Nifty unlikely to scale 6000 soon: Standard Chartered

Indian equity markets have absorbed close to $3 billion in 2012 so far. This has triggered a sharp rally after a worst performance in 2011. Rahul Singh, Head of Equity Research at Standard Chartered Securities feels that the market is likely to take a breather at current levels for now.

"Renewed confidence on the capex and policy front is likely to help the market go higher. However, the Nifty is unlikely to touch the 6,000 level in the next three months. Problems in Europe could act as a dampener," he said in an interview to NDTV Profit.

Below is the complete interview. Also watch the accompanying video.

Will the rally sustain?
 

Our view is that the market will take a breather at current levels. We are close to 14x valuations on FY13 earnings. This is very close to a 10-year average multiple. Fundamentals could take littler more time to pick up. So, we are factoring in what could happen in FY14, whether damage to FY13 earnings is already done. I don’t think they can be salvaged if you look around the companies. So without a tangible movement on the execution of big projects and on the policy front, the market seems to be a little bit ahead of itself. 

March is an action-packed month in terms of election and budget. So, there is a long hinging on what happens in March. But even apart from that, the valuations do indicate that the market will now wait-and-watch rather than following the momentum we have seen over the last five weeks or so.

Any indication that gives you the conviction to say that the bear market phase from November 2010 to December 2011 is left behind? So there is no reason for us to retest those levels?
 

At the end of the day, two events become very important- one is the rupee's behaviour and there is a lot counting on how the rupee behaves in the next couple of months. Another issue is what happens to crude. We have seen geopolitical concerns driving crude to almost $116-$117 per barrel.

We all need to keep a watch out for the Europe. The rupee is much more vulnerable to capital flows; especially Europe contributes a lot of debt capital flows in debt inflows from rupee perspective. One should not be taking that lightly. I don’t think we can say conclusively that we are past sitting up. Even as we wait for execution and policy issues to speed up in March-April time frame after elections that will not be enough if we see crude going up another $10-15 from here and that will not be enough for markets to sustain this momentum if something goes wrong in Europe. 

We hope that these events will remain stable. On the policy front, the expectations have gone up but are still not very high. If the big projects start moving and if we see some order inflow coming in, and then we will be in a much better position to say that conclusively. Rate cuts may not support valuation in case of hard landing.

So, only a rate cut won't be sufficient for the market rally to sustain and we need other things to fall in place as well. Is there a question mark on the RBI’s policy cut?
 

The RBI's stance is likely to be dependent on fiscal consolidation in budget. This budget is going to be watched by the RBI as closely as it is watched by the market participants. 

A rate cut of 125-150 basis points whether it gets translated completely into bond deals, we need to watch it because the 10-year bond deals right now 150 basis points higher than the earnings yield. And if you look at the slowdown period from 2011 to 2004, the earnings yield has been higher than 100 basis points. So even the 10-year bonding will come off by 150 200 basis points, then it is just being matched by the earnings yield. There are various theories which say that we could sustain in that situation, given the global liquidity, the situation is looking much better. But that creates distortion between this traditional wisdom that the earnings yield has to be higher than bonds yield for you to buy the market. 

So that is something which we need to keep an eye on but one cannot get carried away by that. As i said, what happens to crude, Europe will have implications for the rupee. When crude goes high, the rupee starts to feel the pressure. Once that happens, you will get a domino effect of that on the portfolio flows and the whole thing starts to unwind a little bit. So the whole virtuous cycle that we have seen in January, can turn very quickly into a vicious cycle if crude doesn’t support India.

A lot of money has come in so far this year, will it stay around or is this just a rotation game played by the investors?
 

A lot of it was rotation money, especially in the first couple of weeks of the year. But a lot of genuine buying has come in as a follow up to that. So, one cannot be so dismissive of the portfolio flows, saying that the entire money may not stay back. 

A lot of it is chasing performance and if there is something wrong in the election results, which doesn’t support the expectation which is getting built up then you could see outflows and that is where the risk is. Even if the outflows are at a fraction of what we have got as inflows, then sometimes that itself is enough to cause significant corrections. 

So if the whole money was not to go back then that itself is not such a great news because on the way down, sometimes the corrections are much sharper than the way up. So as I said, we need to watch the situation and not get carried away in terms of valuations. I think we are reaching that point where the market will take a pause and watch out for the fundamentals to now kind of follow through. 

We have seen that. Last year was a very good year for consumer stables but now the market is just taking a breather even when the results have not been very bad. The market does not like it. The scarcity premium being attached to those valuations are not getting addressed by the fundamentals.

Do you think that the Nifty can go to 6,000 in the future and if it does, do you think the kind of stocks which go up and which have gone up so far can be called investing untouchables, can we use that phrase? GVK, GMR, Lanco Infra, people would find very tough to buy them because they have done 60-70 per cent?
 

If the Nifty was to go up 10 per cent from current levels then there is no doubt that the sectors which are going to do well are ones which are dependent on the capex cycle, on the policy. 

The industrial companies and the asset owners have taken the most hit because of the uncertainty on policy as well as on the raw material availability and the capex slowdown in general. So it is very natural that if the index were to go to 6,000 then it was because of the renewed confidence on the capex cycle and the policy front. And both will mean that the kind of stocks which you mentioned will outperform the rest of the market. The balance sheet repair will also take place.

Do you see the correction happening already? Are cash flows coming back? Is there a visible change in the financials of these companies?
 

Capital raising will become easier for these companies, to raise cash either through equity or debt and that could drive the next leg of re-rating for some of these names but not all.

 What is your gut feeling on Nifty going up to 6,000 levels in the next six months?
 

It looks difficult as things stand today. We are in the prolong slowdown so how soon we come out of it is a function of lot of moving parts, especially external moving parts which are not under the control of RBI or the government. Hence, all things need to fall in place if the market needs to hit that level.

 What are your top picks?
 

L&T in the industrial space. Their order inflow hasn’t completely collapsed because of the order inflows they get. A lot of pain is there in PSU banks. We expect more pain in banking space in the next four quarters. We like HUL in consumer staple space. We also like telecom sector at current levels from a one-year perspective. We think that the cement sector is likely to benefit due to pick up in capex cycle.