See volatile mkts till political mist clears: Sharekhan

Q: While that may be comforting for the moment, the bigger event happens on July 22^nd. How do you think the markets will position themselves ahead of it, will they remain rangy? Thereafter, what are the scenarios you are looking at and what is the stock markets likely reaction? How should a trader position himself if indeed the government is not able to make the numbers. How do you see the markets behaving and therefore how should a trader position himself before July 22? If indeed this vote goes through, then how is the trader positioned?

A: My feeling is that the market has been factoring in a bit of negative sentiment because of the political uncertainty. It’s been around for a while. The July 22 meet is going to be the major event that could decide the direction of the market. The best way to play this out would be to buy both calls and puts on the Nifty. If one has a huge position, one should hedge it by buying some out of the money puts of Nifty. It’s going to be an extremely tricky call to say whether the government will go through or not. In 1999 or 2000, the Vajpayee government couldn’t make it. So taking a call would be extremely difficult. But if somebody wants to play buying it through, options would be safer bet. The possibility of the market moving up is quite high. If the government is able to win the vote of confidence and if other things don’t really turn too negative, then there would be a decent pull back in the market. I would play on the upside.

Q: Impact of all these rate hikes may still be felt in the next 6-9 months down the line. The financial turmoil in the US is not going away and there are experts who still believe a major implosion of an institution could happen. Would you advice investors to buy at the current levels or do you think the long-term investors could get better bargains in 2009?

A: A part of the rate hike has already been discounted. The market is expecting about 25 bps of a repo rate hike and one may see some negative news flows for the next three months or so particularly from the US and even in the domestic market. Inflation is likely to remain high. A majority of the negatives have been priced in the valuations at which the market is quoting at for some of the largecap companies. So the moment there is a positive trigger, the market may react very positively to it. So, rather than trying to wait for everything to settle down, long-term investors can definitely start nibbling.

Q: What would you buy ahead of a possible positive turn of events on July 22, what is good to go long on at this juncture?

A: The best bet is to go for a call option when Nifty strikes the 4100 or 4200 levels. One could also look at some of the other largecap stocks like L&T, BHEL, Reliance Industries, Bharti, Sun Pharma and TCS. TCS is available at about 11-12 times FY10 earnings. For a company, which generates a net cash flow of Rs 4,500 crore, it is definitely a very attractive level. So these are some of the largecap stocks that one can really bet on.

Q: You spoke about TCS being one of your picks. Satyam came out with its numbers today, it has taken a bit of a battering. Would you look at the stock at if it goes down below a certain level or is it a no-no, considering the kind of guidance they have given?

A: The market has taken the results that Satyam announced negatively. There has been some kind of a pressure on the billing rate and the overall hiring has been a major negative surprise. Both Infosys and TCS have hired aggressively. One will have to look into the details of what exactly has happened in case of Satyam. The overall guidance was quite strong so at this point of time we would really like to stick to TCS and Infosys.

Disclosures:

It would be safe to presume that I personally and my company have interests in the stocks that we have talked about.