studied in detail, so I would not like to give a really off the cuff reply.

Q: What is the best way to approach the market now? If your view is that we are in for a difficult year from equity’s perspective, how do you hunker down and ride this out?

Jaipuria: One is that investors have to be clear that returns are not going to be what they have been over the last three-four years, because the last three-four years were the years of extra-ordinary returns somewhere that needs to be averaged out, so probably this is the year that some part of that averaging takes place. I think people should look at companies, which basically have visible earnings growth and which are not dependent on global growth environment, because globally things are going to be weak and weaker growth in India and so unique things that have got visible growth will be immune from these.

Q: Just to sum up you would be very surprised then if in 2008 you saw those highs of 21,500 again?

Mehra: The way the market looks, yes. But as I have said earlier that right now the way the markets move it is difficult to take a twelve month view at a time because very often something that you dislike heartily in terms of sector or a stock at the beginning of the year might look like a great buy in the middle of the year as happened with banking or if you look at construction again every two quarters your view can change. So that part remains, but definitely whether it is December or before that things are not going to look very good for the market.

Source: Moneycontrol.com