Expect more downgrades in the coming quarter says Jyotivardhan Jaipuria, MD & head of research (India), DSP Merrill Lynch. In an exclusive interview with
Devangi Gandhi and Muthukumar K, he says another 3-4% earnings downgrade could happen in the June quarter and further downgrades during the September quarter. However, he expects Sensex to rise by about 5-7% in the second half of 2011.
How are the June quarter results shaping up so far?
We started the quarter with expectations of a significant downgrade which has been the case so far with a number of disappointments. On an aggregate basis however, the performance has not been bad so far because of the size (large) of the companies which have announced their June quarter results so far.
We still expect another 3-4% shaving off the EPS for the market in June quarter itself and that would probably not be the end of the earnings downgrade. We may continue to see the downgrades in June as well as September quarters. While we started this earning season with an FY12 Sensex EPS (earnings per share) estimate of R1,225, it is likely to decline below R1,200 towards the end of the June quarter and further to R1,175-1,150 towards the end of September quarter. The returns in the coming one year are likely to be earnings driven.
What is your view on the equity market?
Currently, the market is in a consolidation phase after experiencing a sharp rally in two years since 2009. Like the general view, we also think that the interest rates are likely to peak out after a 50 bps rate hike hereon. The implicit assumption behind the view is that a decline in global commodity prices could cool off inflation and subsequently the interest rates. There are three reasons which could aid a decline in the global commodity prices, the first being a slower pace of the global economic growth. Then the end of second round of Quantitative Easing (QE2) which was believed to have added to allocation towards commodities. Lastly, tightening of monetary policy in many emerging economies like China, which are the biggest consumer of commodities, which in turn could also ease off demand pressures as well as higher commodity prices.
Historically, in the last ten years, on an average the Indian equity market has given an annual return of close to 15%. We do not expect such great returns from the current levels. We expect another 5 to 7% gain for the market towards the year end. If the trend of strong performance of equity market in the second half plays out, a gain of 10% from hereon could be expected at the optimistic level.
Are global investors increasing equity allocation at current juncture ?
Our global view is that investors are excessively overweight in bonds and some inflows could be diverted towards equities. Logically in a low interest rate scenario investors should be moving towards equities given that they provide higher returns but in a shorter time duration investors may not always be chasing the returns and could be looking towards a safer investment avenue. In long -term however the cyclical allocation do play out between bonds and equities.
What is your outlook on various sectors?
If we get into a scenario wherein the interest rates are peaking up, there could be a case for shifting portfolio in favour of interest rate sensitive stocks.
We have gone underweight on the consumers even as we have not gone hugely overweight on banks and autos. We are still overweight on Pharma and software and if we see some price corrections in the interest rate sensitive space in the current earnings season, we may be adding some stocks from capital goods and autos.
What could be the impact of a serious Euro debt crisis on Indian markets ?
The issue with the Euro zone crisis is the tail-risk for the equity markets everywhere. If the policymakers there fail to find a solution to the ongoing sovereign debt crisis, it could pull all markets down creating a 2008 like crisis, as investors get into a risk-averse mode.
