Markets to remain range-bound for some time: Bajaj Allianz Life Insurance

In an interview with ET Now, Sashi Krishnan, CIO, Bajaj Allianz Life Insurance, talks about the market, portfolios and earning estimates. Excerpts: 

ET Now: Markets have been stuck in this range. Do you think benchmark indices will stay in a range for an extended period of time? 

Sashi Krishnan: Yes, I do think they will stay in a range for an extended period of time because what was driving the markets, especially the earnings, is behind us. And if you look specifically at the earnings, though the broad market had seen a fairly decent improvement in revenue growth, as far as earnings growth is concerned, there has been quite a bit of disappointment and as against estimates of close to around 20% earnings growth for the Sensex companies, the earnings growth has been significantly lower. And the primary reason for this lower earnings growth has been that there has been quite a bit of pressure on margins. And most Sensex companies have had fairly serious issues in terms of finance cost, in terms of input cost which has put pressure on margins, which has impacted earnings. So on the whole, markets have taken cognisance of the fact that we could have an extended slowdown in earnings and therefore market should be range-bound for some time. 

ET Now: So given the kind of disappointment that this earnings season has actually showcased, would you scale down your targets for the next year? 

Sashi Krishnan: Yes, I would suspect that the consensus estimates for earnings has anyway come down quite a bit. And as we go into next couple of months, pressures in terms of higher interest rates will clearly be there in the system. Like if you look at the cyclical top of interest rates that we had in 2008, we are almost at those levels. And whatever signals we seem to be getting from policymakers and the RBI clearly seems to indicate that interest rates are not going to ease in the near future. Policymakers seem to be of the opinion that given the fact that earnings have not collapsed, most corporates will be able to absorb a little further interest rate hikes. That coupled with the fact that commodity prices and oil prices are clearly not in our hands and if nothing much happens out there could add further pressure to margins. 

ET Now: Can I safely assume that in the short term, you are bearish and you do not expect markets to go anywhere? 

Sashi Krishnan: Yes, in terms of macro headwinds, clearly we are not very-very confident. Again I would like to reiterate a couple of things. One is the fact that we had a GDP print of 7.8% for the 4th quarter of last year. Consensus estimates in the market was close to 8.2%, but more importantly, both the services sector and the manufacturing sector seem to have stagnated. We are actually seeing no growth out there. The second bigger problem is that if you look at growth capital formation in the economy, that has actually dropped significantly quarter on quarter and therefore the investment cycle has slowed down quite significantly. So that is going to be a bit of an issue and if I am not mistaken, IIP number should be out this weekend and that will give us further signals in terms of whether we actually have a serious industrial slowdown. 

The second issue is in terms of fiscal deficit itself. Though the government has been assuring all of us that they will stick to this 4.7-4.8% of GDP fiscal deficit target, in the same breadth they are also telling us that they expect revenue collection slowdown in the current year. And for all you know, subsidies may have to actually be moved up and therefore with the moving up of subsidies and slowdown in revenue collection, it looks fairly difficult for the government to stick to its fiscal deficit target. And on the monetary tightening cycle, the RBI has given us enough indications that they will continue with the monetary tightening cycle. So there are headwinds and earnings should remain under some pressure over the next couple of quarters.