Anoop Bhaskar keeps a close eye on the used car market. “It is a fairly good indicator of the liquidity in the system,” says the head-equities at UTI Asset Management. For now, that market is showing that there is ample liquidity, even as interest rates have been rising for some time now.
“I track the list of second hand cars that an auto supplement puts out every Friday, make a few enquiries with the dealers about some of the high-end models on that day, and then follow up on Sunday. More often than not, the best cars are already taken by then. And mind you, people buying these cars on loan have to pay a couple of 100 basis points more than what they would pay on a new car. That says a lot,” Bhaskar told moneycontrol.com
But with the Reserve Bank of India yet again raising key signalling rates—that at which it lends to and borrows from banks—interest rates are set to increase further. Economists say the rate hike cycle is still not over, and another 50-75 basis points hike in the coming quarters could weigh on GDP growth this fiscal. And that spells bad news for the stock market, as a slowdown in the economy will hurt corporate earnings.
Bhaskar has been cautious on the market for a while now, and the latest developments only strengthen his conviction.
“There are too many moving parts which are hard to call. You have high crude oil prices expanding the current account (the difference between a country’s exports and imports) deficit. This is happening at a time when foreign inflows (FDI as well as portfolio investments) are expected to be lower than what they were last year. This could weaken the rupee and in turn spark a vicious cycle of FII outflows and weakening currency. Inflation is showing no signs of easing despite repeated rate hikes by the RBI. Then there are macro-economic problems in Europe and US,” says Bhaskar.
He stops short of taking a bearish view on the market, but does not see why share prices should be rising anytime soon.
What is Bhaskar’s bet on a visible slowdown in the economy?
“In the past, SBI’s PLR (prime lending rate) crossing 13.25% has usually been an indicator of an impending slowdown. (It has already crossed that mark) When car loan rates hit 15% (they are 12-13% right now), a slowdown follows soon enough. So the signals are mixed, but the signs are there,” he says.
And if there is a systemic problem, stock selection offers little protection from a downtrend, cautions Bhaskar.
The other problem for fund managers is that there is hardly a sector immune to a downtrend because of the run up in valuations.
“There are no defensive plays available at reasonable valuations. Most of the recent best performing sectors like auto, IT and FMCG were laggards during the 2007-08 bull run. But today, they are either fully priced, and in some cases, over priced. That makes them as vulnerable to a sell-off like the growth stocks,” says Bhaskar.
“If one were to take a three year view, I would say the best bets today are capital goods and infrastructure stocks. While high interest rates could hurt these sectors for a while, the valuations are attractive enough for the stocks to be able to deliver decent returns over three years,” he says.
Market experts were expecting a deluge of earnings downgrades in the current season. Fourth quarter numbers of quite a few companies—including heavyweights like Infosys Technologies and Reliance Industries—have fallen short of analyst estimates. And while there have been scattered instances of earnings estimates being slashed, the downgrades have not been alarming, at least for now.
But Bhaskar feels there could a steady rise in the number of earnings downgrades over the next couple of quarters.
“We could see more earnings downgrades in the coming days. Initially, the consensus was that FY12 earnings would grow 25%. That has now been lowered to 18%. It is when that number further drops to 13-14% that the market could bottom out,” says Bhaskar.
He says that the market does not need a huge oil spike to damage corporate earnings.
“Crude staying at current level can be bad enough. If oil is steady around $120 (a barrel), it means commodity prices are unlikely to see any meaningful decline. Add to that high interest rates, and corporate margins for the third and fourth quarter could be under severe pressure,” Bhaskar says.
Source: http://www.moneycontrol.com/news/cnbc-tv18-analysis/uti-mf39s-bhaskar-says-defensive-stocks-no-longer-defensive_540494.html
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