'The worst may not be over yet'

Q&A: Lorraine Tan

Equity markets across the globe have seen their worst performance during the current calendar year, led by selling pressure from overseas investors. A steep fall in commodity prices is good news, but it will be reflected in the corporate performance only in the second quarter of 2009. Forex derivatives and oil-hedging losses will cloud earnings as there is a possibility of sizeable writedowns from the losses. Equity markets, including those of India, will show some improvement only in the second half of 2009. Lorraine Tan, director, research for Asia, Standard & Poor’s (S&P), speaks about markets, corporate earnings and others in an interview with Rajesh Bhayani.

Do you see global equity markets stabilising in coming weeks?
It is too early to say so. When markets move in a narrow range for a few months and consolidate, only then will they start moving up. Such a situation is yet to come. Markets may only improve in the second half of 2009. The Nifty may average the 4,500-level by the end of the next year.

Where does the Indian equity market figure in your list of over-sold markets?
Our analysis, based on share-ownership pattern compared to market cap, suggests that those markets that have lower ownership of shares, like Malaysia and Singapore, will bottom out faster. Markets like China and Hong Kong are neutral. India does not figure in these lists and there is potential for further selling as it is relatively expensive.

Does your projection of the Nifty reaching the 4,500-level next year not sound very optimistic?
No. This is because we expect some money from the US and Japanese investors moving to Bric (Brazil, Russia, India and China) markets. India is relatively less dependent on the US market and it has support of the domestic demand.

Poor corporate earnings and impact on the broader economy generally follow a fall in equities whenever there are downturns.
Yes and we will see more job cuts, a further fall in earnings and so on, including in India. The economic activity will see more impact in coming months. In other words, the worst is yet to come. The last quarter of 2008 and the early part of the next year will see some more impact.

Will the steep fall in commodity prices not help companies to keep their costs low and improve their earnings?
It is true that commodity prices have fallen steeply in the recent past. The issue is many companies have hedged in commodities and forex derivatives and they are likely to incur losses, for which they will have to make provisions, which can affect their earnings in the fourth quarter. The strength of the dollar and the fall in crude oil prices are far more than most companies have expected. Many companies, including those in India, have hedged against the crude oil price to ensure that the rise in the price does not hurt them. However, the steep fall has taken them by surprise and now many of them will have to provide for this. Similarly, the consistent rise of the dollar, with money flowing back to the US, has also caught many unawares.