Also read: Sensex will reach 24000 in FY15: Deutsche AMC
Singhania: How do you make many in this macro environment?
Chokhani: You could own stocks [for the long term]. I think that is the short point: that one has to be focused on businesses and what they will earn rather than who will buy, when they will buy, why will they buy it? Or who will form the government?
25 years ago, when I had done my MBA, I produced a report on India and I do not kid you, if I just reproduce that report today with updated numbers, it is the same macro problems, the same current account mess, the same fiscal mess, nothing has changed.
We have had reforms. We have had some 16 governments or some such number, it does not go up. The bullish thing is always a micro in India.
Singhania: One thing has changed, you had no money when you were optimist, you have more money when you are pessimist.
Chokhani: Narayana Murthy said that at 18 you should be a communist and at 40 you should be a conservative.
Singhania: On the earnings part, you recently updated your Sensex target to 24,000. What is your earnings growth expectation? We are seeing after 4-5 quarters earnings again trending into double digits. Now the pessimist can argue that it is one or two stocks or one or two sectors, the optimist might say that you are again back to that teen kind of earnings growth. What is your earnings expectation for the next two years and what is the genesis of this target being upgraded to 24000?
Laijawala: Our expectation is 10 percent for FY14 and the team is looking at 14-15 percent growth for FY15. For FY15, we are expecting a more broader earnings recovery. In FY14 it is obviously far more focused on few sectors which everyone knows about.
So that is what the markets are going to look at. A very, very important point is that markets tend to re-rate when earnings reach an inflection point. This is going to be the factor that investors are going to watch out for and this drives our expectation for a 24000 target for this year -- that that moment is going to approach in FY15.
Timing is very difficult. Is it the election? Is it various other variables? While everyone thinks it is the election we think there is far more happening in the economy than just the election. The election may probably decide the pace of change or the delta of change, but there are many other variables which are falling in place for India, which investors should not ignore and therefore that will decide that inflection point.
Singhania: What is your view on tapering? Everyone is concerned about tapering. We had done a study sometimes back on these new terms which get coined and which create havoc in the minds of investors, we had fiscal cliff, we had tapering and we had so many other things. We did a Google analysis of the search trends and we found out that these trends last for two months, they hit the peak and after two months people forget and the economists then coin new terms. This tapering has been going on for the last six months. The day tapering was announced all equity markets went up including the US. So what is your in-house expectation of the pace of tapering?
Laijawala: At Deutsche, we believe that the tapering will be done by the end of the year. There are fears that the taper could be more accelerated should the US economy move at a faster pace than anticipated. The bigger concern that is beginning to emerge now is an earlier-than-anticipated move by the Fed on the rate cycle. So while the consensus expectations for this year are for the rate cycle change in 2015, what if the US economic recovery is even stronger than the estimate and the pace of the acceleration is stronger the current expectations of a normalisation of monetary policy?
The other point that investors must watch out for is the short-term rates in the US. I think the environment or the trajectory of short-term rates in the US will have a very important impact on market sentiment. Because yes, you can see equity prices move up during times of economic recovery when bond yields are rising, but when short end rates tend to move up, that is when nervousness comes into equity markets.
Singhania: On the tapering front you did mention about the risk of equity flows impacting yields, currency everything. We have this new governor who has been very articulate about his policies as far as managing the forex is concerned and we have this huge flow which came in from FCNR and we have this huge buffer. What do you think will be the impact of a major taper and an aggressive taper, both on the currency as well as the debt market in India?
Mehta: As far as debt market from foreign flows is concerned, it is really not there.
Singhania: But first trend is we have seen USD 2 billion come in, right?
Mehta: When we say foreign money on debt market there are two types of investors: one is traders and H1, and one is the real money guys. If you step back a little bit in May, we almost reached a peak of USD 41 billion on the debt side.
In that how much is the real money guys, real money guys will not be even USD 4-5 billion, which are there today also. They are still there. It is the arbitrage guy and arbitrage guy has no view on country, no view on currency, no view on anything, they are pure arbitrage guys. They are logged in into currency and they are running a carry game of 1 or 2 percent. So it is a completely forward game. If the forwards are lower and you are able to make 1 or 2 percent carry they will always come in.
What happened in May, the forwards went up, you thought you would make 1-1.5 percent carry, your forwards went up by almost 2 percent. So it made sense for you to unwind that position. So from a currency point of view it just helps the sentiment, but it is currency-neutral because he is unwinding his hedge too.
So all these guys, whether they come or go has no meaning. It is the real money guy, who actually comes in will impact because these are the guys who will come unhedged just like equities. In equities 90 percent of the guys are unhedged.
So when the real money guys come in and they are coming unhedged, that will have impact on currency. A lot of real-money accounts are not even set up to invest in India. We had a problem of withholding tax. A great timing to solve that problem was along with Fed taper that we announced the withholding tax rationalisation and people started looking into it, we have one more chance.
People are in the process of setting it up, so that is why I am not too worried about taper. It will just have a headline impact. Once they are set up and actually in the debt market we are in the situation where we were in 1996 in equities. Real money guys have not just invested in India. So they will have to come at some point of time, but the biggest challenge still remains the flow which comes on the equity which will really impact the currency.
So now if we look at FCNR (B), a lot of money is again the FII money, the same bank money as same as FCNR (B) because you have India exposure and stuff like that, but it is again giving you sentimental-wise comfort because three years forward they have already sold it to the same banks.
So you have temporary buffer, but when you have outflows coming in and if there is negativity there is chance of not getting the right government and that could impact the sentiment.
That is the worry you have. Even the right government may take time to change things and all that, but at least there will be bridge inflows coming in because of positive sentiment, positive momentum.
Singhania: So it can have some volatility.
Mehta: Absolutely.
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