Mkt may test into 12K levels: Centrum Fin

MR R Amarnath of Centrum Finance, believes the timing of elections and electoral outcomes could result in an overhang on the market. He doesn't expect guidance from corporate India to be very robust. Sensex EPS estimate may come down by 12%, he said. And markets could test the lows of the year once again. Offshore money is playing a wait and watch game, he said. He sees the market testing into 12,000 kind of territory.

Excerpts from CNBC-TV18s exclusive interview with R Amarnath:

Q: Give us one word about politics and how important that is going to be, vote for today and over the next few weeks?

A: I think the year in which markets look to politics and Central Banks for deliverance on various aspects cannot be a good year - that is what something I have maintained for the last several months. Having said that, I think a lot of issues where there was denial in terms of the market or in terms of the corporate world those factors have got acceptance now or digested in terms of possible negative impacts. But I think there are four factors still to play out; two domestic and two possibly global in that sense over the next three-six months.

From the domestic perspective, I would put politics as an important factor in terms of timing of elections and the market getting concerned about what could be possible electoral outcomes. So that would be one, which would overhang and therefore cap any kind of upside.

The second issue is - in the last few months we have seen for the first time that the economists in India are ahead of the curve in terms of predicting that things are going to slowdown whereas the sectoral specialists and analysts have surprisingly not caught up on that. So the second domestic factor I would look forward to play out would be possible earnings downgrades post the July result season, which we are just getting into. So those would be two domestic factors that possibly could cap upside and possibly see us once again testing into 12,000 kind of territory.

Q: What do you think will be the mood after this current earnings quarter? Do you think we will come out of it feeling that we have got the first knock and more knocks will follow in Q2 and Q3 or will it be a quarter which actually holds up numbers and you will be kept guessing on whether people are getting it wrong predicting so much downside?

A: I doubt whether this quarter, the guidance or at least the indication-even if there is no formal guidance from corporate India-is going to be as bullish or robust. So I think the rose-tinted glasses have clearly come off. It is now a question of how calibrated the change in guidance is. I think analysts would definitely have a difficulty in terms of adjusting to the fact that if I am going to downgrade earnings by 10%-12% and the stocks have come off 30%-40% from the highs, do I change recommendations or not? So I think that is going to be the greater part of the dilemma but I think the market would correct a bit to the factor of lowered estimates.

Q: A whole clutch of funds just closed up collections a couple of days back and three of those four funds are actually either fixed income or debt funds, do you think we are going to start struggling with domestic liquidity as well?
A: If I were to take the bear argument, one could say that there are already people who are trying to draw parallels between whatever was the tightening that happened in 1997 etc. and whats happening in 2008 - I mean are we going to see something of that. To my sense, there are lot more positives for India at this point in terms of the strength of bank balance sheets, the leveraging of corporate India; the fact that we now have a bulk of our population at a per capita income of about 10,000 dollars, which is a trigger point for consumption to continue on a sustained way.

There are lot of differences and I dont think we are going to see that kind of a slowdown or an impact on earnings as happened post 1997-1998. But yes, I think we are behind the curve actually as far as the street is concerned in terms of tempering numbers a bit. My sense is that maybe you could see that the talk on the street of Rs 10,000 Sensex earnings or that kind of a number maybe coming off by about 10-12%.

Q: What about the bond yields now that is at 9.23% and people have now started talking about the possibility of drifting somewhere close to even 10%-12%? Does that change the equation in terms of valuations and how you look at the equity market now?

A: I think the equity market always tend to adjust to things at least six-nine months ahead of the actual event happening and I think in this case as well the market adjustment has factored that in. Now the question that remains unanswered is how long are the high interest rates or the inflation pressures going to sustain? The key to that lies in two global factors; one is clearly oil in terms of how it pans out particularly through the winter season in the west, which is going to come up in a few months.

Second aspect would clearly be-in terms of-buffeted by high oil, buffeted by the mortgage meltdown how is the US consumer going to hold out.

So everyone is waiting for that six-nine month lag and see how much does it impact after that lag, so again October is important from that perspective. Those are the two global factors, which one, would be looking for to pan out. So my sense is that we could again be testing the lows of the year again till some clarity emerges at how prolonged is the macro economic pain going to be. Is it going to be that we are going to come out of it in another two-three quarters or is it going to be more like six quarters?

Q: Any sense of what the offshore money interest is like right now?

A: The offshore money-everyone wants to play the wait and watch game thinking that there is still some money, which might want to be taken off the table and nobody wants to be caught in that selling. So everybody is playing wait and watch even if the view is that maybe specific stocks or opportunities are clearly looking very attractive. I think everyone is sort of keeping the powder dry for bad days or bad weeks. That seems to be the institutional sentiment overseas.

Published in 9 7 2008