Seshadri Sen of Macquarie Research said that even as the market outlook in the short term remained difficult to call due to mixed cues, he saw an upside to the market in the medium and long term. "We have revised our March 2010 Sensex target to 18,000," he added.
Q1FY10 earnings, he said, were likely to be better than Q4 of FY09. “High beta stocks continue to be our favorites for the long term, financials and infrastructure remain our top bet,” he added.
Speaking on the inflation, he said, the inflation would move up by the end of the year but not to such a high extent as to spook the equity markets.
Here is a verbatim transcript of the exclusive interview with Seshadri Sen
Q: After the recent rally have you had reason to change your year end targets at all for the Index or you pretty much stick with that?
A: We did revise our March 2010 Sensex target to 18,000 around the Budget time, so yes we have because we are seeing continuous earnings upgrade starting to come through already and we think that that process will continue. So from a longer-term perspective we do believe that the market has upside and so yes we do see the previous top that was formed on Budget day being broken.
Q: What is going wrong with the foreign institutional investors (FII) flows over the last few days, since the Budget a billion dollars has gone out of the cash market if you take the QIPs out- is there some disappointment on the back of the Budget, is it monsoons, is it a global trend what is your sense?
A: It is a mixture of all three. To start with very unrealistic expectations were built up after the elections. There were many announcements looked for in the Budget which did not belong to the Budget; FDI in insurance, oil price reform don’t belong to the budget and it was a little unreal for that to be expected. So there were a lot of flows which came in on the back that which I guess moved out.
Globally things also started to falter a bit and so that also added and plus that was a period when monsoon uncertainty was at its high, it now seems to have calmed down a little bit but that was the period when you saw the highest amount of monsoon uncertainty which also led to a little bit of outflows. But if the economy recovers and the earnings upgrade start to come through, you will probably see some of those FII flows start to come back.
Q: Yesterday a lot of people watched what the Finance Minister had to say quite carefully about the roadmap for disinvestment, how he is going to treat the fiscal deficit, market borrowing, did that allay some of the concerns which global investors expressed after the Budget?
A: Some of it yes but not all of it because while the promise is there of fiscal improvement, we believe at Macquarie that this is a temporary phase where the fiscal deficit will remain high but the truth is that what is out there are the moment is the FY10 number, the rest of it is little bit of hope. So to some extent, some of the concerns have been allayed. People were looking for issues to be dealt in the budget which did not belong to the budget and yesterday’s address has addressed some of those concerns with the market.
But I think from here on some of this investors will look to actual movement on the ground before they start taking that on board.
Q: To stay with macros, the one concern that seems to be coming to the fore is the rise of inflation and how equity markets perform in an inflationary environment- do you see that as a risk as well?
A: We don’t see inflation definitely remaining at these levels. Inflation will perk up a little bit towards the end of the year but I don’t think it will go up to the extent that it will completely spook the equity markets. You cannot have a perpetually 0% environment and economic growth and equity market performance - all three cannot exist together. So as long as inflation stays moderate but higher than the current levels, I don’t think it’s a concern. To answer your question, yes inflation will perk up sometime towards end of this year or early part of next year but I don’ think it will be to the extent that it will spook the equity markets.
Q: We are very young in earning season but what are your expectations of this quarters earnings might go by and what it might do to justify the way market is trading right now?
A: This earnings season, I don’t think will be spectacular, it won’t be terrible either. We were all expecting an economic recovery only in the second half of this year; we are still going through a slightly difficult period for the economy and this earnings season obviously looks back at the April to June quarter when the economy was still tottering a bit. So it will be better than the January-March season, which is one positive cue for the market but it certainly won’t justify the current valuations but I think the valuations look beyond this current quarter.
Everybody recognizes that the economy is coming out of a trough and as long as the lead indicators for an economic recovery in the second half remain in place, I am not sure that the market will be too spooked by relatively ordinary earnings numbers. I just want to say that I don’t think they will be terrible but they will be just ordinary.
Q: From a tactical perspective what would you do now – would you load up on high beta which has been leading this rally, infrastructure, real estate, financials, metals or would you want to lean a bit more on the defensive side after the current rally and the recent correction that you have seen?
A: Tactically short-term you may want to load up a bit on defensives but we have a slightly longer-term view and for that I think the so called high beta names continue to dominate, are favourites. We do expect just the sectors that you enumerated financials, property, infrastructure do remain our favourites because we think there is still upside to the market and it is better to play leverage to an improving economy rather than trying to be defensive at this stage.
But in the short-term defensives may work better but that is really difficult call to make.
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