Thursday, 20 November 2008

Mkts set new 2008 lows; how should one trade now?

The seventh-day losing streak continued on Dalal Street. The markets started gap down, and then spent the entire session in negative territory as dismal global cues wreaked havoc. A sharp slump in the US as well as in Asian and European markets, due to cut in US economic growth forecast of 2008-2010 by Fed and weak housing data, has weighed on our markets. The Sensex and the Nifty closed below October 27, 2008 closing values. The benchmark indices remained under pressure throughout the session, despite showing a bit of recovery in the last 15 minutes of trade due to short covering. The Nifty closed at 2,553 down 81 points, while the Sensex shut shop at 8,451 down 322 points.

Anand Tandon, Director Equities at Brics Securities believes that the current levels do not leave too much value on the downside. “It’s quite possible that the index may tend down but given the kind of fall that we have witnessed from the peak to now, the percentage to be gained from the further shorts here for the most part is not a huge lot.”

Tandon said markets are at a level where the downside to upside ratios are now too much in the favour of the bears. According to him, one should look at a situation where there will be a surge in the liquidity overall in the system. “We are already seeing that in the banking system, it hasn’t yet translated into the corporate loan figures because the banks are holding cash and not looking out to lend. But that said once the global presses start to roll and currency starts coming out, I find it difficult to imagine that we will have a situation where there is anything but surplus cash floating around. In that kind of a situation unless we assume that India will go into a position of Japan and there will be no demand growth you have to look at a rebound for most asset classes and that will have to include equities as well irrespective of what the corporate performance is like.”

He sees markets at a level higher than where it is right now over the next two-three months.

Where should assets be allocated?

According to Tandon, gilt is a good place to look at not necessarily from the point of view of hiding but one will continue to see move down on the interest rates and from that point of view gilt funds should do reasonably well. “At some stage equities will have to start moving up again as well as commodities because I am now working on a scenario where you are now expecting to see all global countries printing a lot of currency backed by nothing more than thin hair promises and consequently hard assets have to come back into favour. The only scenario which, negate this kind of analysis would be a situation where there is absolutely no demand revival which at least for a country like India seems little farfetched. So, my most preferred scenario would be a revival of hard asset prices and therefore an easing of liquidity in a significant way.”

How should one trade this market?

Rajat Bose, said, “If I had a short position on the Nifty, I would actually try and cover that short position because I do not want to keep that short position running, since in my understanding this downswing is on the last leg. I was projecting 2,700 earlier and then again I projected about 2,500. Now what I think is that 2,488 to about 2,477 is a major support area and we would see a bounce back from there.”

He advises to sell puts, book profits and get out because there would be some more downside left. “I would not like to keep positions running at this stage, even though the international cues are still negative. My view is that there would be a time very soon, when we would be actually trading on the long side because contrary to the received wisdom, my feeling is that we would be positively surprised by the market in December and there would be a good rally."

Sectoral watch:

Tandon said sectors which have the best order books are the ones that are most likely to disappoint because expectations even now run high that these order books will fructify and lead to a bottomline increases. “Banking sector is where the market is already factoring in reasonable amount of NPA (Non Performing Asset) increase but that could surprise on the downside because I do not know how much the actual NPA be as and when they turn out.”

He believes that commodities are probably nearing the bottom. “I am working on a scenario where my main preferred thesis is that there will be a huge surge in liquidity and therefore there will be an increase in the value of all hard assets including commodities all over again. It need not happen in a hurry but the next big leg has to be on the upside and therefore I would be betting actually on increase in prices for metals as well as for oil.”

Are markets close to the end of bear market globally?

Tandon said markets are not nearing end of a bear market globally as far as equity market go but you cannot have trillions of dollars being printed without something changing; you cannot have a situation where all asset prices are falling and yet more and more money gets printed even as it gets lost in the real estate bubble and the CDO (Collateralized Debt Obligations) bubbles that are there in the US eventually we will get to a stage where more money will be getting printed than its required to absorb this and this will have to drive up asset prices. “The doomsday scenario that can negate this is that the governments go burst before that. The regulatory balance will be so strong that you will be able to rectify most of the financial market eventually. But, in the interim the flow of money will drive up hard asset prices.”

Where are the markets headed?

Tandon feels market can continue to trend down because this quarter will be easily one of the worst quarters for corporate earnings and we will see that again for the next quarter as well. “It is quite possible that the sentiment will remain sour except that macros have improved significantly over the last few months, commodity prices are down, interest rates are down, liquidity is better and most importantly there is a global attempt to rig the markets up. So something has to give, we cannot have a situation where it continues to slide down one way.”

Tandon said markets already had very long run of down slides so at this point, the percentage to be gained by shorting is not necessarily a huger lot and it is not in your favour to go and take fresh shorts.


Anand Tandon: It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.

Rajat Bose: It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.

Source: Moneycontrol

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