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Has The Market Turned Bearish?

Monday, August 05, 2013

The Nifty and the Sensex have lost around 6% each in the last eight trading sessions on uncertainty about how long the RBI would continue its measures to defend the rupee. More bad news poured in with Goldman Sachs downgrading Indian stocks to ‘underweight’ and Bank of America-Merrill Lynch downgrading some PSU banks. So can it be assumed that the Indian markets are in a bear phase? Can a further sharp fall be expected?  Mayura Shanbaug spoke to some market leaders and brings forth contradicting views. Her report...

Currently, there are too many bearish flags to ignore in the stock markets.  With Foreign investors having pulled out a net 63.36 billion rupees ($1.07 billion) from stocks so far last month, and Indian policy makers in a tight spot with the rupee downfall, along with negatives factors like further adverse movements in the USD/INR, Crude, CAD and Fiscal Deficit, Inflation and some indications of a tapering of QE, many believe that the spring of the Indian stock markets is surely over, but there are others who firmly believe otherwise.

Both indices: the Nifty and the Sensex have lost about 6% each in the last eight trading sessions, on uncertainty about how long the RBI would continue its measures to defend the rupee. More bad news poured in with Goldman Sachs downgrading Indian stocks to ‘underweight’ and Bank of America-Merrill Lynch downgrading some PSU banks.

So will the bear phase continue? The “Stock markets will continue to be volatile and in the near-term, as the visible economic slowdown will weigh on the sentiment and the steep decline in rupee will distort the earnings of those companies that have sizeable foreign exchange liabilities,” says Vikram Dhawan, Director, Equentis Capital.

According to Dhawan there is concern for past few months that FIIs investments into Indian equities and bonds are at historic highs. “This along with waning interest from the retail investors is resulting in exaggerated market moves either ways, whenever the FIIs are selling or buying in sizeable volumes,” he says.  
However, he feels that certain quality stocks and sectors are overdone on the downside, “We expect a sharp rebound in the near to medium term. So the market will have winners and losers and the right stock and sector selection is the key to making money in current market conditions,” he says. 

”We feel that there is a distinct possibility of the markets making fresh historic highs towards the end of the year. Although, in the near-term the volatility will remain elevated,” he adds.

“If the FIIs pull-out money from the Indian markets en masse then any level is possible on the Nifty on the downside, however if the Nifty goes below 5400 then it will be a good opportunity to buy quality stocks with a medium to long-term horizon,” he advices. 

Echoing similar sentiments, Shrikant Chouhan, Head, Technical Research, Kotak Securities feels that it’s a really a fearful stage for the Indian market. “As the time is passing it is receiving all negative news flows,” he says.

According to Chouhan, the equation of the rupee and crude prices is also impacting the core economy. “The pessimism is increasing and in case, if FIIs start following it, then the market may fall to extreme levels in the coming few months,” feels Chouhan.

Incidentally, if we consider the overall industries in India, one would witness that the slowdown is persisting for the last one year with GDP growth significantly under pressure and the investment cycle at a near halt. The broader market is moving based on certain sectors such as IT, FMCG, Pharma and Oil &Gas.

“The broader market breadth is poor that will keep sentiment weak,” states Chouhan. “In brief, in the long run (6 to 9 months) the market will come down from the current level, but in the short term, due to an over retracement or oversold situation the market may bounce back to retrace some of its losses,” he says.

“The level of 5850 is going to act as a major hurdle for the market and above that 5970 is not ruled out.  On the down side it has support at 5660 and below 5660 it may even fall to 5400 with a minor support at 5560,” he adds.

But has the RBI’s decision to stave off the rupee fall really helped?  “Certainly not,” says Siddharth Rajpurohit, Sr. Equity Research Analyst, The Market. “The temporary steps taken by RBI on money market rates to curb the fall in USD/INR has not really helped to restrict the fall. Hence RBI would be forced to maintain these steps for a longer period,” he says. Rajpurohit feels that due to the stiff liquidity scenario, banks have started to increase the base rates and in a poor economic scenario; rising of interest rates would further dampen the economic outlook.

Incidentally, the RBI and finance ministry are considering other steps such as increasing margins and restricting trade of USD/INR futures outside India. The government is also trying to boost exports with higher interest rate, increasing subventions and adding more sectors under it to strengthen the currency. 

However, Vikram Dhawan feels that the RBI’s decision to defend the rupee is a bold one as history is replete with instances where Central Banks have tried unsuccessfully to manage currency rates over a longer period of time.

“So we presume that it is just a short-term measure and interest rates will resume their southward journey in the not too distant future,” he says. “Moreover rupee has depreciated very steeply in a very short period of time and we don’t’ see a significant downside from here in the near-term, unless there are policy mistakes or populist moves by the government,” he adds. 

Another question doing the rounds is: Will the markets factor in good monsoons?

“Good monsoons are a welcome respite in these tough times and it will definitely improve sentiment for both equity and bond markets,” feels Dhawan.

The share of Agriculture and its allied sector is close to 14% in our GDP.  Also Agriculture is the largest employer in India. “A better monsoon is definitely good news for India as it would further give a boost to consumption with increased money supply flow in the economy,” says Rajpurohit. He feels that this would lead to revival in many sectors and hence, the markets may witness a positive move with the onset of the harvesting season.

According to Vishal Jajoo, Senior Research Analyst (PCG), Nirmal Bang Securities, the good monsoons have already started getting factored in the stock prices of FMCG companies. “We expect this trend to continue going forward as well,” he says.

However, Shrikant Chouhan feels that the real fruit of it will be realised only after September 2013. “This time the rainfall is over and above average. How actually, it turns up till the end of August will also matter a lot,” he says.

Chouhan feels that in the past, even if India got good monsoon it was very difficult to get the real advantage of it to boost the economy, due to lack of efficient logistic and storage facility.

So how should your portfolio look like?  According to Dhawan, the banking and commodity sectors are cheap from the medium to long term perspective and once the monetary easing resumes, then we expect all the cyclicals to bounce back sharply. “Accumulate Blue Chips at every steep fall and keep excess cash in Tax-free Bonds,” he says.

Siddharth Rajpurohit feels that one must definitely consider FMCG and Pharma for investment and apart from this the other better opportunities lies in Agro based sectors (except fertilizers), tractors and certain private banks.

“Small investors must invest in blue chip companies and avoid companies with huge debt and sectors such as power, infra and capital goods. Investors must also diversify their portfolio across various assets classes,” he advices.

“Due to uncertainties and still the picture of a broader economy is not clear, we have to look for defensive sectors like Technology, FMCG and Pharmaceuticals,” says Chouhan. “They are trading at rich valuations and buying on dips is advisable,” he says.

Chouhan advices retail Investors and NRIs, that they should look at adding and holding on to Index linked Stocks to their current portfolio with a focus on Sector Leaders or Blue Chip Stocks especially at declines. “Further fluctuations are expected especially in the next 30 days and thus, traders need to optimize profits in an ideal situation or minimize loss in a normal trading landscape,” he adds.

Vishal Jajoo warns against speculative investments. “Don’t try and time the markets,” he says. “One should use the weakness in the markets to invest in companies with consistency in earnings, strong cash flows, excellent corporate governance and which have decent visibility in their earnings,” adds Jajoo. However, he feels, in the short to medium term, IT and FMCG should do better.

“Stock markets will continue to be volatile and in the near-term, as the visible economic slowdown will weigh on the sentiment and the steep decline in rupee will distort the earnings of those companies that have sizeable foreign exchange liabilities,”
Vikram Dhawan, Director,
Equentis Capital.

“The level of 5850 is going to act as a major hurdle for the market and above that 5970 is not ruled out.  On the down side it has support at 5660 and below 5660 it may even fall to 5400 with a minor support at 5560,”
Shrikant Chouhan,
Head, Technical Research, Kotak Securities

 “The temporary steps taken by RBI on money market rates to curb the fall in USD/INR has not really helped to restrict the fall. Hence RBI would be forced to maintain these steps for a longer period,”
Siddharth Rajpurohit,
Sr. Equity Research Analyst, The Market.

“Don’t try and time the markets... One should use the weakness in the markets to invest in companies with consistency in earnings, strong cash flows, excellent corporate governance and which have decent visibility in their earnings,”
Vishal Jajoo,
Senior Research Analyst, Nirmal Bang Securities

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