IIP nos key to mkts trading forward: Religare Sec

Excerpts from CNBC-TV18’s exclusive interview with Sangeeta Purushottam:

Q: What is going on with the breadth? Is it just a post-May 2006 kind of situation, where largecaps might recover but midcaps will take a much longer time?

Purushottam: That will happen because whenever we see a huge fall in the market, the first recovery does happen in the largecaps. Only when they show a sustained momentum do people really start looking out for midcaps and looking for value alongwith growth. So, we will have to wait a while before the midcaps start performing.

Q: What about the largecap end of the market, are you beginning to sense some kind of bottom in many of the largecaps or is it too early to say that?

Purushottam: I think it is too early to say that because as long as there is an uncertainty and you are not sure whether the newsflow has decisively turned positive, there still could be some shocks.

Having said that, what does happen is that at certain valuations, number of stocks become attractive and people start nibbling. But that is what it is largely at this stage. Until you see confidence return and full-fledged buying happening, you are not really going to see a decisive reversal.

Q: What is going to be the big cue for the market going forward into April? Do you think it will be earnings once again as people start talking about it, will it still be global events or do you think macros in India like slowing GDP or rising inflation are beginning to take centrestage now?

Purushottam: I think it is going to be macro and global events more than earnings, because earnings in some ways will be looked upon as something that reflects the past. So, I think people are going to be looking a lot at these macro numbers as well as the global cues, probably more at the global cues first, because the entire downturn has actually been part of a global phenomenon. I don’t think the recovery will happen unless and until we see overall stability emerging on the global front. So, that is going to remain pretty important, and the macro numbers as well.

Q: How worried are you about the macro numbers, inflation, the credit numbers that are coming out, do you think we are heading into a difficult spot or do you think it is in the price already?

Purushottam: The numbers aren’t terribly encouraging. I think inflation is something which is going to remain in this range between 5-6% for the next few weeks at least, because we will soon be getting into a low base effect coming in, which is a reverse of what happened last year roughly around this time or a few months later.

As far as the IIP numbers are concerned, I am a little puzzled by some of the numbers on the capital goods side, because from the companies that we cover, we are not really seeing any slowdown in their order books or the growth prospects. So, it is a little hard to reconcile the macro and the micro picture over there. But nevertheless that is a number that will be looked upon by the market and markets do react to it. So, that is something that one needs to watch out for.

Q: Are you getting a sense that financials are about to bottom out, because we have seen some buying in ICICI Bank after a long time, as well as in HDFC, and SBI, or do you think there is more pain ahead?

Purushottam: The pain will be related to the overall pain that the market will actually go through. For financials to recover, we need to have a sense that the overall scenario has really stabilized. The pickup that we are seeing in financials off late is because of some nibbling happening as a lot of valuations have indeed come off. You can never quite pick the bottom. There is some element of buying in that happening. It is hard to say whether it has completely bottomed out or not. We usually make that call after the event. It is a little hard to make that before the event.

Q: What about metals, do you expect to see more downsides here in metal stocks?

Purushottam: That could happen because the expectations of an overall slowdown in world GDP growth needs to reflect at some point in commodity prices, because even if money is flowing by default into commodities, it cannot be completely isolated from what is happening in terms of real growth.

The steel side may actually end up doing better because there are supply constraints there in terms of either the raw materials emerging. So, they may be able to hold on to prices better than some of the other metals. But in a scenario where we are looking at uncertainty or overall slowdown, it is hard to make a call that commodities itself will continue to do well.

Q: What sense do you have of the Nifty given the underlying broader market is moving?

Sukhani: The Nifty represents the blue chips and whenever a rally comes, it is the Nifty and the blue chips that will move up first. So, whatever the broader market does, the midcaps and the smallcaps are getting slaughtered. But the focus should still remain on the big index.

The Nifty itself is telling us that the selling is getting exhausted in these largecaps. Slowly but steadily the market is moving in a range.

There is a sense that perhaps, if the worst is over, at least in the short-term, we could be stabilizing. If that happens and the blue chips begin a rally, then the broad market and the midcaps will follow soon enough.

At this point the rewards appear to be more on the long side more by buying than on the short side. But all it needs is just one bad day in international markets to cancel this scenario; so that caveat remains.

Q: What kind of target do you set for the Nifty if you are trading with a slightly bullish bias? Do you think it is good for 4,800 plus or at that point would you revisit and take stock again?

Sukhani: A move should certainly take it to 4,800. At that point, profits should be taken. We have to wait and see whether the momentum sustains a higher level. That is a question mark.

We are really talking about a relief rally rather than a new bull market. The Nifty has to do a lot of things to prove that the bear market or the correction is over. This may be the beginning of the process.

Q: For a bullish trader, where do you keep your stop losses now?

Sukhani: That is much easier because 4,500 is a level we have seen getting breached and getting held on to. So, for anyone buying 4,500 is the worse case stop loss and a closer stop loss could be put by intraday traders by looking at the day’s low.

But 4,500 is a good stop loss for position traders also. If that is breached, then we don’t know what will happen.

Q: What is going on in the midcap universe?

Sukhani: Technically, I am sensing a bullish scenario. What I am seeing is capitulation finally happening in those midcaps and smallcaps. People are simply giving up. Now, capitulation needs to take place before any kind of upmove can begin after such a deep decline. So, it is not all that bad.

Apparently, the last of the sellers are actually going in the market and selling. Once this period is over, there will be no one else left to sell. So, probably we are seeing the worst part of the midcap downtrend, which is going to get exhausted soon enough.

Q: Have you taken a look at these charts, which are getting destroyed with very large intraday moves? What sense do you have there?

Sukhani: In Orchid, there is much more downside. This is not the end of whatever downtrend that has started. But in S Kumars, the opposite seems to be true. The stock has fallen close to its 2-year support and it seems that sometimes there is a panic and that panic is occasion to buy. So, for S Kumars that buying opportunity exists, but not for Orchid because its support comes much lower at Rs 50-60.