See 20% upside in earnings this qtr: Motilal Oswal AMC

Nitin Rakesh, CEO, Motilal Oswal Asset Management Company said that he expects 20% upside on earnings this quarter, adding he sees robust numbers in the third quarter of FY11. India’s consumption story is still strong, he says.

Rakesh likes Infosys and TCS in the IT Space, he said.

Below is a verbatim transcript of his interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy. Also watch the accompanying videos.

Q: How are all these macros stacking up for you? Do you think very stiff resistance at the current highs of 6,300 is very much in order, even if we break the 6,000 mark in the new year?

A: I think we have for the last six-eight weeks we had this seemingly sharp move, but effectively we are in this range of 5,700 on the downside, over 6,000 on the upside. So, I think clearly it’s time to take stock, consolidations underway. A lot of global events, a lot of domestic events both from an economic perspective, inflation, interest rates, liquidity, quarterly numbers are coming up. So, I think at this point it looks like that we are in this range of 5,700 to about 6,000 on the Nifty.

There aren’t any immediate triggers either from a liquidity or a fund flow perspective or from a fundamental perspective. Yes, people have concerns around for example the crude prices, but I think as at this point in time all of that really is being digested and markets seems to be in a consolidation mode.

Q: How long do you think this consolidation mode will play? And any sense that you are getting for the early months of 2011, is there any expectation of the markets breaking out of their all time highs in the first half of 2011?

A: We need some fresh triggers. Clearly, a lot has been discounted by the markets over the last few weeks. In my view, there are only two-three events that can lead this move back up above previous highs. Obviously, we definitely need robust foreign flows to continue. If we got anywhere from USD 30-40 billion this year, I think we need to see if not higher, but atleast in that same range next year for the markets to even stay robust.

Secondly, I think with this quarter earnings, seemingly to be above 20% at an aggregate level, that might provide the next trigger from a valuation point of view because the concern everybody has had is that at this level the market seems fairly priced. So, even though we may not do much on the price front, even if we do positive things on the earnings front, I think that might make the market look attractive again.

Q: If one looked at the corporate earnings for the last eight quarters, up until September 30th, the second quarter of 2009 you actually saw a negative performance, you saw the slowdown impact very drastically which is why it was easy to have very positive performance up until Q2 that is September 30. But when you come to the last calendar quarter of 2009 there was a fairly decent uptick both in macros and much more so in corporate performance. Would you say therefore this Q3 of FY11 could be a tough ask to do really that much better than what is projected?

A: Obviously, the stock prices don’t move in a linear fashion even though the earnings growth seems to be much more linear. So, clearly there are more factors that play from a price point of view in the markets.

Secondly, a point about this base effect on the earnings front, taking that into account as well it does look like that we might see a fairly robust third quarter numbers for FY11 based on the projection that we are running. Clearly as I said that has to be the next trigger for the market. If anything, even for us to get back to the previous highs that we saw six weeks ago we really need those kind of numbers actually turn up.

Q: What is the inhouse number crunching telling you that some sector surprise is possible?

A: There are obviously a couple of things that play here. Clearly, the consumption story still continues to be very strong and we are likely to see some positive surprises on that front. So, if that stays strong, clearly that has a trickle down effect to every other sector that impacted. So, clearly I think that is the first major trigger.

Despite all the concerns around the banking sector, we might see a positive surprise because at this point in time atleast based on our internals analysis, it doesn’t look like we will see a fairly significant impact on the margins. So that also will be good news.

I think thirdly, the counter trend to that is the impact of higher oil prices and higher commodity prices on companies that use commodities. But keeping in mind that almost 40% of Sensex companies are commodity companies, I think that also might cancel each other out as well. So, I think overall we still think that we might see more than 20% earnings growth for this quarter which I think will be a fairly good number.

No output signal from OPEC as oil heads to $100

OPEC gave no signals on Friday it would supply the world with more crude, despite oil prices trading near a two-year high and with most analysts predicting a rally above USD 100 per barrel.

OPEC's most influential oil minister, Saudi Arabia's Ali al-Naimi, said he was still happy with an oil price of USD 70-80 per barrel.

US crude closed at over USD 91 per barrel on Thursday and Brent traded at around USD 94 per barrel.

He was speaking on his arrival in Cairo for a meeting of Arab oil exporting countries.

Arab OPEC ministers are meeting in the Egyptian capital this weekend where they may discuss oil production and price, but no formal decision on output will take place. OPEC's next scheduled meeting is for June.

Libya's top oil official, Shokri Ghanem, said his country was producing 1.5 million bpd at the moment while having capacity of 2 million.

"Our capacity is close to 2 million (barrels a day) but you know we are producing around 1.5 million," Ghanem said.

"Production is according with our international commitment, in particular our OPEC commitment, and in the meanwhile we don't want to rock the boat of the market."

China invites South Africa to join BRIC: Xinhua

China has invited Africa's largest economy, South Africa, to join the four-member "BRIC" grouping of fast-growing emerging markets, its state news agency reported on Friday.

Chinese Foreign Minister Yang Jiechi said BRIC has accepted South Africa as a full member of the group, which currently includes Brazil, Russia, India and China, according to Xinhua, which was monitored in Johannesburg.

China, South Africa's largest trading partner, will invite South African President Jacob Zuma to attend a summit of BRIC leaders that Beijing will host next year, it said.

South Africa is the world's 31st-largest economy, according to World Bank data for 2009 and is less than a quarter the size of the smallest BRIC economy, Russia.

The BRIC countries have sought greater clout for their grouping, holding a summit in Russian in 2009. "BRIC" is a term invented in 2001 by Jim O'Neill, the chairman of Goldman Sachs Asset Management.

South Africa applied to join BRIC at the G20 meeting of the world's leading economies in Seoul in November, Russian President Dmitry Medvedev said at the meeting.

Its economy is projected by its government to grow about 3.0 percent this year, hardly the blistering pace seen in other BRIC countries.

Some investors make asset allocations based on the BRIC classification and all of the countries that currently make up the grouping have seen their global financial clout increase substantially in recent years.

South Africa's foreign minister was scheduled to speak on Friday on the BRIC listing, the ministry said.

European airlines unfazed by oil price spike: Analysis

European airlines, hit in 2010 by labour strikes, the volcanic ash cloud and an early onset of snowy winter weather, are taking surging oil prices in their stride thanks to fuel hedging.

Crude oil prices, the key factor in fuel costs, have risen above USD 90 per barrel for the first time since October 2008, heralding a swelling fuel bill for airlines around the world.

But a return by airlines to hedging policies that will offset higher oil prices means that airlines are prepared and investors have less to fret about.

"On the whole, hedging policies work and even Ryanair found that out rather late in the day," said BCG strategist Howard Wheeldon.

Irish no-frills carrier Ryanair used to hedge a lower level of expected fuel price exposure than rivals, saying it saw massive speculation in oil markets. It remained largely unhedged at oil prices well above USD 100 per barrel.

Soon after, CEO Michael O'Leary admitted he had "screwed up" by not hedging the company's fuel needs at prices under USD 100 per barrel. Now Ryanair has hedged 90% of its fuel price needs for the fiscal year through March.

During the global economic crisis, many airlines had shunned hedging in a bid to save money in the short term as demand for air travel slumped. Having failed to lock in contracts when fuel was relatively cheap they lost millions of dollars last year.

Now it looks like airlines have started packing on hedging contracts again in anticipation of oil prices pushed higher by global economic recovery over the next couple of years.

Zero-Sum Game

To protect themselves against swings in fuel costs, one of the industry's biggest cost factors, airlines buy hedge contracts with which they pledge to pay a certain price for jet fuel they buy in the future.

But as they usually start locking in prices a year or two in advance, they cannot adjust policies quickly enough to adapt to rapidly changing prices.

German flagship carrier Lufthansa, which had hedged 68% of its estimated 2011 fuel price exposure by December 1, said it will break even in terms of fuel hedging at an average oil price of USD 88 per barrel next year.

Lufthansa spent 3.9 bn euros (USD 5.12 billion), or almost a fifth of its revenues, on fuel in the first nine months of the year. That figure would jump to 6.5 bn euros if the average 2011 oil price was at USD 104 per barrel.

"It's a zero-sum game," said Gert Zonneveld, an analyst at Panmure Gordon who covers among others Lufthansa rival British Airways.

"You smooth the peaks and the troughs, you create more stability for your business, you can budget more easily because you know what the price is going to be."

British Airways is 82% hedged for the quarter ending next week, up from 74 percent for the year-earlier period. At the same time, it is conservative for the longer term, with a cover of only 30% for the fiscal year to March 2012.

Economic recovery

As most airlines hedge their exposure to fuel costs up to one or two years in advance, any spike in fuel prices takes a while to trickle down to profitability, so analysts say it's not 2011 results they would worry about.

"The issue is that if oil does stay at these higher levels then they're likely to be affected in 12 months time with their 2012 profitability," said Macquarie analyst Paul Butler.

"But so long as the economic recovery continues to go ahead, I think that they would probably be able to offset much of that by putting up ticket prices."

Global airlines group IATA said in September it expected oil prices to remain relatively stable at USD 79 per barrel, but it still warned that industry growth would slow after pent-up demand for travel and freight transport dissipates.

Last year, oil prices dropped to less than USD 50 per barrel and some said the era of major fuel price hedging had ended. Airlines' current hedging levels suggest otherwise.

"A sensible airline will not have made any particular adjustment. If they did, they will regret it," BCG's Wheeldon said.

China gears up fight against inflation

China's central bank said on Friday it will use various policy tools, including interest rates, to help fight inflation in 2011.

The People's Bank of China said in a statement on its website (www.pbc.gov.cn) that it will stick to a prudent monetary policy to steer money supply back to normal.

The central bank has increased banks' reserve requirement ratio six times and raised interest rate once this year.

China says willing to help eurozone recover

China is willing to help countries in the eurozone return to economic health, a Chinese Foreign Ministry spokeswoman said on Thursday, following a report that Beijing could step in to shore up finances in the beleaguered bloc.

Many investors are looking to China, as the owner of the world's largest foreign reserves, to use a portion of its USD 2.65 trillion holdings to come to the eurozone's rescue by buying up Greek, Irish, Portuguese and Spanish sovereign bonds.

"As for what countries' state bonds China purchases, that's not in our purview," Foreign Ministry spokeswoman Jiang Yu told a regular news conference in Beijing. "But I can tell you China supports the financial stabilisation package of the European Union and International Monetary Fundto respond to the European debt crisis."

"We're willing to support eurozone countries in surmounting the crisis and achieving economic recovery and fiscal health."

China offered to take more "concerted action" to support European financial stabilisation, the Financial Times said on Wednesday, citing unnamed senior European officials after talks with Chinese Vice Premier Wang Qishan.

Wang said on Tuesday that Beijing supported efforts by the EU and the International Monetary Fund to calm global markets in the wake of Europe's debt crisis and said China had taken "concrete actions" to help some European countries.

Concern that Europe's debt problems could engulf bigger economies in the region have weighed on global financial markets this year and taken a toll on the euro.

"The European market, it can be said, has been in the past, is now, and in the future will be one of the most important investment markets for China's foreign exchange holdings," Jiang said.

In part to protect its euro investments, China has repeatedly expressed support for the common currency this year and vowed to buy bonds from Greece, whose fiscal meltdown in May set off the latest debt rout.

A Portuguese newspaper reported on Wednesday that China was ready to buy 4 to 5 bn euros of Portuguese sovereign debt to help the country ward off pressure in debt markets.

Obama signs bill to fund US government until March

President Barack Obama on Wednesday signed a bill funding the US government until March, the White House said, postponing a struggle among lawmakers over spending and the deficit until next year.

The bill to fund the government through March 4 gives Republicans the chance to try to push through dramatic budget cuts when they take control of the House of Representatives and have more members in January.

Will Europe make its bank stress tests tougher?

The European Central Bank is demanding tougher testing of the region's banks after previous checks came under fire for giving Irish banks a clean bill of health shortly before their near collapse.

When and how were the last tests conducted?

In July, 91 EU banks were tested on how they would cope if lending such as home or commercial property loans turned sour.

But supervisors did not consider the risk of a bank being forced out of business if it struggled to get credit itself or if savers withdrew deposits, both factors that accelerated the demise of some of Ireland's leading banks.

The July checks, embarked upon after similar US tests were credited with reassuring investors, were meant to do the same in Europe by uncovering hidden problems and forcing weaker lenders to recapitalise.

Initially, news that only seven of 91 failed the test -- none of them Irish -- received a warm welcome. But some branded the exercise irrelevant in the months afterwards as Ireland was forced to accept an 85 bn euro bailout mainly to stop its banks from toppling.

With investor confidence in the euro zone shaken by indecision over how best to help countries that find it hard to borrow, Europe's leaders are looking for ways to perk up pessimistic markets.

Stress testing the banks at the heart of the financial crisis may help. But European countries do not agree on how it should be done, and crucially whether they should include a so-called liquidity test to gauge bank resilience if credit dries up.

Will the next round of health checks be stricter?

Some of Europe's leading politicians are very critical of the stress tests.

The European Union's top economic official Olli Rehn recently called for tougher probing of banks in a fresh round of stress-testing planned for February, saying they must include a check on liquidity. The European Central Bank backs this line, EU sources have said.

Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, sent a similar signal last week when he said previous tests had not covered "all dimensions".

But it is unclear whether such pressure from the European Union's executive arm and the ECB will overcome reservations about harsher checks from Germany and others, who are nervous that over-rigorous testing may produce uncomfortable results.

Why has Germany been reluctant to back public stress tests?

Any bank that fails a stress test would probably have to top up their capital cushion to persuade investors and lenders that they can survive should the crisis worsen or bad loans be written off.

Germany's regional lenders, or landesbanks, are among the worst hit by the crisis and some of the country's commercial banks -- Hypo Real Estate and Commerzbank -- count among its biggest European casualties.

Little, however, is known about the full extent of the problems at the country's landesbanks, which were reluctant to publish the findings in the last round of tests. Some believe this disguised the true vulnerability of German banks.

So far Germany has spent little propping up individual banks compared to other European countries.

Instead it relies on the strength of its community savings banks -- who most assume are cash rich despite the losses of the landesbanks that they own jointly with local governments -- to keep the system afloat with liquidity.

Moody's, the credit rating agency, warned in April that the reliance of German landesbanks on a system of mutual support for stability, rather than being individually strong "makes German banks more exposed to shocks and contagion risk".

The agency's analysts warned that the German backstop was not up to coping with the financial crisis, writing: "Several of the larger public sector banks ... remain too weak to fend for themselves in times of stress, let alone support others."

So far, bust investment bank Hypo Real Estate is the only German lender to have been declared dangerously weak by stress tests.

More rigorous stress tests could include others, landing the state with a far higher bill to support its landesbanks as well as rocking confidence in Germany.

Who decides how strict the checks will be?

The checks will be carried out by a new European banking authority in what will be the first trial of the fledgling agency, set up by Brussels to better police banking.

The London-based agency will take many of its staff from the ranks of the European Commission, which is already tasked with helping set the criteria for the stress tests. The European Central Bank also has a say.

But, ultimately, it is the supervisors from Germany and other countries who jointly make the decisions of the European Banking Authority, who will make the final call.

Authorities like Germany's Bafin, which earlier this year adopted a softer line with its banks, telling them participation in stress tests was voluntary, might again get their way.

World Cup triumph marks year of the Spanish: YEARENDER

A World Cup soccer final disfigured by cynical Dutch thuggery was partially redeemed in extra time by the swift reflexes of Spanish midfielder Andres Iniesta.

Iniesta scored the only goal of the match to give Spain a deserved victory in Johannesburg's Soccer City against a Netherlands side who sullied the legacy of their wonderful 1970s and '80s teams.

Defender John Heitinga was sent off and there were seven other Dutch bookings at the climax of a tournament which failed to catch fire in the chill of the South African winter.

Spain, who had under-achieved at the international level before winning the 2008 European title, rebounded from losing their opening game with Iniesta and Xavi weaving intricate patterns in midfield.

Apart from five goals to David Villa, the Spaniards' finishing did not match their creativity. Eight goals overall from seven matches, the lowest tally by a champion side at a World Cup, told its own story.

South Africa's overwhelming concern was to stage a safe tournament in a violent country.

Terrorism was also a pressing concern. The ease with which sports events can be disrupted had been exposed before the Cup when gunmen killed two members of Togo's delegation as they travelled to the African Nations Cup in Angola.

To everybody's relief, organisers were able to report at the end of the month-long World Cup that there had been no murders, rapes or carjackings related to the tournament let alone any acts of terrorism.

In response, International Olympic Committee (IOC) president Jacques Rogge felt able to tell reporters in Durban at year's end that the republic was capable of hosting a first African Games.

Spainiards celebrate

Soccer's world governing body FIFA had already decided to take their World Cup to new territories by choosing Russia's vast expanses as the 2018 hosts followed by the tiny emirate of Qatar four years later.

A joint bid for the 2018 Cup by Spain and Portugal, two countries entangled in the euro zone debt crisis, fell by the wayside but otherwise Spaniards had plenty to celebrate.

Rafa Nadal, who continues to add subtlety and variety to his relentless physicality, collected grand slam tennis titles on clay in Paris, grass at Wimbledon and a hard court at the US Open while Alberto Contador won the Tour de France cycling classic for the third time.

There was a darker side to Spain's otherwise triumphal year. Contador tested positive for the anabolic steroid clenbuterol during the Tour and world women's steeplechase champion Marta Dominguez was named as a suspected drug trafficker in a Spanish civil guard investigation. Both denied any wrongdoing.

Another potential Spanish champion Fernando Alonso watched his Formula One title hopes evaporate when German Sebastian Vettel led from start to finish in Abu Dhabi. The Red Bull driver, who had trailed Ferrari's Alonso by 15 points before the final Grand Prix of the season, won by four points.

While Vettel celebrated, seven-times world champion Michael Schumacher's comeback season had already ended. The 41-year-old German spun his Mercedes on the opening lap in Abu Dhabi and was struck by Force India's Vitantonio Liuzzi.

Fading trio

Schumacher was one of a trio of great athletes who had ruled the world at the turn of the century but who were now increasingly facing the ravages of time and fortune.

The most spectacular fall from grace came in the person of Tiger Woods who was forced to confess at the start of the year that newspaper revelations of serial infidelity were true.

Woods subsequently lost his wife, his meticulously crafted image as an all-American hero, which had been worth millions in corporate sponsorship, and the world number one ranking he had held for more than five years.

He also failed to win a PGA title for the first time since joining the tour in 1996.

Woods showed glimpses of his best form in the Ryder Cup staged in pelting autumn rain at Celtic Manor in Wales but even he could not prevent Europe from defeating the United States in the biennial team event by a single point.

Seven-times Tour de France champion Lance Armstrong crashed out of this year's race when he fell on the Col de la Ramaz during the eighth stage. He eventually finished in 23rd place.

Armstrong returned to the Tour last year after retiring in 2005 and finished a creditable third to Contador. After this year's disappointments the 39-year-old American conceded that the indomitable will which had helped him to overcome cancer was no longer sufficient and said he would stop competing in Europe.

A Canadian doctor who treated Woods after knee surgery is being investigated for allegedly providing performance-enhancing drugs to American athletes.

Armstrong is being investigated after former team mate Floyd Landis, who was stripped of the 2006 Tour title after a positive test for testosterone, accused the Texan of taking prohibited substances.

Scandal also tainted cricket in a year dominated by England who beat Australia in the Twenty20 World Cup at the start of the year and took the lead in the Ashes series as the year drew to a close before being routed by the Australians in the third test.

Pakistan test captain Salman Butt and his two opening bowlers Mohammad Amir and Mohammad Asif will learn next month the results of an inquiry into newspaper allegations that they deliberately manipulated incidents in the fourth test against England at Lord's.

Canada had a good start to 2010 by taking a record 14 golds at the Vancouver Winter Olympics, including an immensely satisfying win over the United States in the ice hockey final.

The opening of the Games was overshadowed by the death of Georgian luger Nodar Kumaritashvili in a training crash.