Mkts to pullback after elections: Tata MF

Ved Prakash Chaturvedi, MD, Tata Mutual Fund said interest rates would peak out in November or December. One will see a better situation in the market once the political uncertainty clears out.

He added that markets will pullback after the elections.

According to him, sentiment will improve on account of 3 factors: if crude prices come down sharply, when our electorate delivers or decides its political mandate and if we have a good monsoon leading to a very good production taming out domestic inflation.

He said that high interest rates would hurt a lot of real estate companies both in terms of their balance sheets and demand. He believes the worst is yet to come.

Excerpt from CNBC-TV18’s exclusive interview with Ved Prakash Chaturvedi:

Q: Do you see a full percentage point of rate increases happening in the next six-months?

A: In the realm of possibility, rate increases may happen. Quite frankly, inflation in this country is already higher than the disclosed figures are. We all know that some of the pent up inflation of oil prices has not yet been passed on. I am afraid the scenario is not very good and there is some more inflation that we will need to see through. If the policy stance remains that rate hikes are the answer to inflation, a couple of rate hikes are certainly in store, which might mean a 100 basis points more. I do not know whether it will be in six-months or may be a bit longer, but it is quite possible.  

Q: Do you think a lot of analysts will have to re-look that pullback in the second half of 2008 theory for equity markets?

A: There will be a pullback after the elections. We are in a very similar situation to what we were in 2001-02. The interest rates are going up and stock markets are in a bit of a difficult sentimental situation. A decisive political mandate will change the direction of the markets.

Interest rates will peak out towards November-December. As we move towards a situation where political uncertainty clears out in India, towards the middle of next year, we will see a return of good cheer but not before that.

So, there will be some reworking of numbers. I do not feel that the reworking of numbers would be significant. The impact of all this for the year will be at the margin, but in a market like this even that impact will dent the sentiment significantly. The consequences of that will be felt in equity valuations.

If you look at the valuations for equities going forward, they are already at a lower band of 10-13 times for FY09 and maybe about 12-times for FY10. That has been the long-term lower band for the Indian markets. So, the market will overshoot and we may go a little lower.  The valuation band has come to the lower quartile band and that is possibly the only good news for long-term investors that one can talk about it at this stage.   

Q: Would you buy real estate now after the fall? Do you think these stocks can lose much more even from here?

A: I personally think the worst newsflow for real estate companies is yet to come. The high interest rates will hurt a lot of these companies both in terms of their balance sheets and demand, which is already being felt. The worst is yet to come.

Q: What about the whole clutch of rate sensitives aside from real estate? Would you be a buyer in any of the other pockets?

A: The entire infrastructure pack like power and engineering has been knocked down largely because it was overowned. Overseas investors are selling the stocks and due to the current scenario in the market, prices are coming down steeply.

I would still be very positive in the long-term on infrastructure. If the prices of the companies come down it would be a very big opportunity. This will remain the biggest and the most exciting spot in the Indian capital markets and in the equity markets for the next five-years to the next decade. This is really a golden opportunity in that space.

I am still very cautious on banks, both from an NPA perspective given by the way the rates are going as well as the treasury hit that they would take. One will really have to watch out for what happens as the interest rate hikes play out. I would be careful on banks but I would say that some of the other areas are presenting a very good long-term opportunity.