Markets to rise on monetary easing: Saurabh Mukherjea
The decline — the first since the second quarter of 2009 — came as the debt crisis intensified and threatened to spread to big economies, notably Italy.
Risk-rewards are in favour of equities and investor sentiment for equities is at an all-time high, Saurabh Mukherjea, Head of Equities at Ambit Capital told NDTV Profit today. American investors are excited by emerging markets as a whole and India in particular. This is the most positive back drop for Indian markets in a couple of years, he added.
Edited excerpts:
Why are the markets rising?
Asset prices have recovered because of what the ECB (European Central Bank) did on 22 December (quantitative easing or QE) and the ECB will repeat that act in February. If the ECB eases on 29 February, it will add further fuel to equities.
Outlook on markets:
Whether the current rally will sustain depends on the economy. From March-April, the interest rate cycle is expected to turn not only in India but the rest of Asia too. The rate cut cycle is positive for cyclical stocks, which will lend a degree of fundamental support to markets. We need QE to continue over the course of FY 13 but the government will have to show some degree of proactive measure in Parliament with respect to reforms.
Risk-rewards favourable in short term:
Over this month, and in the run up to another big bout of QE from the ECB on 29 February, risk-rewards are in favour of an upside. In the longer term, the question mark becomes bigger and the risk seems meaningful. The UP elections not going in favour of the ruling coalition and the FDI impasse in Parliament are some of the risks.
Q3 Earnings have taken a back seat:
Earnings have panned out as per our bearish expectations. The operating margins have roughly cracked by 200 basis points on a quarter-on-quarter basis and 300 basis points on year-on-year basis. The weakness is likely to continue in Q4 FY12 and Q1 FY13.
However, investors are not looking at these results too closely. Investors are looking at the turn in the economy, at the QE and at the interest rate cycle. Investors are ignoring weak macro environment and earnings.
Investment opportunities:
There are 80-90 firms on BSE 500 with broken balance sheet. Most companies with broken balance sheet will try to raise capital and dilute shareholding in FY13. So to buy these broken balance sheets and to make money, investors need these stocks to rise 80-90 per cent over next 7-8 months.
The easier way is to play the rally and go for cyclical stocks with strong balance sheet that do not need to dilute shareholding.