Yesterday, the Sensex closed at 16,218.53 down 93.62 points or 0.57% and the Nifty shut shop at 4,924.25 down 26.50 points or 0.54%.
CNBC-TV18's managing editor Udayan Mukherjee says, June is going to be a tricky month. “It is going to be a rough month for the market,” he adds.
According to him, more pain is left in the market. “You will see volatility in the next few months,” he asserts.
Below is the edited transcript of his comments on CNBC-TV18. Also watch the accompanying videos.
Yesterday was a scary day, maybe not for the stock market, but it was for the economy with the 5.3% GDP reading. That must have knocked the stuffing out of most people who were watching.
Stock markets handled it well perhaps because it was expiry, and the mood was a bit better across Europe yesterday. But once again this morning we start off with flagging global sentiment. Now that expiry is behind us, who is to say we don’t start the day below 4,900 yet again.
Shoulders should be slumping and chins should be hanging right now. There is no way to paint this in a good light. I know some brokers tried to put up a brave face yesterday pointing to that one small number, within the GDP, which may not have looked too bad. But brokers are being brokers.
But things are terrible out here on the ground. You don’t need to look at the GDP reading. You just need to go around and ask people who control India’s GDP and they’ll tell you that things are pretty bad on the ground.
What happens to markets from here? It is difficult to say because June is a tricky month. While it’s easy to say markets fundamentally should go down from here, it’s complicated because it’s not an easy run. Governments will try and get in to the act now and that will always and inevitably lead to pullback rallies, bouts of optimism. So, it plays out in a way which we cannot predict, June 17 not withstanding. So, you’ll see ups and downs and volatility in the next few months.
If you just keep an eye on the fundamentals and step away from the techncials of the market and these short-term bouts of optimism and pessimism, you would have to say that it would be nothing short of a miracle, if the markets actually found their final bottom around where we are today.
Things are just too bad. You would have to be complete denial not to see them as they are. So, I think we have got more pain left in the markets fundamentally speaking. Does it play out in a straight line or goes zigzag and surprise people? That I think you should expect fully. But eventually I think the circumstances around us and combination of fundamentals, in my eyes, almost inevitably leading us lower in the medium-term.
June is going to be a rough month. But you don’t know how it plays out because you are already beginning to see the first small simmering or clamour of noise coming in for the ECB and the European government to start acting. Yesterday, there was a scare; people started talking about the IMF need to bail out Spain. IMF came out quickly and said, “no its not come to that yet”.
You are coming to that crescendo in Europe where something will happen. I don’t know whether it’s LTRO or Eurobond. But something they will throw at the system because they will not sit back and say okay let pain go bust and see what happens from there. Policy makers have travelled that path in 2008 and that’s not an option. So, they’ll do something.
Will it be a permanent fix? I think not but they will kick the can down the road. So, as and when these policy things kick in you will get relief rallies in the market. Now-a-days 10-15% as you saw in January and February is not difficult to strike out. So, June is such a binary kind of month that you probably could see any kind of an outcome globally.
You just have to look at the fundamental macro numbers which are coming in from there and they don’t strike any comfort in your heart. So, things are going to be difficult across global markets for a while. Could we have a 10% rally which surprises most people, even in the backdrop of such pessimism? That surely can happen, but that’s not the end game in my eyes.
On the Nifty:
These levels are not important. We make a big deal of 4,800-4,950 that is short-term trading noise. The market has no respect for all of these things. I think in the short-term you need to keep an eye on what kind of news flow comes in from Europe, positive or negative because both kinds of newsflows are possible over the next two weeks leading up to the Greece elections. That will determine what the market does in the near-term.
In the medium-term, which is where investors should be focused on, there is a lot of pain to wade through, you are not going to get out of these gross domestic product (GDP) rut in a hurry, whatever the Reserve Bank of India (RBI) does. From a 5% GDP reading suddenly the mood cannot improve overnight. So, I think we are in it for some time now. The combination of events seems to suggest that the Nifty eventually will head lower. I don’t know what levels.
It is difficult to talk about levels out here. But right now the going is tough and you don’t want to get too brave. Sure if there is a prospect because of global news of a trading rally building up, trading rallies can be very powerful as we saw at the start of the year, by all means people should shed their inhibition about participating in the market despite weak fundamentals as they should have at the start of the year and chase the market for a bit. But then scalp profits and get out because this is not the kind of circumstance despite a lot of brokers suggesting that that you need to get terribly aggressively invested because you can see a lot of upsides.
I think risk/reward is still probably skewed towards risk from a medium-term perspective. I know it is strange to say this after five years of underperformance and the kind of levels we are trading at, but I don’t think all the risk is priced in, given the kind of numbers that are propping out.
Yesterday’s number was not great, we saw Rs 400 crore sell number, but disturbingly domestic institutions have been selling for the last couple of days. Both FIIs and domestic institutions are selling in the cash market. Yesterday’s figure on the Nifty futures was a very large Rs 1,200 crore sell number. So, I think the bears are getting quite active as we get to the climax of June.
It is not a great kind of situation from flows. Chris Wood of CLSA is right in pointing out that there is that risk of FIIs selling. Typically what happens when what is perceived as a growth haven, that starts disappointing, the markets get de-rated. I think that is the big fear that we have going on our hands right now of a substantial de-rating of our market. GDP is at nine year low, rupee is at an all time low, global markets, global economies going through what they are, who is to say India does not get to its all time low P/E. It won’t go down to 8,000 Sensex surely, but it may go down to the lowest P/E multiple that it has traded in the past, which is 10 and sub-10. Ten P/E is 12,500 Sensex. So, you can still build very scary scenario for this market.
We can build many bad scenarios at this point in time. So, things can get ugly. They have not got ugly because FIIs have not sold so far, but they can get quite ugly from here. What is the downside? Don’t get into that mindset of thinking that we are already at 16,500. 16,500 is a very high level of the market to be at, when the world is falling around us. We are at 5.3% GDP and 16,000 plus Sensex. I think there is probably downside fundamentally speaking. We should not be complacent about the fact that from here stocks cannot fall more.
On June series:
June is different because it’s got event risk. Event risk plays out both ways, up and down. So, you don’t know which way June will play out. Positioning is ultra bearish for June and that’s the one thing that’s good for the market that people have bought a lot of protection, they are going in thinking about the worst. Therefore, even if the outcome is not as bad as people think it will be marginally, or there is some hope which is thrown at the global system, you could see that ultra bearish positioning come off very quickly and markets may rally. That’s not my base case, but it certainly is a possibility.
So, you are building yourself up for a lot of volatility, two way moves in the near-term. But once you are done with June and the event plays itself out and it could be a 5-10% outcome in June either way, after that what? Do global markets turnaround? Do global economies turnaround? Does Indian economy and earnings turnaround dramatically post June 17? I think not. So, let’s not take our eyes off the woods right now. The woods are very dark and deep at this point in time and we are not out of them. The trees are difficult to predict at this point because that’s an event risk.