The Hindu Business Line : Near term market volatility seen: UBS

Mr Sandeep Bhatia of UBS believes that there will be no fundamental impact of Thai move on India. He expects liquidity crunch to continue till the second week of January. According to him, the 10-year bond yield will go up to 8.5 per cent by next year.

Mr Bhatia also anticipates the dollar to weaken in comparison to the rupee. He further adds that third quarter earnings are unlikely to disappoint and that margins will stabilise. In his view, near term volatility is expected, as valuations are demanding. He feels that quarterly results and the Budget would be the next drivers for the market.

Excerpts from CNBC-TV18's exclusive interview with Mr Bhatia.

What do you make of the sudden volatility in the market?

I think volatility is here to stay. There has definitely been lack of too much news flow after the result season, the valuations are demanding and the markets have had a good run for the rest of the year.

I think we will see a clear trend in the market emerge only after the next quarter results are out by end of January as we head into the pre-Budget and post-Budget season. There could be some interesting changes as far as taxes and policy announcements are concerned. So I think in the near-term for the next one month, volatility is here to stay.

How do you read things globally now in terms of liquidity, we seem to have just dried up for the last few days, and how do you read that event in Thailand?

Liquidity is going to be drying up as we head into the holiday season, our fund managers mostly go on leave from December 15 and they would not be coming back to the desks until the second week of January. So liquidity definitely will get impacted. Therefore, any movement in the market based on any news flow gets exaggerated with low liquidity levels.

As far as Thailand is concerned, I do not think it had any impact on a fundamental basis in India.

We are moving towards free capital accounts and these kinds of capital controls are not going to happen in India. So this reaction that happened yesterday, was clearly an overreaction.

Some of it is coming back today, but it has no long-term impact, either on India or most of the countries in the region, we would believe.

Is there any reason to believe that this may not be just a monthly bleep of volatility and we might get into the protracted pain for the market and earnings or the Budget may not necessarily impact the move that much?

I think if volatility has to be protracted then something has to change globally. I do not think that we are seeing any major concern globally, we expect a soft landing in the US; we expect interest rates to come down in the US. So if that changes then there could be protracted volatility for investors globally, which would definitely have an impact on India. So the volatility, which is coming into India currently, is transmitted from outside the country.

As far as the Indian causes for volatility are concerned, whether it is the Budget or the earnings season, we have seen the worst in terms of commodity price increases being very well digested by the Indian corporate sector. The good thing is that now we are in the best part of the year, the October-December or February - March, are one of the strongest periods for the economy.

We do not see significant increase in raw material prices whether it is crude oil or metals coming through in the next six months and therefore the pressures on margin should stabilise or maybe even abate.

If expectations run ahead of itself as always happens as we saw when the market ran up last month, then there was a bit of a correction, but I do not think that there will be a big shock in terms of earnings growth.

One enduring theme for the last two or three years of this bull market has been the infrastructure, capital good story. Some question marks have come through on the sustainability of this growth because of Chinese competition. With the way these ultra mega power projects have gone, are you concerned about this story getting derailed?

I think it is not getting derailed, but there would be midcourse corrections on the way. I think the infrastructure story has to be seen on a wider scale, so it is not only the power projects, but also it is the airports and the roads and the ports. I think India is woefully behind in terms of this and the real challenge for us in the market is to see whether we can continue to see the kind of corporate earnings growth that we are now got used to in the market, which is why we are pricing it at such high and continued levels.

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