Chances of a deeper correction are rising: Chris Wood
Published on Tue, Nov 03, 2009 at 10:57 , Updated at Tue, Nov 03, 2009 at 15:49
Source : CNBC-TV18
Global equities have surged about 70% in six months on hopes of a rebound in the
Jim Walker, MD, Asianomics, too doesn't see a V-shaped recovery in global equities. "If you look at the level of activity across the world from Europe to
On US markets:
After Friday's sell-off, US markets ended Monday in the green zone on positive manufacturing data. The
The ISM manufacturing index rose to 55.7 from 52.6 in September. This is the third straight month of growth and highest reading since April 2006. Pending home sales rose to their highest level in nearly three years in September. Also, construction spending rose 0.8% in September.
But Wood is still cautious. He
says there is some initial indication of a technical breakdown in theHowever, Richard Bernstein of Richard Bernstein Capital Management is a lot more bullish. "Right now, there is a blurring between the secular issues and the cyclical ones. There are people, including me, who are concerned about the secular issues, but we can't ignore the fact that the economy is getting better, employment is improving. When that happens you will see a cyclical rebound."
Also see: Obama warns on US job losses, urges export boost
Michael Darda of MKM Partners too sees the markets headed higher. "We have moved a very long way in a very short period of time, so we are building in recovery expectations. A period of consolidation and correction will not be out of line. I believe that the recovery process is underway. Even if the big gains are behind us in percentage terms, I still think that in the next 6-8 months the markets will move higher, correction and pullbacks notwithstanding."
Today, Asian markets ended weak ahead of the two-day monetary policy meeting of the Federal Reserve. Wood feels an easy monetary policy in
On India:
In last week's credit policy, the Reserve Bank had stated that it would be looking to raise rates going forward on the back of positive August IIP numbers. This didn't go down well with the market which sees a further rise in borrowing cost. The street sees the recovery in India Inc on the back of lower expenses, rather than a pick-up in business.
According to Wood,
CLSA +ve on power, road; bullish on metals
CLSA +ve on power, road; bullish on metals
Published on Tue, Nov 03, 2009 at 10:32 , Updated at Tue, Nov 03, 2009 at 16:07
Source : CNBC-TV18
Commenting on Q2 FY10 numbers, Krishnan says earnings are ahead of expectations. "We expect earnings growth of 5-6% this year. We see strong topline growth in H2 on a base effect, but margins are likely to be under pressure."
Here is a verbatim transcript of an exclusive interview with N Krishnan on CNBC-TV18. Also watch the accompanying video.
Q: We had a big rally and somewhat of a correction over the last couple of weeks in
A: The markets have had a very strong run from the lows of March, while we have seen that reflected in earnings upgrades as well. Clearly, valuations are a little above their historical average. What the market seem to be pricing in is a smooth recovery right into FY11. What we have seen globally is clearly having some impact on investors thinking, including those who were at our conference since yesterday. In our view the key for further performance of the market is going to be pick up in the investment cycle because a lot of the low hanging fruit from the recovery of the consumer is now largely in the numbers. However, we are quite confident that we will see that coming through because there are enabling conditions in the form of domestic recovery, in the form of interest rates being pretty low and also in the form of equity markets still being a lot more supportive for capital raising than what they were a few months ago.
So we will start to see those upgrades coming through in the next couple of quarters and that will actually drive the next leg of earnings upgrade. For now, the first run has largely been digested.
Q: How has earnings season gone by for you this time around, there seemed to be some large scale disappointments but for you how did Q2 perform?
A: if you look at the aggregate numbers, they were actually slightly ahead of our expectations. We were looking at a headline de-growth for the Sensex about 1.5% because of year on year comparison. However, we came out with a small growth of about 3%. When we look at our broader universe of 110 stocks, the situation was fairly similar a beat of about 5% points. The beat was largely on account of margins surprises and particularly benefit of lower raw material costs and treasury gains for number of banks. So relative to Q1, we are clearly seeing momentum of surprises coming off. There was disappointment in some sectors for some of the property stocks. We were quite disappointed with the numbers and the picture was mixed in some of the other sectors as well.
Q: Looking ahead into two-four quarters, do you find reasons to bring about significant earnings upgrade from here or do you think this is not going to be one more of those cycles where every quarter you see sharp acceleration in earnings upgrades as often happens when the market takes off?
A: The momentum has already started to flag. You can attribute it to the fact that the upgrades which you have seen since the bottom have come on account of recovery in consumer led sectors whether its autos have seen volumes pick up. I would say every property relative to forecast we had in early 2009, we saw volumes starting to pick up. Therefore, we needed to upgrade our numbers. In some of the global cyclical, the assumptions at that point of time may have been pessimistic. So we have seen is a reset of very pessimistic estimates and the recovery in consumer sentiment playing into these upgrades.
However, if one looks at the composition of market earnings and particularly driving growth between FY10 and FY11, you now need to start seeing meaningful upgrades coming through sectors like banks like Oil & Gas, metals, IT services. All of these are more co-related to either investment cycle picking up; credit growth coming back for banks or to the global recovery getting a bit more traction.
You have a bit of breather over the next quarter or two. However, by early 2010, you will start to see a pick up there as well. Globally, our view is that you will see global traction midway to 2010 and that will essentially mean looking 12 months out we should still be in midst of earnings upgrade cycle. However, there is a pause for next quarter or two.
Q: In the nearer-term for the rest of this financial year, what is your earnings growth estimate? What will it mean for the second half by way of growth uptick you would want to see?
A: For this year we have a rather muted growth expectation of about 5-6%. This is because we have some of the large contributors to earnings the global cyclical facing a much tougher comparison. What it does mean is that you will see topline numbers being fairly strong as we go into second half because of YoY comparisons for the domestic sectors. However, you will start to see the gains that you saw on margins coming off as we go later in the year. We have seen input cost move up. Some of the operating leverage gains will not be as strong because cost structures will start to move up.
The overall earnings momentum will get somewhat more muted. In FY11, you will see a pick up yet again and that will be on a low base. This is because FY08 to FY10 have virtually been growthless years if you take the aggregate two year period
Q: Do you see any apprehension on part of people who are attending on conference on infrastructure sector on how sanguine they are about capex actually picking up?
A: Some investors are doubtful because the sector has actually held up fairly well in terms of valuations and while there is visibility in the medium term for some companies due to strong order book, you cannot give the benefit of that for an extended period of time. The reason why we think that the investment cycle should pick up is what we are hearing or seeing from corporates that have deferred their capex plan last year around this time in response to they credit crunch and the fact that the demand really fell off severely. They are coming back slowly. The mood is still of caution, so they are coming back slowly but what we also see is that even for the smallest of companies, the SMEs which we track through a quarterly survey, the capex intentions are clearly rising. So two quarters ago, just a little more than a quarter the companies in that sample were investing in that capex, the rest of them had put their plans on hold and less than only around the third we are actually looking at undertaking capex in 2009, things are changing on both counts. Hence, about 40% are now in investment mode and a little more than 50 are talking about investing in the next 12 months. Therefore, the momentum is starting to pick up and outside of this like power and roads, there was clearly a big pipeline that had got built up but where projects got delayed or deferred because of capital constraints or in some cases policy related issues as well and I am quite optimistic with at least in these two infrastructure sectors, one should start to see things picking up.
Q: You have two of the largest telecom companies being profiled today. So what you have made of that space that has easily been the biggest earnings disappointments this quarter?
A: Yes that was the sector in which it pulled down the growth what we were expecting. The sector is in a fairly early stage of disruptive pricing. By this I mean that the companies responses are still coming in, but you do have tariff levels which are already very competitive. So we could argue about how much further price erosion you could see. You also have a number of new entrants which are yet to make a big impact on the space and their own response and signals on how aggressively they will enter the market may start to change or they may indicate that they would not be as positive on this market as they would have been. Hence, according to me, there is a bit of trouble in the short term. The market may look at the stocks and say that these are levels that which there seems to be value or buying into the stocks just yet especially because you have not had even a quarter of results after these big tariff cuts have come through. So the sector is going to be a bit sluggish for the next couple of quarters but you would probably find some value investors who have got ht e luxury of taking a much longer term horizon starting to nibble around these price levels.
Q: Where do you stand on global commodities because numbers from some of those companies, the large ones like Hindalco, Tisco have not exactly been up to street estimates? Are you bullish on global commodity stocks generally or you think they could correct from here?
A: There is again here a short term versus the longer term issue. Some of the global commodities correct a bit in terms of prices, it is in the short term again going to be a function of what you see on the dollar and whether risk aversion creates a stronger dollar and correspondingly impacts commodity prices. When I look at most of the stocks in the metals space, compared to any time in the past ten years or so, this is the first time that I can see most companies in the sector having a reasonably strong volume growth story over the next two-three years and that is something that which is the attraction of the sector that right now so we are positive on some of the names. Principally, we think that even if there isn’t a very strong price recovery, we have a combination of good volume growth coming on account of new capacities. In some cases that is going to lead to meaningful cost savings as well just because of economies of scale and some cases of restructuring of overseas operations. So we are actually quite bullish on that space. Some of the stocks have corrected and are starting to look very interesting.
Q: How much margin pressure you expect to see over the next two-four quarters because that is what has helped to autos and even cements to some extent?
A: You will definitely see margins tapering off. The commentary from all the auto companies during the results season has been that the margins have been very good this quarter. However, I don’t expect them to sustain. So they have been very cautious on that and I do think that as the cost trends up a little. We will see some margin pressure. The extent of disappointment may not be that much because companies have been guiding for that. Cement is another sector which is in the relatively early stage of price correction but as supply comes on and there is a lot of it over the next 12 months, we could see prices coming under more pressure which will mean that margins will take a beating. So I do think that the margin outlook for the second half of the year is certainly going to be a lot more challenging than what we have seen till now.
Src: Moneycontrol.com
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