Mkts to stay rangebound till Dec: Motilal Oswal

Dhiraj Agarwal, CEO-PMS, Motilal Oswal Securities believes most of the bad news is in the open and downside from here looks limited. Possible early elections will not be a risk for the market, he said.

One can expect another 25-50 bps hike in rates, which may cause short-term pain. But markets may see some bounceback if there is incremental positive news.

Inflation remains the biggest worry for markets with no signs of cool off yet, he said. It's a high probability that the market will stay range bound for six months, but are unlikely to see more severe price destructions from current levels.

A large universe of stocks have earnings support, so they may bottom out.

Excerpts from CNBC-TV18's exclusive interview with Dhiraj Agarwal:

Q: What are the expectations from these series? Will we get away with a range bound month or do you think there is still downward pressure?

A: I think the tough environment continues; the news flow continues to be negative. But at the same time, my sense is that most of the bad news is out on the table at this point of time; one could see some more incremental negative news coming here and there. So it’s a tough call at this point of time to say whether the markets will fall further from here or not.

But considering that all the bad news is out in the open, I would reckon that the downside if any is going to be limited. However, at this point of time I cannot see any significantly strong reason for a short-term upside to emerge either.

Q: How much of a risk do you perceive from the political front on how developments could move from here?

A: Personally, apart from knee jerk reactions, I do not see politics as a risk at this point of time simply because it's not that the elections are 2.5 years away. The whole debate is whether the elections happen now in November or in January or in May. We all are talking about a matter of six months at this point of time. In fact, I would prefer the sooner it gets out of the way, the better because it's the hanging sword of uncertainty.

If one sees the policies, the pervious two governments have been broadly in sync barring two to three individual items here and there. So in the long-run I do not think it matters, but in the short-run it does damage confidence to some extent and tends to keep people away. So between November and May it’s a tossup - does it affect the market that much? I do not think so.

Q: Do you see any more bad news coming in from the interest rate situation, which could get worse than what people think or have built in today?

A: Most people in the market are talking about inflation possibly touching 12.5-13% and most of the strategists and economists are talking about another 25, maybe upto 50 bps rate hikes to come, which if it happens won't be a big jolt. However, when the action does happen, one might see a short-term panic reaction.

The other way to look at it is that the sentiment in the market for the last two to three months has been completely battered. The low of Sensex in March was about 14,600 and the low of Sensex in last couple of days is roughly 13,700. So sentiment-wise last two months markets have fallen 30-40%, but the fact is that the two lows are within 10% of each other.

So do we bounce around in this range, drop another 5-7% below the current low if small incremental negative news continue to filter in? It’s quite possible. But do we completely crater from here? I don’t think that much room is there. Valuations have started kicking in many sectors now.

Q: The problem though seems to be that while most agree the market is looking oversold in the near-term, there is no catalyst inside to pull it back or to ensure there is a big bounce back. What to your mind might be that catalyst?

A: The big worry factor for the market at this point in time is a one-point worry factor, which is inflation, whether spread by oil prices, metal prices or agri-commodity prices. Hence likewise the catalyst which can actually take the market up in a meaningful fashion is some signs of cooling of inflation.

As of now those catalysts in the near-term are not visible, so I am not necessarily saying that we will see a big leg up in the market in the next few months. I think the best possible scenario is a range bound market for the next few months.

Q: What is it that you hear about money deployment in the entire insurance fraternity i.e. the mutual funds, the Portfolio Management Scheme (PMS) outfits such as yours, High Net Worth Individuals (HNI). What have they been doing with their cash?

A: Money inflows have trickled down to very small levels; they have nearly stopped if one sees the inflow into domestic mutual funds. In the last two months, approximately it’s about Rs 1,000 crore of inflow, which is down to a trickle. Money was raised in January-March quarter by and large which was undeployed and fund managers are taking advantage of the current fall in the market to put that cash to work. So from HNI and also from retail, the incremental money inflow has definitely slowed down.

Q: What about potential outflows from retail and mutual funds and more to come from hedge funds overseas, do you possibility or risk there?

A: I think on the hedge fund side, I would be surprised if there are not significant outflows already and even if there are incremental outflows, the risk from that side on the market would be minimal because in the current environment, I would doubt if any hedge fund is running a net exposure of more than 20-25-30% in India. There could be a few slightly more long biased and slightly more aggressive, but I doubt if many net exposures are higher than that. So it’s not that if there is some more incremental outflow, there will be huge amount of selling coming in from hedge funds.

From the domestic markets, I think significant outflows, at this point looks a bit difficult. The small investor community in India have in general gotten used to patience and down drops in the market. While this cycle looks a little more painful as compared to the previous one, there is one thing to keep in mind that it is not first time we have seen a 30-35% fall in this decade, we saw this in 2004, we saw it in 2006 and we are seeing this again in 2008. It is more of time pain, this time around because it's taken six months, we are more used to a two-month sharp down fall and then a V-shaped recovery which is not happening, which is causing a little  more anxiety at this point of time.

Q: How much probability would you attach to this outcome that this does not go away soon, it turns out to be a prolonged 1-1.5 year kind of a bear market and you see far more price destruction than you see already?

A: Maybe in six to nine months, the probability of a range bound market is reasonably high. Both from the point of view of the damage which will take time to be undone and also from the point of view of macroeconomic news flow which even if it starts improving, will take some time to correct, a few more months of range bound market is there.

Is there a severe price pain from hereon? Is there severe price destruction possible from hereon? I think that’s a bit more unlikely. That’s what has been broadly happening since February; the big rallies are 15-20% and then they come back and break the previous lows by marginal amount. That is what is important that once the previous low is broken, market does not cascade, it just goes 2-4% below that and takes a temporary support. So it looks like it will take some more time rather than kill you much more in prices. 

Q: On the midcap universe, do you think it will be as range bound for them or do you fear there might be much sharper price erosion of these stocks which have been trading momentum if not anything else?

A: One needs to start becoming discerning on the midcap universe at this point in time. Many stocks which went up on the sheer power of momentum and money chasing them in December-January might continue to suffer, there could be more price erosion coming in there. But is an equally large universe of stocks at this point in time supported by strong earnings and valuations and those will start finding some base here.

A quick recovery in the midcap space is very difficult because after such a deep cut, initially the recovery or the money flow goes into largecaps and it takes a while before midcaps starts delivering performance. At the same time within the midcap universe, there will be very divergent performances from here on, there could be stocks which can fall another 30-40% if it’s not well supported by earnings and valuations.

Disclosure:

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