The sentiments have suddenly changed with the markets shedding over 8% this month and foreign flows reversing. Vikas Khemani, EVP and head of institutional equities at Edelweiss Securities believes the worsening macro situation is responsible for the recent correction. In an interview with Samie Modak, he says six tough months lie ahead for the market.
We have had a worst possible start for the year. What do you think has led to the current situation?
This was kind of expected. A lot of macro deterioration happened over the past three months. There are concerns that the worsening of macros will have a negative impact on economic growth as well as corporate profitability.
What has really changed at the macro level? And when do you see the situation improving?
Inflation numbers are getting out of hand, the IIP numbers point to a slowdown. RBI is in a very tricky situation right now. Investment growth is not happening. Hence, it cannot afford to keep interest rates very tight. At the same time consumption is very strong. And if they increase the interest rate, investment activity would slow down, which will create a supply side constraint feeding inflation. So structurally it is a very complex scenario. I don?t see any solution in the immediate term. Good macros get you a premium and bad macros reduce it. In my opinion the premium will fall. On top of it corporate earnings can surprise you on the downside. So a combination of both can bring markets down over the next three to six months.
What kind of returns do you expect the market to deliver in 2011?
We don?t have a target but the overall market direction is not looking good. I must also point out that the cycles have become very short and the macro issues play out very quickly. So taking a full year call in this kind of complex environment is tough. Our view is that the market could go down a further 8-10% from current levels and at best give a 10-12% return over the next one year.
Given the worsening macro, do you think there is a possibility of earnings downgrades?
We expect negative surprises from the third quarter earnings. The fourth quarter numbers will spring in even more disappointments. The P/E multiples have already come down after the recent correction and hence, you are seeing de-rating already taking place. You will see analyst downgrading the earnings in the next one or two quarters.
Which are the sectors which you are bullish on?
We are currently bullish on oil and gas as expect refining margins to improve, the petrochemical side is also picking up. In my opinion, Reliance could be the stock of the year as everything is working in its favour. It will definitely outperform the benchmark indices this year. IT also looks good as the underlying business environment is robust and it is a natural hedge against depreciating rupee. We expect the rupee this year will come down to Rs 47-48 levels.
What kind of foreign flows do you expect this year?
FII flows this year will not be as high as last year. We?ll be happy if we have half of what we had last year. Again putting a number to it is very difficult as things could change during the year. Five months down the line if environment changes we could see good flows but given the current environment it looks like FII flows will be muted.