Aug 07, 2013 09:19 AM IST | Source: CNBC-TV18

Weak macros, more correction in EMs to drag Nifty lower

According to Udayan Mukherje, services data is ringing a lot of alarm bells on where GDP growth will breakdown to during the course of the next few quarters. Things do not look too good to him.

The market was flat on Monday but today might be a bit more troublesome for the market. Global markets are not looking good, Asia is looking bad and Monday’s services data surely would have knocked off the macro stuffing, says CNBC-TV18’s Udayan Mukherjee.

“The manufacturing was weak but the services data is ringing a lot of alarm bells on where gross domestic product (GDP) growth will break down to during the course of the next few quarters. So, things do not look good,” he adds.

Also Read: Why emerging markets could sell off again

The SGX Nifty indicates that the Indian market will start the day around a percentage point lower and then take it from there.

Below is the edited transcript of Udayan Mukherjee's market analysis on CNBC-TV18

On global cues

Global markets are flat and last night volumes have been very weak in the US. So, it is almost like they have hit a new high and they are pausing not quite knowing what the next course of action is there in the US. But the bigger worry is the cracks which are appearing in the emerging markets over the last few days; Japan has been weak for the last 72 hours, today the way Hong Kong, Taiwan even China’s trading is not very good.

The debate on quantitative easing (QE) whether in September or not is brewing at one level but emerging markets are just not getting any money these days. If you look at the data points; flows have dried up considerably.

Monday was flat; there was some pullback in the beaten down names and the downside momentum seemed to have got arrested a bit but today could be another blow for the market.

It has shown signs of breaking down, it had paused after the first breach of 5,750 on the way down but now with the kind of intensification of the negative data points, it is a matter of time before we go back or knock on that important level of 5,500 again. The market is looking quite shaky and scary. So, the best you can do is to keep fingers crossed and hope it will not get too bad.

On GDP growth

The services data is scary. In the last few weeks a lot of economists and policy makers said that things will improve because rains have been good but it is services and manufacturing that drive Indian gross domestic product (GDP) and Indian economy. This is not 1970 where agriculture has a major role to play. So the first signs of this were evident.

In banking credit growth, in some of the consumption related sectors, hotels, the micro data points or the anecdotal experience things are not exactly looking good and this sharp contraction in services Purchasing Managers' Index (PMI) which is the largest component of the GDP in any case should be very scary.

We will probably find in the next few days a lot of GDP downgrades happening again. Two weeks back there was one round of downgrades after the RBI action. Most people brought down their GDP expectations to between 5-5.5 percent. Today you have already seen a couple of people talk about sub 5 percent number, Religare has brought it down to 4.5 percent and therefore, 6 percent looks like a dream.


In fact in the last media interaction from the finance minister, he also alluded to 5.5-6 percent which is 6.5 percent in the Budget, 6 percent about three weeks back, now 5.5-6 percent.

I am sure the next time he speaks to economic participants he will talk about 5.5 percent and that will take to 5.5 percent GDP growth. So these things don't happen miraculously as the government thinks. Suddenly comes the second half, economy will start picking up. This is the stuff of hope but not the stuff of any data point.

So we are about to see some mark downs in GDP growth. If we start reporting sub 5 percent, 4.8-4.7 percent kind of GDP growth for a couple of quarters, some of the global investors might also be shaken out of that complacence about the India growth story.

Now, it is important to see how the RBI approaches this because on one hand they can see growth completely crumbling and on the other hand they are putting up their fight on the rupee with tightening measures on the monetary policy and therefore, it will not just be a balancing act, it is just an impossible act for the RBI now given the kind of growth we are staring at.

On rating agency reaction

I am wondering what the Fitch economists think in mornings when they see the kind of data that is coming in. However, with economies like India and the way things are going, you should err on the side of caution with upgrades because chance of egg on the face are very high but India’s data has been fairly standard and poor.

We will see some stern warnings coming in from the rating agencies over the next few months because our deficit situation is not looking great; red line not withstanding. There are some trouble points with the amount of fiscal deficit we have consumed already in the first three-four months of this year. So, things are not blowing in the right direction.

The latest tax collection numbers are looking quite dismal and if growth is going to go off the sub 5 percent over the next couple of quarters, this 20 percent tax collection expectation might be a dream for the finance ministry. So, we are in dangerous territory, already things are quite bad but in the next few weeks rating agencies will fire some bullets from their gun saying we are watching and if things do not pickup then we will be out with the knives again.

On Nifty levels

There is no reason for the market to go up right now. Earnings are weak, macro is weak, global mood on emerging markets is not strong. The path of least resistance for the market is on the way down and it has been breaking lower levels, important support levels on the way down.

It is just a matter of time before it gets back to those 5500 kind of levels. Now that may happen after a pullback which can happen for some reason but today we are going down to 5600 kind of levels. So if people were talking about the support of 5650 or a temporary halt around there, we are going to slice through those kind of levels.

Now whether ITC suddenly goes up 4 percent and keeps the Nifty afloat, is difficult to answer. But the market should be headed lower now given the kind of news flow that we are seeing. My bigger worry is not whether the Nifty will lose another 150 points and get to that 5500 level but whether are we looking at a different kind of a scenario.


In the last few months market has been in a 5500-6200 range. We have gone up and down several times. Within that picture a lot of individual stocks have been broken but still the overall market and the Nifty because it is the index and accounts for a very large part of India’s market cap was in a range.

Now the confluence of negative factors that are building up now, are they going to break the Nifty below this long standing range? That is the scenario that I worry most about these days because you could build a scenario right now if some of the stronger sectors start to de-rate or give up some of their very strong or resilient performance of late, the Nifty can easily go back to its old levels of 4700 quite easily.

A large part of the market is actually trading well below 4700 Nifty. All you need is five-seven stocks to de-rate from their expansion due to some liquidity pressures, foreign institutional investor (FII) money going out and you will find that the Nifty can go back very effortlessly to sub 5000 levels once again.

I don't know whether it will happen because may be five-seven stocks can still keep the Nifty afloat for a bit longer but the way fundamental pressures are building up we can see levels that we did not think earlier and we should be seeing this year below 5500 and so that whole range bound theory is at serious risk.

How it plays out over the next few week, we will see but if emerging markets start another leg of correction then with the India specific news flow it is going to be very difficult for the index to hold out in the phase of that.

On F&O market

I do not see too much in store as derivatives analysts do everyday Options data because that changes with every passing day, people do something and say people have written these Puts and therefore, these levels are safe. The moment the market comes below that, they all scramble to cover up those positions.

I am not a big fan of day to day saying the market is between 5,800 and 6,800 and 6,000 because 5,800 Puts have seen a lot of accumulation. These are traders who take positions. That position changes with the level of the market. So, I do not think there is a predictive text in the options data that builds up everyday and is a very dump way of analysing the market.

This is an Options strike price and build up therefore, this will not break. Going by that, market would forever be in a range but it never is. So, do not read too much into the data.

The one thing that is important and material for our market is what global investors are doing because nobody else seems to set prices in our market other than them and the one encouraging thing in this fall is that foreign institutional investors (FIIs) have not built significant short positions in this downtrend, they have not been big sellers in the cash market either.

They are doing nothing practically neutral on the cash market, they have been unwinding some of their long positions in the Nifty Futures. But on Monday we saw the first sign that they could be building some fresh short positions in the market as well and that is not a great sign.

I say this not because there is a one to one correlation between short position built-up and the market direction but this market is very shallow and there are not too many buyers because you would have noted that domestic institutional investors are selling practically everyday. In such a scenario, if shorts pickup from the FII front, then this market will be very difficult to support.

We did see some pullback and that was overdue in the broken infrastructure names barring Bharat Heavy Electricals (BHEL), all IRB Infrastructure Developers and Hindustan Construction Company pulled back, some of the banks also pulled back a bit, even some of the financials like Power Finance Corporation (PFC). But that is a comeback trade from a very brutally broken down level. So, I do not think there was leadership in the market yesterday, there was a dead cat bounce and let us see today if that bounce gets sold into once again.

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