ET NowIn a chat with ET Now, Sashi Krishnan, CIO, Birla Sun Life Insurance, shares his views on the markets and the upcoming Q4 earnings. Excerpts:
ET Now: Is the market expected to head lower given earnings disappointment from Q4?
Sashi Krishnan: Yes, the markets have corrected close to 4%, slightly over 4%, over the last one month. It all began with worries that if there was a Fed rate hike, then money would start getting out of India. If you look at the overseas investors who have been very active in the Indian markets, they have put in something like 5.6 billion on a year-to-date basis in the current year.
But there is a slowdown worry because overseas investors have, compared to the MSCI, almost doubled the weight. The Indian markets are at 15.5 times one year forward. So they are not cheap markets. People are overweight, there is a Fed rate hike in the offing. If you put that altogether, you are going to see sideways markets for sometimes, coupled with the fact that the earning expectations for this quarter are not very positive. You should see single digit growth, both in top line and earnings, and that will disappoint.
ET Now: We are trading at roughly about 17-18 times one-year forward pricing in double digit earnings for this year. If you are saying that the market would rather be flat on earnings to FY14 at 8-9%, that would mean a downward adjustment and in that light what would be a fair value for the market?
Sashi Krishnan: If the market itself does not adjust downward, you will find the lot of stocks that will correct and that will afford opportunities because there are triggers as we go into the monsoon early days.
But the expectation is that we should have a reasonably good monsoon. In the next couple of months, we also see a lot of new policies that this government will announce in this budget. Capital expenditure is picking up. So getting into the second half things should be better whereas there will be some downward adjustment. I do not think it is going to be a big downward adjustment.
ET Now: We have already seen a big downward adjustment in PSU banks and I wonder why everyone is convinced of better days ahead.
Sashi Krishnan: The expectation that there will be an improvement in the book has not happened. Whereas there has been a lot of restructuring over the last two years, some of those will again slip as we go into this quarter. That is the worry that many people have about the banking sector that the asset quality is not improving as quickly as we thought it would improve and this deteriorating asset quality will impact the balance sheets.
Secondly, if you look at the budgetary provisions that the government has made for recapitalisation of banks, they were much below expectation and therefore there is going to be a challenge in how we are going to recapitalise these banks. Many of them will have to access the market and if they access the market, obviously there are going to be challenges for them.
So putting all this together and the fact that you are not going to see too much margin improvement in this quarter, the banking sector has gone on to the back foot and corrected quite a bit.
ET Now: Is the market expected to head lower given earnings disappointment from Q4?
Sashi Krishnan: Yes, the markets have corrected close to 4%, slightly over 4%, over the last one month. It all began with worries that if there was a Fed rate hike, then money would start getting out of India. If you look at the overseas investors who have been very active in the Indian markets, they have put in something like 5.6 billion on a year-to-date basis in the current year.
But there is a slowdown worry because overseas investors have, compared to the MSCI, almost doubled the weight. The Indian markets are at 15.5 times one year forward. So they are not cheap markets. People are overweight, there is a Fed rate hike in the offing. If you put that altogether, you are going to see sideways markets for sometimes, coupled with the fact that the earning expectations for this quarter are not very positive. You should see single digit growth, both in top line and earnings, and that will disappoint.
ET Now: We are trading at roughly about 17-18 times one-year forward pricing in double digit earnings for this year. If you are saying that the market would rather be flat on earnings to FY14 at 8-9%, that would mean a downward adjustment and in that light what would be a fair value for the market?
Sashi Krishnan: If the market itself does not adjust downward, you will find the lot of stocks that will correct and that will afford opportunities because there are triggers as we go into the monsoon early days.
But the expectation is that we should have a reasonably good monsoon. In the next couple of months, we also see a lot of new policies that this government will announce in this budget. Capital expenditure is picking up. So getting into the second half things should be better whereas there will be some downward adjustment. I do not think it is going to be a big downward adjustment.
ET Now: We have already seen a big downward adjustment in PSU banks and I wonder why everyone is convinced of better days ahead.
Sashi Krishnan: The expectation that there will be an improvement in the book has not happened. Whereas there has been a lot of restructuring over the last two years, some of those will again slip as we go into this quarter. That is the worry that many people have about the banking sector that the asset quality is not improving as quickly as we thought it would improve and this deteriorating asset quality will impact the balance sheets.
Secondly, if you look at the budgetary provisions that the government has made for recapitalisation of banks, they were much below expectation and therefore there is going to be a challenge in how we are going to recapitalise these banks. Many of them will have to access the market and if they access the market, obviously there are going to be challenges for them.
So putting all this together and the fact that you are not going to see too much margin improvement in this quarter, the banking sector has gone on to the back foot and corrected quite a bit.
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