In his view, 2007 is a defensive year where people want to hide but in the next quarter or so, the more aggressive people will start getting valuations where one can buy stocks, which can give 50% upside on a 12-month basis. However, he feels that one will not find that in blue chips, which are recognized as being stable and secular but in other stocks.
Excerpts of CNBC-TV18's exclusive interview with Manish Chokhani:
Q: What’s your sense now looking at the strength in the global markets, whatever is transpired locally? What’s your market call now?
A:
We remain in a long secular market, the corrections will keep happening as we
keep hoping for. But nothing has changed the basic thesis of investing in
India. The fact is that we overshot on the way up and therefore we probably
need to spend some time treading water. But I can’t make a very spectacular
bear case and nor can I make a very spectacular bull case either for the
current year. But going ahead, if I take a year view from now, we will be more
likely to be 20% up and I will take that bet.
Q: What’s your sense of the global situation because in the last few days, there have been some local factors to contain with interest rates etc, globally things seems to have perked up many markets have hit new highs. Do you think the whole outlook for at least for the near term globally has changed a bit?
A: It's not that, you have seen this wall of liquidity, which has been unleashed in the world, and from time to time, Central Banks have to pull the stick back, just to bring things back from the realm of inflation or speculation. We almost had a repeat of this last year when the Fed Chairman made the statement implying that the rates are going to ease and then commodities went parabolic, and after that, he had to came back and cut rates again.
Something very similar is happening in the current year because inflation has been running all over the world. So events are really playing out as one would expect in a normal economic cycle that interest rates have to diverge, at some point in the US, just to prop the currency up and because we have, in a way, imported that fiscal stance into India, we are tending to follow that for a while.
But at some point, the Asian countries will have to
take a view on what they have to do to their currencies collectively to tame
the inflation monster because interest rates is not going to do the trick here
because availability of credit more than the price of credit is really the
issue. So I continue to
be sanguine about the prospects of Asia and India, in particular. I don’t
think I have seen anything yet to cause a change in view saying that this bull
market is now over and it will not come back for the next couple of years. We
should be okay.
Q: What do you expect to see in the next 3-4 quarters in terms of the earnings slowdown which people are expecting and given that what kind of valuation ranges are we trading at you think? Can you build that case for example for the market to rush to significantly new highs just yet?
A: Very unlikely, in my opinion. It’s like a cyclical slowdown in the context of a longer bull cycle. But if you were to build the case for earnings, I would think 2007 calendar year, we are likely to be sliding a slope of hope in terms of earnings expectations, unlike 2005, where it was climbing a wall of worry and earnings just beat us all through. So in that sense, the index earnings estimates, which broadly are out for FY08, are in the region of about Rs 850 odd for the index.
If you forecast that forward by another year -
because a year from now we will really be pricing the index for a FY09
earnings - we should be in Rs 950-1000 range depending on how much earnings
slowdown and what point they will start re-accelerating again. So on that
basis, in the case of a bull, we do at least Rs 1000 for FY09, it's hard to
imagine the index not trading at 15,000-16,000 by this time next year. The
bear case is if we don’t actually make those earnings and we end up around Rs
925 and thereabouts, you would
still be ahead of where you are currently, so I can’t make a case where we
will lose money in a 12-month perspective. Given the fact that there are
barely 7-8 companies, which are propping the index up because the broader
market has already been estimated over the last year.
As is evident by the fact that a lot of funds or a lot of portfolio managers, a lot of individuals have not really performed in line with the broader index. So a lot of good companies has actually got beaten down already. Therefore, one feels that it is better to look at companies, which would want to build for a longer term portfolio as opposed to where they were even 6 months ago.
Q: What’s your take on technology and is that a good place to be now for the next year-year and half?
A: It’s a bit like the market now because even if I take a lead from Infosys - they have guided Rs 81, let's say, they do Rs 85 and you forecast the following year and they will probably be in the region of Rs 105-110 of earnings, it's hard to see why there should be trading at this time next year below Rs 2200 on that 20 multiple basis and indeed if things look like they can re-accelerate at some point when rates start turning, which they inevitably will be, towards the end of this year. You can even build the case that you can make money over there but will it outperform the broader market in 12 months? It's hard to say because there will be other sectors, which are beaten up to pulp, which can probably bounce a lot more than lot of these secular great companies.
Well, a lot of people have already chosen to hide out
in fact. So, 2007 is a kind of a defensive year where people want to hide but
the more aggressive people, someone somewhere in the next quarter or so will
start hopefully getting valuations where we can buy things which on a 12 month
basis can give us 50% upside. Sadly, you won’t find that in blue chips, which
are
recognized as being stable and secular but maybe elsewhere. So at the end of
the day, we are all here to make money, which is very unlikely again to make
it in the so-called 'safe havens'.
Q: Do you think you will get better prices to buy during the course of the next 9 months or do you think the market will not give you that opportunity?
A: Over the next 3 months, as you don’t find a lot of reasons for this market to go up and you still are faced with headwinds on the interest rates front and possibly a downgrading of earnings at some point because we will probably slide the slope of hope in earnings at least in the short run, I suspect you will get better chances to buy. But having said that, it is not like I can make a very major bear case and see this index falling by a 1000 points either, except in the top 7-8 companies where there seem to be propping up and holding up valuations. But at some point, people will exit the market. Who knows what sort of mouthwatering valuations they throw up? One is really hoping for that because one doesn’t have a lot of infinite supply of money. So I am hoping to get lucky.
Q: What’s your own call on interest rates for the next 3-6 months and how are you positioning yourself from those rates sensitives?
A: My sense is that already if we have USD 200 billion of reserves and the RBI is structurally short on domestic bonds through the MSS facility to the extent of USD 15-20 billion, I can’t make a case for interest rates to be substantially higher by end of this year. At some point, this has to reverse and come down. Also very importantly, by next year in fact, because of the FRBM, our primary deficit is going to reduce and we have an excess of savings such that SLR requirements of the banking sector, which will be lower than what the government needs to borrow.
Therefore structurally, rates have to head down next year at least its out belief. Therefore banking, as a sector, in fact over the next 3-6 months, could give you the best buying opportunities because currently we are all scared that the banks are going to lose on their bond portfolio side whereas probably by January of next year, we will start again looking for bond gains over there because I can’t imagine rates in India being where they are given the way our domestic saving is as well as the way a lot of foreign money seems to be headed to our shores and we will continue to be so.
Q: Would you buy steel now?
A: We love commodities; we think it’s a long cycle
for commodities, resources really rather than commodities and it is really a
10-year cycle very much like our own index and we will see periodic
corrections there. But these volumes ain’t going away and because of all the
disruptions the various ministers do all over the world including in our own,
they are going to continue to cause disruptions in prices over here. In a
structural upturn, whether it’s for steel, non-ferrous, coal or energy, it’s a
great place to be in. I won’t run away from these in a hurry and the beauty is
that valuations are the lowest in the
sectors where the earnings surprises are going to be the best whether in
steel, non ferrous, cement.
Q: Are you saying that you could see a bit more pain in the next 6-9 months but that could be a good entry opportunity?
A: Yes, and it may not be in the index, the way the index has disguised a lot of things in the last year as well giving an optical illusion that it has been rising whereas the broader market hasn’t participated. I suspect some of that will continue over the next 3-6 months, that you may not see major index falls because the heavyweights really have no reason to fall in a very major way. But individual stocks or individual sectors get bombed out. For instance, it has been happening to banking. I suspect the pain will get a bit worse before it gets better and one is hoping that things will get overshot like they always do on the corrective side as well as the way they did on the upside.
Hopefully, for savvy money managers, this is the best of times because 2005-2006, you need to just turn up and throw darts and buy stocks and make money. Even for the fund industry in India, I think this is a great time because it will differentiate the men and the boys like it will happen in companies as well. So it’s actually a great year to pause, consolidate and take stock.
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Courtesy : Moneycontrol.com |