Rely On Good Research

Kishor P Ostwal
CMD
CNI Research

A LIQUIDITY BUBBLE

• The market fundamentals are poor. This suggests that the euphoric buying was liquidity-driven and restricted only to the 100 index-based stocks, which is meaningless from the macro purview of the market.

BUY ON DIPS

• Considering market behaviour and high volatility over the past four years, it would be ‘buy on dips’. In fact, we cannot rule out the possibility of seeing the Nifty at 5700 again.

The Indian markets are under the control of a few investors – global as well as domestic. There is no level playing for all the investors unlike in the western markets. Hence, they are not comparable with other emerging markets in the true sense.

The kind of volatility seen in the Indian indices over the past few years has not been seen in any of the other emerging markets. The fundamentals are poor, especially the issues related with CAD, the scenario in the manufacturing sector and banking NPAs. This suggests that the euphoric buying was liquidity-driven and restricted only to the 100 index-based stocks, which is meaningless from the macro purview of the market.

The Q2 earnings were below the street expectations due to several underlying factors. In some sectors, though topline growth was seen, the overall earnings were below expectations. The H2FY14 results may not be encouraging so long as the rate cycle does not reverse. There is no sign of improvement in capital investment in India. H2FY14 will continue to be governed by high liquidity with the deferment of QE tapering. Also, the general elections could be a major driver of the country’s equity markets.

The equity, commodity and currency markets are inter-linked through a common set of operators. Hence, the INR may not represent its true value. The heavy import of capital goods was the major reason for the INR drop. I think that the INR has every chance of falling till the 68-69 level, close to its previous low. The continuous USD inflow ought to have improved the INR, but this is not happening. Now, a recovery in the INR can only be hoped for post the elections.

Inflation is rising due to rising prices of vegetables and oil, and higher living costs. Hence, a reduction in rates seems difficult, at least until the elections. The top priority of the RBI is to control inflation. Though the Finance Minster recently made it clear that inflation should be controlled through the supply economy, it seems that the supply economy itself is unlikely to come under control.

As far as the state elections go, if the BJP wins, the Nifty will rise in anticipation of a BJP ascendance in the central elections too. But considering market behaviour and high volatility over the past four years, it would be ‘buy on dips’. In fact, we cannot rule out the possibility of seeing the Nifty at 5700 again.

The global markets will remain in a positive frame and even the US economy has been responding to the QE issue. I believe that QE tapering is still far away as the prudent US economy many not take the chance of losing the grip on the recovering economy by going ahead with tapering.

Shipping, realty, engineering, metal and banking are the sectors to go for. However, I would prefer to be stock-specific, as many stocks have unreasonable valuations and are skeptical to the risk of downgrades.

As much as 90 per cent of retail investors have moved out of the market. In order to bring them back, I will request policymakers to introduce physical settlement in derivatives, which will make equities an asset class. This can bring back those investors who had diverted their holdings to realty and commodity.

For those who are still in the market, I suggest following a bottom-up approach to seek out the gems among the stocks. Among these are stocks like BF Utilities, which has risen from Rs 140 to Rs 380 in the past 30 days, and Aban Offshore, which has moved up from Rs 220 to Rs 303 in 10 days’ time. These kinds of returns can only be seen in value stocks.

Rely on good research or do your due diligence, pick your stocks and wait for your turn. Whenever the market corrects 10 per cent buy blindly, as every time the markets have fallen in this way, they have bounced back. There is every chance of seeing Nifty at 7000 in the next 12 months post the elections.