Raamdeo Agrawal of Motilal Oswal Securities said the market might see strength after the Budget. "The Budget is unlikely to have any major impact on the market. The government may focus on agricultural growth in the Budget this time," he told CNBC-TV18.
He feels lower participation may restrict the speed of the recovery. "The market was beaten down recently. It has the tendency to move in either direction quite sharply. Any recovery will be slow as retail investors have been badly hurt. The recovery will be much slower but will last for a longer time."
The Finance Minister may try to give some incentives to local equity market investors, Agrawal added.
Excerpts from exclusive interview with Raamdeo Agrawal:
Q: What’s your sense, this time there’s been no great pre-budget rally but last couple of days, some people has been saying, maybe because of low expectations, post Budget we might see strength this time? What do you think?
A: I would think so because I think we had one of the worse disasters just 3-4 weeks before the Budget. In any case, Budget will not dole out anything great to the corporates. My sense is it will be much more farm-oriented kind of a budget because there is a global crisis on the food side. Fortunately, we don’t have a physical shortage of food here in India. We are kind of self-sufficient.
But I believe that wheat prices are just going through the roof all over the world. UNO and such agencies have also started taking interest in food prices. So my sense is that, it is one year before the election, the government can try to do something which can excite the imagination of rural voters who are there in large numbers, and second is that food prices are a very integral part of the inflation calculation as well as for the well-being of the lower end of the population.
So all in all, there is a lot to be done on the rural side. We haven’t been doing too well on the agricultural growth side. So my sense is that, there will be a lot of thrust in this first Budget of the 11th five-year plan, and we have aspirations of 4% agricultural growth. So, let’s see what the government has up its sleeve in terms of fiscal levies or fiscal boost to the entire industry.
Q: What’s your sense of the market now? Do you see a situation where the index rally is on to 19,000 or beyond 19,000 kinds of levels or do you think that will be a tall order?
A: Any recovery will be very slow and stalling because a lot of so-called players or investors more particularly on the retail side, have been very badly hurt in recent downturn. Hence, the recovery will be much more halting. But my sense is that recovery will be there. The slower the recovery it will be more lasting and solid unlike the pace at which it fell. I think It will take many more months to go back to the normal level of, the old level of about 19,000-20,000. How fast it can happen, I don’t know but it will definitely be much slower.
Q: But if it’s an agricultural focused rally, not too much directly for the industry or for the stock market. Do you see the possibility of a post Budget rally as such or the markets merely being rangebound?
A: My sense is that the market is in a mood to move in either direction. Whenever there is a downside, it comes down very sharply and whenever it moves up, it moves up very sharply. So what we are seeing in commodities, they have moved up in last four weeks, globally by about 30%-40%, and copper from USD 6,000/tonne to USD 8,300/tonne, wheat literally doubled in 6 weeks. If you look at iron ore revaluation, it moved 65% in just one shot. So I think the markets or the stocks will revalue itself in a very short while.
So my sense is that, because our players have been hurt and the participating capability is less, that would be a constraining factor. But otherwise the mood is, do it as quickly as possible if there is an insight about a stock.
Q: How are you reading this whole commodity spike that you spoke about? Do you think we are heading for a bit of an inflation scare in the middle of the year or will it only filter through in terms of higher earnings for commodity companies?
A: Of course it will mean higher earnings for commodity companies. But my fear is that the price spiral, which was confined to industrial commodities, now it has gone to foodstuff, be it palm oil or wheat or rice. It is just going from one to the other end. The foundation is of course high-energy prices. The whole thing started with the high oil prices and we are seeing that even in coking coal prices. Suddenly there seems to be a shortage of everything on earth.
In just two years, it looks like nothing is being produced in adequate quantity or is it too much of liquidity chasing all kinds of future contracts and hence prices are just being jacked up, or there is a little bit of tight supply. So, it looks like we are headed for a little inflationary kind of situation. The current inflation in the US is highest after 1984. So, it is definitely an inflation scare running across.
Q: What does it do in terms of the ability to curtail interest rates both in the developed and in the developing world if commodity prices continue to remain so high and what does it mean for raw material prices and therefore margins for companies?
A: As far as corporate earnings are concerned, it clearly means that one has to look at the businesses whether you are in a sellers or a buyers market. If you are in the sellers market, then in that case, all the cost escalations belong to the customers and there will be inflation in the end product. But if despite high prices, if I am in a buyers market, in that case the producer has to absorb all the costs and hence there will be a hit in the margins. So, this particular game will definitely happen.
So, one has to be very careful what kind of business one buys and wherever economies of scale is giving advantage to a company, those are the businesses where margins should be protected and hence one should look at those kind of companies much more favourably compared to other companies.
As far as longer-term inflation is concerned, that scare is clearly on top of mind and hence it will hamper any kind of meaningful interest rate decline, which was thought out earlier as a possibility, because the kind of inflationary pressure we are seeing now, it is building up further. So, I don’t think we can expect any significant reduction in interest rates and probably what we are going through might be the bottom of the interest rate cycle. That looks to be the situation. Even internationally, what is happening is that the US is passing through a negative interest rate cycle where short-term interest rates are significantly lower than inflation rate right now. Hence the longer-term 10-year paper is tending to go up looking at the longer-term sustainable inflation rate. That is going to actually curtail the power of the Fed or any authority because then they cannot do anything about long-term inflation.
So, it is a bit of a complex development, which I cannot really fathom. But I am not very positive on any kind of major interest rate cut in India at least.
Q: In the Budget do you expect anything material for the stock market in terms of either change in capital gains tax or STT or dividend distribution tax?
A: This year the biggest thing happening in the stock market is the recent debacle where it is believed that foreigners sold quite heavily here. So, the FM may try to give some incentive for domestic investing so that it can become a counterbalance to any kind of eventual foreign selling. What it could be, I don’t know because retail in India holds about 20% and foreigners also hold about 20-21% of the market. So, they are pretty significant players and they can move in a very cohesive fashion whenever they don’t like the market or some international development happens. But I am not expecting any major change, which can either way change the economics of the market at this juncture.
sourcw: moneycontrol
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