Demand growth will be strong in Q4, says Harshad Patwardhan, director, investment manager-equity at JPMorgan Asset Management Company. He says like in Q3, demand will continue to grow with pressure on margins. Speaking to Chirag Madia, he says while some corporates could surprise with its reporting of Q4 earnings, there?s a strong possibility of earnings downgrades by analysts for the financial year.
How do you see the Q4 corporate earning panning out?
There were two distinguishing features in the last quarter (Q3) results ? first, the demand growth in the system was fairly buoyant with early signs of margins compressions because of inflation and surging commodity prices. So, margins disappointed but volume as well as demand growth remained strong. I think this trend of demand growth coupled with margin pressure will continue in the fourth quarter. But as we head to next year some of the fast growing sectors might slow down. While I am not expecting degrowth, sectors like auto which were earlier growing at 25-30% could see moderated growth going forward.
While some companies might surprise in the fourth quarter, the overall trend is likely to be similar to that of the previous quarter. With margin pressures becoming more evident, I see a strong possibility of analysts downgrading earnings for FY12.
After over 10% fall in January, equity markets have run up significantly over the past few weeks. Where are the markets headed?
In the short term, markets are likely to remain volatile but from medium to long term perspective we see no reason to worry. Interestingly, despite all the negative news flows that hit us, both internally and externally, we are not far away from all-time highs. Right from scams and scandals to crisis breaking out in the Middle East, Eurozone as well as Japan, the Indian stock market has surprisingly been resilient.
How will a surge in oil prices impact equity markets?
It will impact our markets in two ways ? one is through compression of margins (impacting corporate earnings ) and other is by way of impact on the macro-economic situation by way of higher current account deficit. To some extent the impact of higher crude prices has already been factored in by analysts. The surprise element going forward could be oil prices shooting up to levels of $140-150 per barrel and stay there, which could then impact corporate earnings.
With the kind of volatility witnessed in the equity markets, what are you suggesting retail investors at this point in time?
Our consistent message to retail investors over the last few months has been to enter equity markets through systematic investment plan (SIP) route. For investors having little more risk appetite, we recommend smaller companies fund (midcap or smallcap), where growth will be superior over the longer term.
