Await policy action on ECB, oil, export fronts: Bharti AXA

Prateek Agrawal, Head–Equities of Bharati Axa Investment Managers feels that in the immediate-term, the news flow that will happen on the policy front would be mixed. He expects policymaking on four fronts: ECB relaxation, oil retail price increase, fertiliser policy getting announced and export disincentives to go for various sectors. 

Agrawal observed that these things would be positive for a large part of the market but may also be negative for the inflation sensitive part of the market. In the immediate term, he doesn't see a favorable interest rate move.

Excerpts from CNBC-TV18’s exclusive interview with Prateek Agrawal:

Q: The market seems to be dithering at current levels; volumes are not very attractive even on triple witching and expiry day. What do you think are the chances for the market trending lower from these levels or higher?

A: In the immediate-term, the news flow that will happen on the policy front would be mixed. We expect policymaking on four fronts: ECB relaxation, oil retail price increase, fertiliser policy getting announced and export disincentives for various sectors. These things would be positive for a large part of the market but may also be negative for the inflation sensitive part of the market.

If you look at the construct of the index, it would be more or less balanced. The quantum has to be seen. For example, if the retail oil prices are not increased to reflect the current market realities, it would mean that companies still cannot trade in relation to the expected profits that they make in a normal market scenario. They would still make the numbers mandated by the policymakers. So, 15% of the market would tend not to perform. That is the scenario in which the index may look a bit down. But, otherwise if all of these four things happen and India Inc is able to see profitability in line with what the market forces dictate, then index should be more or less flat.

Q: There has been a severe drop in a lot of infrastructure stocks: GMR Infra, IVRCL, JP Associates. A bit of that was halted in yesterday’s trading session. Some buying interest has been seen in some stocks. Do you think some semblance of value has been reached?

A: Not yet. Infrastructure and capital goods space still trades at a reasonable premium to the market. It needs to come down to the market level for interest to resurface.

The construction space is a mixed set of companies. It is not only construction, but also real estate kind of plays. Various other factors like interest rates would come into play. Construction space trades lower than the market. The premium thing is not there. But that space suffers on account of inflation in steel and cement.

Q: What is the in-house view on interest rates for the rest of 2008?

A: In the absence of global flows of equity, be it direct equity into stock markets or PE funds, in a situation of rising fiscal deficit the company would be needing more money for their capex, interest rates should have tended to move up.

We have seen some pressures in terms of deposit rate increases while the lending rates haven’t been increased. But the margins for the banks are going down. So, if there is a case that they need to increase going forward, they  may be arrested wherever they are. The only way to do that is maybe to inject a bit of liquidity into the system. That can happen if RBI reverses SLR or reduces MSS or allows ECB funding to happen at a much bigger rate.

Q: Do you anticipate these kinds of changes? How do you play the interest rate sensitives in the run up to such a decision? Do you start buying in the hope of such a decision or do you just wait out till any concrete decision is announced?

A:  In the immediate term, we don’t see a favorable interest rate move. The best case would be that they stay where they are. So, no point in second-guessing and taking a position into interest rate sensitives. One area where there may be easing is the real estate area where there is weightage in the real estate lending which used to be as high as 1.25%. It has been reduced to 75%. So, that helped that space but that’s about it.