Jyotivardhan Jaipura of DSP Merrill Lynch is cautious on the market and says that valuations are not exactly cheap and there are global factors, which are probably not conducive to a very strong bull market rally at this stage.
He feels that over the next two months, there should be a correction and markets may go a little higher before it falls down. He thinks that somewhere towards the end of September or October, markets will be lower than where they are today in terms of index levels.
Excerpts from CNBC-TV18's exclusive interview with Jyotivardhan Jaipura of DSP Merrill Lynch:
What is your feeling right now because you have been a bit circumspect about the market as well, at 11,500 levels, what have you been telling your clients?
I am also cautious on the market, like I have been for sometime. Valuations are not exactly cheap and there are global factors, which are probably not conducive to a very strong bull market rally at this stage.
The Fed is a worry, interest rates in India per se are going up, also they have been edging up to the extent that things could slow down next year in terms of corporate earnings and that is something, which will make the markets look even more expensive. So I would be looking for a pullback from these levels, before it would be a right time to enter the markets again.
What do you think the month of September will do to the market because there are not many triggers and not much is expected, there is a Fed meeting only towards the end of the month, what do you think will make the markets swing?
Normally, we don't take calls on a month, but I think markets have had a sharp rally, so to that extent, one must remember that the rally has been on low volumes. One could see markets correcting in the month of September-October.
I guess, over the next two months, there should be a correction. Maybe markets will go a little higher before it falls down, but I think somewhere towards the end of September or October, markets will be lower than where they are today in terms of index levels.
What would this correction be predicated on? Is it just valuations and where markets have reached or is it because of global concerns because there will be a large global investor meet in the month of September as well, you don't expect too much by way of flows then in that month?
I guess the correction would be led by a technical pullback after the sharp rally that one has seen. One must remember that over the last five to six weeks, there has been a 15 per cent jump in the markets. Second, a lot of global fears that were worrying the market six weeks back have not gone away. That is something, which will keep haunting the market.
One must remember that monsoons have also been normal, but the spread has not been exactly very good. So that's one more factor, which will be plaguing the market .
What are you expecting for the October quarter though, because for a lot of people this quarter was a pleasant surprise and most people seem to be going with the consensus that October earnings may not be too bad either, what's your feeling?
I think, October earnings itself will not be too bad, but one has to remember what is good and bad in India; now the expectations are very high. One has seen earnings grow at 25 per cent plus for the last many quarters and now everybody is taking that 25 per cent for granted. My guess is that as we get into the next fiscal year, probably, earnings will slow down to the 12-15 per cent range and that's where people will question the valuations quite a bit.
If your view is that this market needs to soften up over the next couple of months, then from a tactical perspective, what are you telling your clients to do now?
I am telling people to just look at sectors, which they like for the long-term, where they see sustained earnings growth and stay away from some of the sectors, which will get hit by a global slowdown that could come next year. We are very cautious on metals.
In India we like cement and the engineering sector because these are sectors, which one can play as a very sustainable growth story. The whole infrastructure boom will play out for quite some years in India and this is one place where one will make money over the longer period.
One of the cornerstones over the last few days trading is the expectation generally that crude will cool down now maybe to $60 per barrel odd, and we saw a bit of interest coming back to the oil refining sector, how are you gaming this whole hypothesis that crude will cool and what's your view on the oil marketing space?
We think that crude will come up a bit, but what one has to remember is that Indian domestic crude prices have not got adjusted yet to where international prices were. So India may be one of the countries, which actually does not benefit as much from falling crude prices, because from the Indian point of view of domestic petrol and diesel prices, it won't come down.
In fact, at these prices of crude, they probably need to hike domestic prices of diesel and petrol and of course, kerosene and LPG prices have been subsidised for years and years now.
Where do you stand on the rate sensitive sectors now, autos and banks?
We have downgraded autos just recently to a neutral position because autos have had a great run. But going forward, over the next six months, I see demand starting to slow down a bit. The other thing in the auto sector, which one must remember is that competitive pressure is piling up, especially in two-wheelers.
So a lot of them are cutting their product prices at this stage and that will start hitting margins probably by the fourth quarter of this fiscal. There is still some steam left, so we have not gone on underweight on the sector, but we are probably neutral on it.
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