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What Happens To the Markets Now?

Monday, November 28, 2011
By Manik K. Malakar

The equity markets in India have had a roller coaster ride in 2011 with the Sensex having moved in an almost 4,000 points band in this period. A series of factors both domestic as well as global have contributed to the volatility in the markets.

As the New Year nears, the query that is uppermost in the minds of market watchers are: where the market will go in 2012 and what are the cues that will drive equity values?

We start with the good news, in that even though equities were down in 2011 there may be light at the end of the tunnel going forward. “Standing here in November 2011, it is difficult to foresee a very positive outlook for equities in the immediate future,” says D.K. Aggarwal, CMD, SMC Investments and Advisors. “However at a certain point of time, long-term investors would be tempted by the low valuations of companies with a very strong business model and financials,” he continued.

The positive outlook for CY12 is something that most market experts feel will happen. “We have seen quite a weak CY11 and as of now, the fear in the market is touching extremes. CY12 should be good for the Indian Equity Market and we may see improvement in the equity portfolio of investors,” said Sunil Jain, VP-Equity Research-Retail, Nirmal Bang Securities.

And as for the timing of a reversal in the markets, “We would start seeing signs of reversal, i.e. an upward rise, from mid-2012,” said Milan Bavishi, Head of Research, Inventure Growth and Securities. This is subject to the next year’s budget which may bring in market friendly reforms like tax and duty cuts. Also infrastructure investment from the government’s side would have a beneficial effect on industries like steel, cement and infra.

Even from the point of view of Technicals, things look positive. “The markets have corrected substantially for the entire calendar year 2011,” said K. Jayraman, Research Associate, Bonanza Portfolio. The Nifty has come down from 6000 levels to 4700 levels and in the second half of 2011, faced several complex negativities for the market. “Having said that, the market has substantially corrected pricewise and time wise and the decline if any from these levels will be staggered and marginal,” Jayraman continued.

Various parameters are having a negative effect on the markets. Local issues like rising inflation, lack of adequate reforms, higher provisioning on PSU banks, and a high interest rate regime are big dampeners on growth and profitability of companies. External factors of prolonged EU crisis and rupee weakening against dollar are also affecting the sentiment on the market.

“Therefore the markets may see some short term recovery in the Q1 of CY12 because it has corrected substantially already. However, the market may still take one or two quarters thereafter to consolidate and establish a final bottom before a meaningful rally. CY12 therefore will be a sideways market at least in the first half with a marginal upward bias. The Second half will be better in percentage terms as against the first half,” Jayraman explained.

Let us look at the possible moves of the major players who move the Indian equities markets, the FIIs and the DIIs (Foreign Institutional Investors and Domestic Investors). Typically, though not always, the two move counter to each other.

Now in the December period FIIs usually take money out of the Indian equity markets to square off their books back home. This is something that may not happen this time around. “This time the broader indices like the Nifty and the Sensex are down by more than 20% year-on-year,” said Aggarwal. Mid-caps too have taken a severe fall. “Thus, it will be near impossible for the FIIs to book profits while exiting in December this time around,” he explains.  Aggarwal noted that since they had sold in the past few sessions, further selling by them would be reduced, though not of course eliminated.

“I do not agree with this,” said Nirmal Bang’s Jain when queried if FIIs would take money out of the markets this December too. According to data that he analysed in past Decembers, FIIs sold only in one year of the past five. Analysts feel that purchase and sale are more driven by what FIIs would expect about market behaviour. “One can argue that to maintain NAVs, which will always be higher than what they can sell, they might need to buy. But if they feel the market could come down in December, than they will not buy just to maintain their NAV. There could be exceptions for one or two days and that to for a few scrips, but we can’t generalize the same. It’s more of a myth,” says Jain. 

Analysts explain that FIIs make a very cold and balanced call on their investment priorities. “FII’s review their investments critically and monitor the opportunities globally relatively before they make any decision to take money out of Indian markets during December. If they see growth continuation and value accruing they may not do it,” said Jayraman.

Thus, in December 2009 they were net buyers for Rs. 10367 crore and in December 2010 they were net buyers of Rs. 1476 crore, according to data provided by Bonanza. In 2011, however they sold Rs. 10214 crore in August 2011 and they have been continuous net sellers from November 15th onwards, for more than Rs 4000 crore (net). “This is a cause of concern. The market environment is unique this year with complex equations in India and abroad affecting growth and stability,” says Jayraman.

Factors that are spooking the FIIs today include rising inflation, low IIP data, higher provisioning in PSU banks, political scams and instability, unending EU crisis all of them may continue to haunt them and pull money out of market. “The historic weak Rupee to Dollar is another skeleton in the box for the FII’s to negotiate. Going by their recent attitude they may pull out money on every recovery until they see some stability and growth,” Jayraman said.
In the event that FIIs do take money out of the market SMC’s Aggarwal opines with the rupee depreciation and inputs costs increasing in the FMCG segment, there may be selling in this sector on the back of margin erosion.
“FII would like to exit companies which are burdened with huge debts which are being serviced at high rates of interest depleting the profits of the company. They will look at companies to exit where there is a slack in demand or their import content is high or there are ECB borrowings which may cost more for repayment today on weak rupee against dollar,” explains Jayraman. So, they would prefer to be invested in IT and telecom sector and hold investments in private banks, Pharma etc. Capital intensive projects or sectors, selective auto sector, PSU banks, Infra projects with long gestation could be their divestment idea.

So does this mean that DIIs will take up the slack as historically they do? “DIIs have always played a defensive or market stabilization role in Indian Equity market and are most likely to continue in same fashion. Whenever we will see heavy selling by FII, DII will come up to support the market,” said Jain.

“Yes, it is substantially true that the DII’s are taking up the slack of FII’s selling,” says Jayraman. Statistics show that they have been continuous net buyers from November 15 for nearly an equal amount as against the continuous net sale of FII from November 15 till date for approximately Rs. 5000 crore.  “Even otherwise they have been playing a supporting role to the market by buying or selling against the FII’s as the situation demands. However, this may not be true all the time. They have their own timing and strategies to invest in market and they will look for opportunities independently as well,” Jayraman says.

So for the retail investor, what does one do in CY12? Do we buy or sell and if so what? We get the prognosis from the experts.

“We feel that the market is offering an opportunity to build long term portfolios. One can look to buy, not at one stretch but gradually on declines, companies like Sterlite Industries, Bharti Telecom, HDFC Bank, Larsen & Toubro in large cap and Development Credit Bank, Ajanta Pharma, Yes Bank, Tecpro system, Balrampur Chini in the mid-cap space looks good to us,” says Sunil Jain of Nirmal Bang.

“Retail investors would do well to stick to blue-chip stocks for the majority of their equity portfolio,” cautions SMC’s Aggarwal. “Those already invested should hold on to their investments in blue-chip large cap stocks and liquidate the rest of the portfolio, even if at a loss,” he advices.

“Those investors who are on the sidelines and have been waiting for quite some time for the valuations to become attractive for investing, should start investing in small quantities (say 10-20% of their investment target) in blue-chip large cap index stocks gradually. However, they should not invest at one go right now,” Aggarwal says.

Jayraman too is cautious. “From the point of view of retail investors, this is not the right time to pick up investments. If they have missed the rally and not sold their shares earlier at high prices, may be they can wait and hold the same but not add further,” Jayraman says.

“The general rule would be to watch PE (Price/Earnings) of Nifty which is at the 17 level now. If the PE comes down to 14 levels, investors can initiate buying in frontline shares as they will be available at attractive valuations. They should buy into private banks like Axis Bank, Yes Bank for long term. They can focus on front leaders like Reliance, SBI and Tata Motors for one year perspective. Overall at a PE of 14, equity prices would be attractive and give at least 30% - 40% per annum return thereafter,” Bonanza’s Jayraman advices.

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