Inflation to set near-term mkt trend: Envision Cap

Nilesh Shah, MD and CEO, Envision Capital, said sentiment in the market remains bearish. "The Sensex may not break 14,000. Negative news will get factored in at 14,000, where some buying is possible."

According to Shah, the near-term trend will depend on inflation. "If it comes in double-digits, it will be bad. One needs to watch out for political developments on the nuclear deal. Uncertainty regarding politics will add more pressure on the market. Crude remains a concern, which will decide the market course."

Technicals don't look promising, he said. "There is small buying by domestic financial institutions. Foreign Institutional Investors, or FIIs, continue to be sellers. It is difficult to draw any comfort from it."

Excerpts from CNBC-TV18's exclusive interview with Nilesh Shah:

Q: Are we back within that grinding range, or is the market threatening to break down?

A: It will depend on a couple of events, which will unfold in the next few days. One is inflation, which is already close to about 9%. If it threatens to go above that and if it probably goes towards the 10% mark, we could definitely have one more leg down. What really emerged over the last one or two days is some kind of a political development related to the nuclear treaty. If there are more developments, which the market perceives that to be negative, it could probably pull the market down further.

In addition, crude oil is trying to break above the USD 136-138 per barrel mark. If crude makes a new high, it is another important event to watch out for. So, before the earnings season unfolds, it's basically inflation crude oil, and political developments which could decide the course of the markets.

Q: What is the worse-case scenario or the best case scenario that you can think of for the Nifty or the Sensex?

Shah: It is going to be difficult for this market to break 14,000. The bias is more on the downside and probably a majority of people are bearish. But at that level of around 14,000, give or take 200-300 points here or there, there should be some amount of value buying.

By and large, whatever negative developments we can think of, would probably get adequately factored in barring any political developments. Apart from that, things like inflation should get factored in that kind of levels.

A lot of pain and damage would still be seen if the market were to correct at 15,000 to 14,000 points. I don’t see a case for this market to sustain below 14,000 at this point of time.

Q: How do you map the technicals of the market right now with the shorts on the derivatives side and the relentless FII selling on one side and the cash lying with mutual funds on the other side? How are the technicals balanced?

A: The technicals do not look all that promising. The reality is that mutual funds are sitting on cash and they are coming in and buying.But that buying is not good enough.

Buying is probably in the region of Rs 200-500 crore on a daily basis but against that the FIIs are selling anywhere between Rs 500-1,500 crore on a daily basis. It is really difficult to pinpoint at what level the FIIs will stop selling or the levels the mutual funds will stop buying. For the FIIs, it is also some kind of global unwinding or deleveraging exercise which is really happening at their end.

There is really not much comfort coming in from a technical perspective. The selling is relentless and it is difficult to draw any kind of comfort on that front. It is still very early days for that.

Q: Do you think the political situation could worsen to a point where the markets might get jittery? Is this one of those threatening kind of clouds, which will blow over?

A: I do not have any answer to that but markets really don’t like uncertainty. If there is a fresh share of uncertainty, which really comes in from a political perspective, that could put downward pressure on the market. But if it just blows over, then for the markets it would be one event which has probably temporarily passed away. It is really difficult to gauge what exactly the outcome would be of this political uncertainty.      

Q: How are you reading the Ranbaxy situation in terms of the deal and the Lipitor settlement? How would you approach it now?

A: There has been a lot of speculation post the deal that there would be a counter offer from Pfizer. Post the settlement between Pfizer and Ranbaxy, the speculative aspect does not hold merit any longer.

So, the possibility of a counter open offer got significantly minimized. To that extent, it is simple arithmetic in terms of what the ratio of acceptance would be. Daiichi will now be able to go ahead and make the open offer. So, by and large, whatever positives were expected have already been factored into the stock price.

Q: What is going on with the banking side? Just when it looked like some buying was emerging, once again those stocks got hammered, despite seemingly attractive valuations.

A: By and large, the entire BFSI space and the banking space on a standalone basis have always been a proxy for the macroeconomic fundamentals. With inflation levels taking new highs on a daily basis, from a very macro and global perspective that has really been the bone of contention and the biggest concern for the sector, inflation is pushing up the government yields. There could be margin compression for the banking sector.

So, till see the worst in terms of inflation and until inflation peaks out, it is going to be difficult to say whether or not the banking space has bottomed out. When one feels that inflation has topped out or is close to topping out, that would be a good time to look into the banking space.

They have really come down to attractive levels. This is not to say that there would not be more downside. But whenever one feels inflation has peaked out, it would be a good sector to look at and probably worth committing fresh investments.

Q: What about infrastructure, which is also falling quite a bit? Would you pick up BHEL and L&T or do you think they need to grind down even lower?

A: They have come down to very attractive levels. By and large, the entire infrastructure and engineering space is down anywhere between 35% to 75%, from their peak levels six months ago. Their valuations have become very attractive. A lot of infrastructure companies exude confidence in terms of their order books and their visibility of growth from a one to two-year perspective.

So, it may not be a bad sector to look at. Wherever the market bottoms out closer to the level of 14,000, infrastructure is a sector to bet on. Alongwith banking, I hope there would be strong bounceback in the infrastructure segment as well.