Buy now with 12-18 month horizon: DSP ML

Source : CNBC-TV18

S Naganath of DSP Merrill Lynch AMC said the possibility of slower earnings has been discounted in the price already.

He feels investors should invest over the next 3-6 months and then sit tight for another 12 months. “We may have to deal with negative sentiment that flows from global events over the next three to six-months. There will be continued de-leveraging and selling by hedge funds and others because they need liquidity. There is nothing we can do about it. But once that is passed, the next three to six-months will offer one of the best buying opportunities for an Indian investor. If one considers a holding period of 12-18 months, by late 2009 to early 2010, such an investor would find no reason to be unhappy with a buying decision over the next three to six-months.”

Here is a verbatim transcript of the exclusive interview with S Naganath on CNBC-TV18. Also watch the accompanying video.

Q: Are we done with the panic for the moment at least or is this just a relief rally?

A: Given the volatility that we are seeing in global markets day in, day out – for the moment one can consider this as a relief rally. Over night the US markets did well. The money markets in those countries are easing which was not the case last week but as of Friday evening and yesterday, the rates have come-off which is a sign of money moving finally through the system and the talk of a second stimulus package also seems to have lifted spirits.

So I would argue that in the very short-term, this relief rally could continue for a while but given the intraday volatility that we have seen even in the bigger markets, any rally like this has to sustain at least for a few days if not for a couple of weeks before we can say that the worst of the crisis globally is behind us.

Q: But what’s your own sense fundamentally? Do you think we are nearing the end of this bear market or still a long and twisting road ahead – can’t say with conviction that we are anywhere out of woods?

A: Internationally every other week or every other month brings with it new sense of concern about some or the other segment of the financial markets. It is still too early to say that the crisis is over and neither can we say we are half way there. The answer is – nobody has a clue and you sort of respond to it as it comes in front of you week-after-week or month-after-month. One has to just wait and watch and see what next frankly.

Q: How are you reading the macro turf right now? There has been a lot of concern about slowing growth but you have seen the moves from the Reserve Bank of India as well. Do you think we still need to bide a lot of time and go through this slowdown phase for the next three-four quarters or could the end of this pain come sooner?

A: Irrespective of what is happening globally, there are quite a few positive things happening for us here in India. Firstly, the economic growth will still average even conservatively about 7% this year and 7% next year, which is in the context of the global slowdown is still quite a handsome rate of growth. Oil somewhere between USD 60-70 per barrel is a big relief and at some point would show up in terms of helping lower the fiscal deficit. Thirdly, prompt action by the government and the RBI in terms of infusing liquidity is extremely helpful and money market rates have subsided quite a bit in the last couple of days.

All of that will contribute to sustaining the current rate of growth. The earnings this year will probably average about 12% and may be somewhere between 14-15% next year, which is nowhere near the 25% odd average rate of growth that we saw in the last four-years but most of it is in the price already.

We may have to deal with negative sentiment that flows from global events over the next three to six-months. There will be continued de-leveraging and selling by hedge funds and others because they need liquidity. There is nothing we can do about it. But once that is passed, the next three to six-months will offer one of the best buying opportunities for an Indian investor. If one considers a holding period of 12-18 months, by late 2009 to early 2010, such an investor would find no reason to be unhappy with a buying decision over the next three to six-months.

Q: When will this global selling abates somewhat because so far we have seen no sign of that? Do you see that continuing for the next six-nine months?

A: The intensity of the selling probably will continue for the next three-four months or may be at the most about six-months. After which the crisis may still rumble on globally but incrementally the news will get less negative and as far as we are concerned, given the likely rate of growth that I talked about, the GDP level, we should be able to recover much faster.

So that by the end of 2009 or early 2010 – both economic growth, corporate earnings growth as well as the stock market performance should be pretty okay.

Q: Which side of that debate do you stand on? Do you think it could prompt a big wave of short covering if indeed curbs were to come in to shorts borrowed against P-notes?

A: I really don’t have any firm view on the subject.

Q: What is the sense you get from across the region? Do you sense that there are still hedge fund closures happening, there are still people queuing up to sell at every higher level, or do you think the mood could change if things stabilise globally?

A: It is a mixed picture. Anecdotally one hears of some degree of redemptions for this quarter, which could be prompting some of the selling that we are seeing.

On the other hand, some of the larger hedge funds are probably continuing to retain their investors or get new money. One is not quite clear how the picture is shaping out. But whatever selling needs to be done on account of redemptions or other liquidity pressures, we should see that in pretty quick order over the next three-four months.

Once that selling is over, then you would find long-term buyers and others looking at some of these stocks and sectors at very attractive valuations and be able to come back in.

On the macro picture, there are two big plusses going for us. One is that with a savings rate of about 35% of GDP or thereabouts, bulk of which is in fixed deposits on the part of savers, with those rates having gone up, the income stream to holders of such deposits goes up.

So, in terms of the overall income that is a big plus, and in many ways should help us hold the aggregate demand at a reasonably stable level in terms of the economy.

The second is that as the developed world in particular witnesses slow growth, for an economy like ours which is still on an investment phase in terms of infrastructure capex et cetera, we as a country could get us enormously attractive terms when we go out and buy capital goods over the course of the next year or two. Both of which could help the economy enormously over this time period.

Q: Do you expect to see any big accidents in earnings, either this quarter or next? Is it all in the price or is the door open for surprises?

A: Most of it is already in the price. You have many stocks down 50-70% from their all-time highs. So, the possibility of slower earnings has been in our opinion most of it is discounted in the price already.

Q: So you think it is one of those 12-15 month kind of a bear market, after which we will start getting constructive again because the fear has been that this could be a slightly more prolonged one?

A: Whatever has to happen in terms of lower prices, pessimistic headlines etc relating to earnings growth or whatever it is, probably will happen at best over the next three-four months after which there is a slow process of confidence building and investors coming back. It is not that the market will rocket back up sharply but if one is a patient investor take your time, make your choices, invest over the next three to six-months and then sit tight for another 12 months.

By the end of 2009 or early 2010 markets should be resuming their uptrend again because as an economy we are in a far better shape. Our financial system is in great shape and a 12% earnings growth or a 7% GDP growth is highly commendable given the current global financial market conditions.

Courtesy: Moneycontrol.com