Tuesday, 18 November 2008

Investors can buy around 8500 levels: Dipan Mehta

It was another disappointing day on Dalal Street after a gap down start. The markets made repeated attempts at a recovery but with selling pressure playing spoilsport, every rebound was cut short. Negative sentiment in global indices and fall in heavyweights weighed on the markets. The Nifty and Sensex struggled at the psychological mark of 2,700 and 9,000, before closing below those levels.

Will markets test October lows?

Dipan Mehta, Member, BSE and NSE said all markets are faced with a kind of a predicament of testing October lows and as usual all eyes are on US. “If they are able to hold on to the October bottom then I guess most other markets including ours also will be able to hold on to the October bottom.”

Mehta said 8,000-8,500 levels have been good levels in the past because of aggressive buying coming in from domestic insurance companies, even some of the long only FIIs do tend to invest around those levels. “Based on the present statistics and analyst estimates, it would appear that around 8,000-8,500 would be a good value picking opportunity."

According to him, Indian markets are sleazed to what is happening globally and to that extent it is very difficult to make a call whether the bottom will be tested and whether we will be broken or have a rebound from there because it is working on forces which are completely beyond our understanding also at this point of time. He advised not to make too many big bets on either side and one has to just live through these times because this also will end at some point of time.

Mehta said one has to realize that we are in a crisis situation and news flow remains extremely negative not a day goes by, where some statistics, some data point comes which clearly points out that. “All scenarios are possible and markets could easily test and break October lows, trade over there for a long period of time and it is also possible that you could test it and trade a double bottom and rally from there. If there is a semblance of stability in US markets, if the volatility comes down over there, if they get into a narrow band then automatically all the other markets also will follow what the US markets have done and the volatility will come down, they will start trading in narrow band or they may rebound from these levels.”

Rajesh Jain of Pranav Securities said one would like to believe that there is a consolidation range coming up but the manner in which the market gives up every time there is an upswing, very clearly indicates that the increasing number of people who believe that the market could retest its October lows is fast converting it into self fulfilling prophecy. “Indian markets may not see a very sharp recovery or any upmove, a sustained buying spree which will take it past the 3250 mark until December is over and you have some clarity on political picture because in addition to all the problem the world is witnessing and what India is seeing we have politics question mark, we have the five states right now and after which even after the December month sees cleaning up of balance sheet by the global financial world."

Jain said we will see that India faces a question mark in terms of the general elections and that could seriously affect the allocations to India as an emerging market despite all its fundamentals. "Until you have clarity on the national elections, India may not get its share of the global investments pie and to that extent a sharp midcap pullback recovery which takes it convincingly past 3250 or even 3600 mark is going to be that much more difficult. This is something that is at the back of the mind for all global fund managers and it will play on the Indian markets and it is being borne out of the fact that every time we are trying to come back there is always this inevitable position unwinding or position selling or fresh shorts that are taking the market down again.”

Where do we see value-buying in markets?

Mehta said 8,000-8,500 levels have been good levels in the past because of aggressive buying coming in from domestic insurance companies, even some of the long only FIIs do tend to invest around those levels. “Based on the present statistics and analyst estimates, it would appear that around 8,000-8,500 would be a good value picking opportunity. But then, it is a moving target and if we see further deterioration in the world economy more problems coming for the Indian economy, then even the 8,500 level is not sacrosanct and the market could easily trade lower than that. So it is a bit difficult to call at this point of time. I think next few trading sessions are very important and most of the world market, equity markets are poised at key support levels and we hope that there is a bounce from these support levels and then we could take off from there.“

What is worrying the markets?

Mehta feels the valuation gap between private and public sector seems to be narrowing and that is more on account of the fact that the performances to an extent growth rates also seem to have narrowed over the past two quarters. Public sector banks by and large have done better than market expectations and with the exception of maybe an Axis Bank most private sector banks have tended to disappoint, he added.

According to him, a lot of private sector banks are focused on retail and SME lending. “There are going to be issues in terms of asset quality over there so the losses could come in later on. One has to realize that in the banking sector, the revenue comes upfront and it is the cost which comes in the form of NPAs (non-performing assets) that comes two years down the line. So to that extent, the loan book of private sector seems to be threatened at this point of time. That is getting discounted in the markets.”

At the same time, we heard ICICI Bank targeting slower credit growth rates and what was going in favour of the private sector banks was the fact that they were able to demonstrate extremely high growth in credit, very high net interest income which is why they were enjoying such fancy valuation and maybe there is a change in that scenario, he added.

According to Mehta, these are the kind of trends which are getting discounted within the private sector banking space at this point of time. I think it is more to do with narrowing of the valuation gap between PSU banks and private sector banks which has taken place at this point of time, he added.

On technology:

Mehta said technology space is dependent on US (dollar) and euro and they are going to face challenges on the demand front. At the same time, the rupee is weakening so that goes in their favour, he added.

Mehta said there are no places left to hide in this market - every single stock, every single sector is being hit. “The fundamentals of every single sector - maybe with the exception of FMCG or pharma for that matter - have been damaged considerably. There are going to be lot of question marks on earnings and earnings growth going forward. So it could be technology’s day to be hammered today, it could be something else tomorrow. I do not think any specific development has taken place in technology, which explains this kind of sell off which we have seen today.”

How will midcap space shape up?

Jain said the midcap space will have just one savior and that can be if there is an increasing tendency amongst promoters to try and increase their stake and you see the announcements of buybacks, there will be a class of select midcap stocks which are the niche players where you will see some single piece of good news to really act in favor of the stock. So, along with some stock buying activity and some very focused positive news, the quality midcap stocks could try and see a comeback and that will happen only once, he added.

According to Jain, midcap stock investment is the tool of somebody trying to outperform the market. “We are currently all aware of the severe pressure that the large caps are facing simply because of large fund unwinding and midcap is certainly a space where you are not really looking at and it is difficult to sell midcaps also in such a market as today. “We are going to see a lot of pain in that space except for activity like I said promoter activity or single good news changing certain aspects of fundamentals as also the resumption for fund buying activity.”

Where are the markets headed?

According to Jain, there are several themes in which one can try and plan their investments along, book values, cash values, dividend deals, gearing ratios, working capital needs and try and juxtapose them viz the emerging financial picture. “There will be concerted action by global majors and even within India we have seen the kind of financial sector loosening up which is taking place, but unfortunately in India we have not seen the government try and give some sectoral push ups.”

Jain believes that it’s very difficult to try and come out with theme based and stock specific recommendations rather than if you are buying for an 18-24 month horizon you might make money. “If we break the October lows then I would reiterate that lets get over with December and see how much of a clean up the global world does in a failed financial year with a lot of firms failing and then see what sort of political picture emerges in India both in terms of the time frame for the elections and the relative strength of parties and ideologies.”

Source: Moneycontrol

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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.