Buy around 8K, earn above 20% in 2-3 years: Experts
Published on Friday, February 20th, 2009 at 10:49 PMAuthor: admin (5507 Articles)
Ashwini Agarwal of Demeter Advisors said markets are likely to remain directionless. “The market is more concerned about global problems before elections. We also expect more companies to announce earnings downgrades.” He said he would be cautious about any rally post elections and would sell into it.
In the near-term, he said the market is likely to break down into lower band or be in a range. “We don’t see the Sensex going above 10,000-11,000 in the near-term.”
Keshav Sanghi, CEO, Reliance Equity International, also shares his view. He feels the global situation will get a lot worse in the near-term before it gets any better. He said Indian markets can break October 2008 lows. “It is difficult to see a rally before elections. However, we may see temporary relief rally if the government announces positive policies.”
Agarwal feels investors can earn above 20% returns over the next 2-3 years. “The worst of earnings is not behind us, but it is time to invest for the long-term. So, one can invest around 8000 on Sensex. ”
Sanghi too feels that one can start investing around 8000 on Sensex.
Here is a verbatim transcript of the exclusive interview with Ashwini Agarwal and Keshav Sanghi on CNBC-TV18. Also see the accompanying video.
Q: Last we spoke you were talking about the possibility of a relief rally. Didn’t quite materialised, did it?
Agarwal: You did have a little bit of relief rally between 2,600 or so in December through till about just a shy of 2,900 as of last week or something like that. The problem is that we are all trying to play very short-term trends. It’s mostly driven by flows and technical analysis. Uniformly, the news flow continues to be bad.
I have been saying for sometime is the fact that we should not expect the news to get any better any soon. I think it is just that which is playing out. It’s principally a directionless market there is no good news coming through, so there is no underpinning to a relief rally. A relief rally is mostly on account of money flow, it’s not for any other reason. So, such things can easily fail.
Q: This one was prompted by the Dow breaking down globally as well. Are you getting the sense that we are entering another big down leg for global equities or do you think we will still get away by trading in a narrow lowish kind of range?
Sanghi: Absolutely. If you look at all the information coming out of US or even Europe for the last few weeks it is only been bad news. There is no sign of that trend changing anytime soon. All the governments around the world are pumping money into the system and that will eventually play out over the next few quarters. But in the near-term it’s going to be a lot worst before it gets better and we are seeing that play out in India as well. I think Ashwini hit the nail in the head. We are playing short-term trends. You have to get into the market with a view of what your return horizon is. It’s impossible to predict what’s going to happen next week. If you down another 4-5% or go up 4-5% it makes no difference at all. You have to be looking at this as a long-term investment strategy.
Q: In the next few months do you see the possibility of the market breaching those October lows. That’s a pertinent question because it is not 4-5% that’s more like 20% plus?
Sanghi: I think we are going to go through the October lows and it could happen very easily. But I still think about 8,000 Sensex is the right level to be getting into the market. It may very well go to 7,500 or 7,700 but it’s going to go down there and turn quite fast. If you are a fund manager looking to fix your return for the next 12-18-24 months; you could be buying into the end of the bear market. You cannot wait for it to close out and then buy on the bounce up. You will not get the volume. You need to build a position. You got to take a view on what the earnings are going to be and buy all the way down. If you think it’s going to close at 8,000 and I think 8,000 is a good base, you got to start buying.
Q: A question which a lot of people are asking themselves that valuations look okay, so on bad days if you get the market around 8,000-8,500 you start buying or do you give into that niggling fear that this is a bear market like none we have seen and who knows if there is a 25-30% more downside lurking somewhere in which case it would look foolish to have bought here?
Agarwal: Investing in this kind of market is more about your mental resolve and how much of your own fear you can overcome. I do not think anybody at 8,000 will be able to tell you that 6,000 is not possible or anybody at 11,000 will tell you that 6,000 is possible. So, you keep swinging between these extremes of fear and paralyses, and over anxiousness to invest.
I think there is a merit in saying that if you take a two-three year view then investing at valuations of eight-nine times which is where the market would trade at 8,000, there is a reasonable chance that you will make more than 20% annualized return over the next three years. But whether you will make it in the next six months or whether you will make it in the next nine months or you will go down 30% those things are impossible to tell.
The other thing I would like to say is that while the markets looking cheap, we should also remember that the December quarter earnings were bit of a disaster. So, it’s not entirely unlikely that earnings estimates are revised down further in the March quarter because despite some little news that we are seeing on automobile sales and steel offtake etc, I continue to believe that the worst of the earnings news is not behind us.
Things are looking cheap today, but even if the market goes down 10% and earnings go down another 5%, the markets going to be pretty much at the same level at 8,000. So do we know if it’s going to not go down further or something like that, I do not think anyone of us can say that for real? But is this the time to invest for a medium-term? The answer is yes.
Q: What is the problem with banks, the bank index is 14% down this week? In the last one month it is down some 25-27%. Why have banks got such a big drubbing?
Sanghi: There are two real issues. The first one is people are concerned about the exposures that the various banks have to the property sector and other sectors that aren’t doing so well. I don’t think there is enough clarity with the investment community on just how much of a hole some of these banks have in their books.
The other one really is the government’s announcement during the interim budget about how much they are going to be borrowing. Pre the budget people thought maybe 10-year yields would come down to 5.70-5.80% perhaps and we saw it go sharply up to 6.2% and 6.4% for a couple of days. I think that is scaring people as well, if the government crowds out other investment. Those are the two main ones.
I also think the banks had gone up a fair bit ahead of this. So you had some trading out or profit taking in the banks as well. But the main concern really I think is the hole in the balance sheets of the exposures to the property sector and other sectors.
Q: Come in on those two large, private sector financial entities, ICICI Bank is down 22% this week to Rs 325 and HDFC has also got a little bit of a rough end of the stick after that housing loan war with SBI. How would you position yourself in these two large financials?
Agarwal: As a policy, it is really hard to comment on individual stocks. But generally speaking if you build the framework that asset quality is likely to be a problem over the next three quarters and on top of that you overlay the fact that Indian banks relative to – if you see the banking sector elsewhere in the world, it’s reasonably well capitalised and corporates are much healthier than they were in the previous ‘bad asset cycle’ in the late 90s, then I think you can build a case that in the medium-term you will be fine on banks, and you will come out okay.
The interest rate war on home loan is a little bit misunderstood in the sense that if you read the fineprint in SBI’s home loan of 8% policy is valid only until March of next year or something like that. So, it is a very limited period offer, after which the rate reverts to its normal rate. So, I guess homeowners will look at the fineprint before they decide to sign up for one loan or the other. So, I don’t see that as a huge concern.
I think the concerns that have driven ICICI and HDFC down are not so much specific to these banks but generally a jittery outlook on the banks. I agree with Sanghi on what he says in terms of outlook for interest rates and competition for resources within the Indian economy and these two banks tend to be well owned by institutional investors and so they came under selling pressure. That is my read.
Q: What are you sensing in terms of global risk appetite because there was one hope that along with insurance money there will be some allocation in the first quarter of the year and you could see that supporting prices but we haven’t seen much by way of flows and now we are hearing that outflows are picking up? What can one expect with FII flows?
Sanghi: The risk appetite actually has got worse. You saw what happened in Eastern Europe over the last few weeks. And you have seen a lot of global emerging market funds get redeemed on the back of that. If they are getting redeemed because of what has happened in Eastern Europe we are going to see money flow out of markets like India as well, not because they don’t like India or they prefer Eastern Europe, but just that if they’ve redeemed they are going to take money out from everywhere.
I think people are a lot more concerned about emerging markets. I still believe and most of my clients still believe that India will do better than most other emerging markets. But if you get a redemption you have to sell whatever you have. I think that is going to accelerate, if anything, over the next few weeks.
Q: Which brings us to the other big loser or laggard of the week, metals? Hindalco is down 14%, Tata Steel is down 13%. Would you buy value here or just stay away?
Agarwal: I don’t have a firm opinion on either of these stocks. It is a known fact that both these companies find themselves in a little bit of a precarious situation as far as the balance sheets are concerned. So it is anybody’s call on how these things go from here.
If you look at Tata Steel or Hindalco and if you look at just their Indian operations, they are among the most cost efficient producers of steel and aluminium. So, one wouldn’t hesitate to buy them because I do think that in metals as an asset category a lot of bad news is priced-in. But what happens to their debt levels and what kind of pain do they go through? I don’t know. I haven’t done enough work to be able to comment on that.
Q: If your view is that a breach of the October lows is possible, which sectors in the index do you find most susceptible to drag down the index or most at risk?
Sanghi: Let’s do it the other way round, the sectors that I think won’t get affected because I think that is a shorter list frankly. You probably want to stay in the pharmaceuticals. They have held up really well over the last few weeks, even from the October lows. A stock like Cipla probably hasn’t come off at all while we have seen the market come off a fair bit.
Q: Not Ranbaxy though.
Sanghi: I would stay in some of these construction stocks as well just because you have seen the government throw a lot of money into the system. Then you can still stay in anything that supports rural demand. So whether it is a tractor company, fertilisers, seeds, any of that stuff will still do okay.
But I think if the broader markets do go down, you are going to see the banks. You have already seen them give up a fair bit. I still think you are going to see some of the auto stocks give up some more even now. I think you are going to see telecom stocks give up some 5-8% from here as well. You are going to see a broad based collapse of about 10% I think.
Q: From now to the election results how do you map the market? Do you think it will be nervous going into a tricky election or will it rally into the election expecting that some positive outcome will come of it?
Agarwal: Before we get even to the elections, the hurdle the market will be faced with is – how does the current environment in US and Europe pan out. Globally there are lots problems that suddenly seem to be coming up to the surface and if the US markets keep on sinking, I don’t think this sentiment in India will find anything to anchor on to. After that we have to deal with how the earnings for the March-quarter pan out. I am of the view after looking at the December earnings that we may not have seen the worst of the earnings behind us. Sure, in some sectors you will probably see a quarter-on-quarter benefit coming through from lower material prices – some stabilisation of demand but in terms of year-on-year progression, the numbers will look very bad and therefore there might be some more earnings cuts happening.
Coming to the elections, I don’t think anybody can make a guess on what kind of an outcome we will have. If you look through all the state elections that have happened over the last 12-months, the common feature across all the elections is that voter turnout has been much higher than what anybody anticipated. In our first pass the post system a swing of 2-3% in favour of any party at a national election level where you have a huge number of candidates practically in every constituency – can swing the fortunes for or against any party.
I recall vividly that in 2004 nobody really expected the BJP to get such a bad outcome as they did, so I think none of us really know anything. So if the markets react positively as elections come in hoping that they will have a much better government post the elections – I would be really cautious about that and that probably is a wave to sell into but if for whatever reason we do have a strong government post the elections, then I would say that even if the market rises that would be a very strong signal for the market to continue to better later in the year.
Q: May be I am clutching at straws but can you think of anything which can trigger off a powerful relief rally – even a powerful bear market rally in the next 2-3 months given the global and the earning season that we have to wait through over the next two-months?
Sanghi: It is going to be hard really. You have March-quarter results that are going to come out. You have a whole host of bad news potentially coming out of the US and Europe. The only way you are going to have a rally here in India is if you see some government initiative whether they cut securities transaction tax (STT) marginally or more importantly whether they actually cut rates a lot and you get more clarity on the government’s borrowing programme. If you see the market just flush with whole bunch of money, you could see that itself cause a temporary relief rally.
But that’s what it will be – a temporary relief rally. To have anything sustainable, you’ll definitely need to get beyond the March quarter numbers and you will go into the election season at a completely different market level than what you are right now and frankly the only way you are going to see the market rally post the elections is if you get an interesting single party in control or at least a coalition that works together a little better than what we have seen in the last five-years.
Q: So of these three options which one looks the most likely one for the next 2-3 months – A) a bear market rally to 11,000; B) a breakdown with the Dow to something like 7,000-7,500 Sensex or C) neither of these two happen – the market just frustrates with this 1,500 point range between 8,500 and 10,000?
Agarwal: My bet is that it breaks down right now and the fear that I have is that this is the consensus view especially after what’s happened over the last week. Apart from the fact that everybody is saying the same thing, this is the most likely outcome and the other possibility is it frustrates all of us and just sticks around in this 8,500 to 10,000 kind of a range. I don’t really see the possibility of a bear rally taking us back to 11,000 or higher on the BSE Sensitive Index right yet.
Q: That won’t be such a bad outcome, would it – staying between 8,500 and 10,000 in this very bad news phase?
Agarwal: It won’t be bad at all.
Source : MONEYCONTROL
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dear sir,
in the last month i have read articles that the marker raises to 21000 now you are saying it would touch 8000 whom shall we believe
with regards
govind