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Sandeep Bhatia, Head of Equities, UBS, said the Sensex is unlikely to bottom around 16,000, it will go down to around 14,000. "The market is rallying on the belief that the worst is over as the Fed is bailing out US. The Sensex can go up to 17,500 but then it will go back down to 14,000."

He feels negative domestic economic indicators will take the markets lower. "The market may bottom out in April-May, if the US economic situation improves. However, it is likely to go back to old highs of around 21,000 by the end of the year."

The earnings season is unlikely to be driver for market sentiment, Bhatia said. "Q1 FY09 results season will be more important that Q4 FY08. However, guidance given by tech companies us likely to be very cautious in Q4 FY08."

Bhatia hopes RBI does not go in for monetary tightening to rein in inflation.

Excerpts from CNBC-TV18’s exclusive interview with Sandeep Bhatia:

Q: How are you feeling about the way the market has performed this week? Do you get the sense that some kind of base-building process is already under way?

A: I don’t think 16,000 will be the bottom of the market. We will test the bottom and the bottom is lower at 14,000. The underlined trends that have materialized in the economy in the last three months are not going to go away, in terms of improvement, at least till May-June. So, we will continue to see inflation at over 5% and continue to see weak numbers on industrial production growth.

With that in mind, the market will try to find a bottom but could probably be between 14,000-16,000 for some time. I don’t think we have hit the bottom, in terms of news flows coming from the housing crisis in the US. There could be some more news on the banking sector in April, which would test the confidence of this market.

Q: Is the market front running the bottoming out of the bad news, as equity markets tend to? Do you think this is a sharp and good-looking bounce that we are getting, in terms of the damage we have seen these past few months?

A: There has been a lot of damage. The markets are trying to create a rally on the belief that the worst is over and the action taken by the Fed is going to pay off very soon. Therefore, the markets should run ahead of the bottoming out of the fundamentals of the economy. That is clearly going to get tested in the near-term. I don’t think we are exactly out of the woods, as far as the housing crisis is going on in the US. To that extent, we would have some short rallies, but the market will definitely get tested. It would be very difficult to imagine a market, which would break the 17,500 barrier on the upside. The bottom could be tested at around 14,000.

Q: In a couple of days from now, we will be stepping into earnings season. Estimates are varied between 19-20% of the lower end and 24% growth for the very ambitious. What are you expecting to see from earnings this time around? Do you think the market has fully factored that in?

A: Earnings season is not going to be a driver for the market movement. I don’t think the April results season will move the market in any direction in a strong manner.

We are going to wait for a buildup of data rather than one single data point or a single results season. The real issue that the market is grappling with is whether growth is going to slow down remarkably from 8.5% that we have been achieving to 7-7.5%. The jury on that will only be out after the June result season starts coming in.

The April results season is going to tell you what we already know, which is that there is some sort of a slowdown happening in earnings. The guidance on tech companies that will come in first will be very cautious. The other companies or sectors will not give you a strong signal to either buy or sell. Therefore, this season is very much like the previous earnings season. It does not result in any significant market movement in any direction.

Q: Do you think 6.5% inflation is going to be something that is going to be a bitter pill for us to digest in the next few weeks?

A: It was definitely much higher than what we expected. Our view has been that we will see high inflation numbers till May. Therefore, we have some bad news to stomach until then. Inflation will continue to hover at about 5%.

I just hope that it doesn’t result in some sort of a tightening of the credit policy and RBI stands at the margin. Clearly, we are in an industrial slowdown and the monetary policy should not tighten from hereon. So, I just hope that we can stomach it without any change in policy stance.

Q: What are you expecting to hear from IT companies this time around?

A: We will see very cautious guidance. The rupee has weakened from the last earnings season. But given that they have hedged their positions, I would not expect any benefit from a weaker rupee. We will see a very cautious guidance saying they expect volume growth to be strong but the financial side there could be pushback and delays.

Other than that, I don’t think we would see any significant positive stands come through from the IT side. So, at the end of it, I would doubt if people would be in any position to take earnings up or down meaningfully. We would still continue to grope around in the dark hoping that we get clarity in the second half of the year.

Q: You would put IT down to under perform for the next few quarters or just a neutral?

A: If one takes a one-year’s view, I would put money into IT. The valuations have now reached absolutely compelling levels. The only risk we are now going to see is the complete weakening of the US markets. We do not expect that to happen. So, I would put money in IT.

The real issue for the markets is to find a leader or sectors that can lead the market in 2008. I don’t think that 2007 leaders will play as big and important a role as they did. Therefore, we need new leaders and new sectors to lead the charge. IT, in the second half, would definitely fit the bill if the US stabilizes and starts showing signs of improvement. So, that’s one risky bet. But I am ready to take it at these valuations.

Q: Who else might do that because there was a call for increasing positions to FMCG and maybe autos to an extent? This whole inflation concern seems to have turned that whole argument on its head. Do you think these sort of sectors have the potential for leadership?

A: No, I don’t think standalone FMCG or autos have the potential for leadership. This is not the index of 10-years ago, where FMCG was 22-23% of the index. It is clearly not going to be a leader.

As far as inflation is concerned, pricing power is definitely very positive on the FMCG side. We will continue to see 13-15% of topline growth. This year, especially if the market does not deliver positive returns, we could end up in 2008 having single-digit negative returns from the market.

It would be a big achievement for the market to deliver positive returns over and above the highs, which we saw of 21,000 plus this year. So, in the end, if we have a small negative return from the market by the end of 2008, these sectors will definitely standout as defensives. But to drive absolute returns in this market, we require strong earnings growth and cheap valuations. IT has cheap valuations.

Therefore, we need to wait and see if they can deliver strong earnings growth. If that happens with positive news on the US economy in the second half, then they would be the new leaders. If not, then the market will actually just go sideways for most of the year then.

Q: What might the markets do over the next few months? Is it going to be a situation where it gets worse before it gets better? Do you think we are just going to move about in a narrow or broad range before we finally find direction?

A: It clearly has to be in the backdrop of assumption about what happens to the US. The backdrop is basically two-fold. If the US economy starts stabilising by May-June, we will actually have the market bottoming out in April-May and then probably end the year with around 20,000-21,000, very close to the highs that we made in the beginning of January.

That would still not be a bad outcome given that for four years in a row, we had very strong market movements. This is what I would call a refreshing pause. The market is catching hold of some breath and just relaxing a bit after running for the last four years.

But if the outcome of the US economy is much weaker than what we currently expect, then the market can definitely hit lows that I don’t currently forecast, which is below 14,000. I hope that does not happen. Unfortunately, it is impossible to predict, because we will know only as time passes.

Q: How would you approach the entire ferrous and non ferrous pack now?

A: Coal is a bigger story than crude. The basic raw materials-coal and iron ore-will see a structural increase in prices for the current year and for the next two years. So, there is nobody in the world who can hide from that. To that extent, higher prices will get reflected. Like it or not we are going to face inflation. Unfortunately in India, we can’t play the iron ore and coal stories because there are not many listed large stocks. So, we are looking at users of these products and therefore it is steel. Here the situation is very complicated. There are some users who are integrated and some who are not.

Users, which are not integrated, will face margin pressure. There is no doubt about that in my mind. But for users which are integrated, there would be some kind of protection and they could even be beneficiaries as steel price rises. So, to that extent, we like Tata Steel and Steel Authority of India, which are the most integrated players.

Source: Moneycontrol.com