StanChart Sec says beaten sectors may rebound; suggest buys

We expect FMCG valuation premiums to sustain if growth continues.Rahul Singh

Hd-Equity Research StanChart Sec

Rahul Singh of Standard Chartered Securities expects beaten down sectors to rebound due to the liquidity support provided by the central bankers.

Monetary and liquidity conditions have eased so far in 2012-13 after the Reserve Bank of India slashed policy rates by 50 basis points and cash reserve ratio or the portion of total deposits banks need to keep with the regulator, by 125 bps. Moreover, the frequent open market operations wherein RBI bought back bonds also injected liquidity into the system.

Meanwhile, the dollar rallied and financial markets retraced following the European Central Bank meeting in which Mario Draghi failed to live up to his strong "whatever it takes" statement the previous week. Much of the rally which this comment had triggered was given back, and while the markets may have been left underwhelmed, he did open the door to a new round of policy action.

According to Singh, the commodity rally will be negative for inflation over the medium-term. In this backdrop, he finds FMCG companies still attractive due to high growth and dividends. "We expect FMCG valuation premiums to sustain if growth continues," he told CNBC-TV18 in an interview.

Singh says most earnings downgrade for FY13 have been factored in and he prefers consumer staples over discretionary at this point. "There may not be any major downside in consumption due to weak rains," he says.

His top picks include HUL and Marico among consumer plays.

Here is the edited transcript of the interview on CNBC-TV18.

Q: What is the general sense of the market from hereon?

A: As you were mentioning a while back, I think it is about short-term versus medium term. It is not going to be good in the long term if the liquidity led rally in commodities finally starts biting in terms of inflation and fiscal deficit. But, in the short-term it could lead to some pick up especially, in the sectors which have been beaten down where the worst has been in the price.

However, we still don't know how to put a timing to it in terms of when to buy some of these names. You could get some kind of a flurry of activity in those names which were always looking good on valuation, but we were never sure when to pull the trigger. I would look at this as a short term driven liquidity rally, mostly in the high beta names.

In the long-term there are issues which will cap the valuations to some extent for the overall market and we will keep coming back to the better quality names in each of these sectors.

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10 year bond yields to hover in 8.15-8.40% range: StanChart

Anant Narayan of Standard Chartered Bank feels that finance minister P Chidambaram’s statements about reducing the widening fiscal deficit is encouraging for the markets . The market is building up hopes and is focusing too narrowly on diesel price hike, he added.

Meanwhile, given the improvement seen in the liquidity situation over the last few months, he doesn’t expect the central bank to announce any open market operations (OMOs) in the near future.

"In that case the relentless supply coming in from the government, Rs 15000 crore a week, week after week is going to take its toll on the 10 year bond yields," he added. So he expects the bond yields to hover in the range of 8.15%-8.40% going ahead.

Below is the edited transcript of Narayan’s interview with CNBC-TV18

Q: What exactly is your expectation of the rupee post all of these statements and the positive statements that came out from the finance minister (FM) yesterday or do you think that it is the euro and the risk rally that is helping us today?

A: On both fronts we have some positive news. Globally there is a risk on, euro has climbed up. There is a move towards risky assets globally. And plus of course we saw some pretty encouraging statements coming in from the finance minister yesterday, somebody whom the market can take confidence from. But a lot of things have to happen in real terms especially on the domestic front for the trend to sustain and for some confidence to come back into the markets both on the fiscal and growth front.

On the fiscal front, the market has been expecting some action, particularly a diesel price hike for a long time. May be that’s a bit overhyped that particular point about the diesel prices. But some kind of control has to be demonstrated. The fact that we are cognizant of the issues on the fiscal front, I don’t think we need miracles there. But we need some action to show that there is something to keep a lid on the fiscal deficit from going away.

On the growth front action is required as well. A lot of the issues both on the current account as well as on the fiscal front, find their genesis in the lack of growth particularly infrastructure and investments. We do need things happening there which give a fillip to actual infrastructure investments in the country. Both these are required to give market the confidence that the worst is behind us for dollar-rupee. Expect that to pan out hopefully over the next few months while things will remain choppy. Hopefully, we will see a level below 55 in the months to come.

Q: Is the market still hopeful about a movement on diesel after the parliament session and the Finance Minister spoke about a fiscal consolidation road map? Can we lend any credence to that? Is anything possible on the fiscal consolidation at this point?

A: It definitely is. Maybe the market’s focusing too much narrowly on diesel prices, sure that would be a good place to start given that’s an obvious area of subsidy. But some control and some ways of showing higher revenue, which sort of address the overall fiscal deficit is what the market is looking for basically to assuage rating agencies.

I don’t think the rating agencies are looking for miracles. They are looking for a sense that people are aware of the issues relating to the fisc and are taking valid steps towards controlling that.

There is definitely an expectation and hope in the market that there would be some concrete steps to follow up on the very positive statements, which came out from the Finance Minister yesterday to address the fiscal front. We need something on the growth front as well for macro economic stability.

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