May 07, 2012 02:56 PM IST | Source: CNBC-TV18

Market may slip further, Nirmal Jain says invest in gold

Indian market is getting weak on dwindling interest of foreign investors due to economic uncertainty. The Nifty has already slipped below 5000 but experts feel that the pain will not end there. Most experts have a negative outlook on Indian market as there are indications of more weakness.

Indian market is getting weak on dwindling interest of foreign investors due to economic uncertainty. The Nifty has already slipped below 5000 but experts feel that the pain will not end there. Most experts have a negative outlook on Indian market as there are indications of more weakness.

Nirmal Jain of IIFL too agrees that the market could see further downside as foreign institutional investors (FIIs) are concerned due to rupee depreciation. General Anti-Avoidance Rules (GAAR) and a possible review of Mauritius Double Taxation Avoidance Agreements (DTAA) are worrying FIIs, he said in an interview to CNBC-TV18.

As an investment strategy, he advises increasing exposure to gold. He is also overweight on IT and pharma stocks.

Continuing bearish outlook, Jain explains that investors will be cautious on emerging markets in a rising risk-off mood. Adding that retail investor sentiment has reached a historic low, he warned that participation is likely to be less in 2012.

However, according to Jain fall in crude oil price could support market. Even clarity in GAAR issue could pull the market upwards for a few sessions, he added.

Here is an edited transcript of his comments. Also watch the accompanying videos.

Q: What would you tell your investors to do at 16,500 on the Sensex and 5,000 on the Nifty? Is there more downside here?

A: There can be more downside and one has to be very cautious. The way things have evolved in the last few weeks at home as well as internationally, the underlying trend seems more bearish.
Even if there is some news like resolution on General Anti Avoidance Rules (GAAR) or some positive statement to soothe the nerves, it will not last too long. On one hand, the rupee is quite weak and the government and the central bank have hardly anything to do there. Our current account deficit is almost 4% of GDP and imports are inelastic.

We don’t have any plans for capital inflows whether on debt or equity to meet this on a sustained basis. So if the rupee weakens like this, foreign institutional investors (FII) will be quite concerned because if they bring in money then without doing anything, their portfolio will depreciate. Further, there are uncertainties related to GAAR and the Mauritius Tax Treaty.
Globally, things seem to be now headed for another crisis because Hollande has won in France. In his election campaign, he had declared that he does not believe in austerity on one hand, and on the other, he has asked to levy tax of 75% on the rich.

These measures indicate that we are headed for an unstable global environment. In fact, Greece has been in recession for the last three years and most of us were optimists. But it looks like we should be prepared for a more bearish kind of a market this year.
Q: A large part of the correction started playing out from last week itself. What would you say looks like the downside risk now for the market?

A: This kind of market reminds me of 1998. Most of the money with equity, mutual funds and FIIs was getting into the IT sector, when the economy was not looking great, the rupee was depreciating and this sector was doing well. Now, the sector’s demand growth is not as robust.
But I think the market downside in terms of indices may be around 15000 or 4900. Things can change everyday so one has to wait and watch. The key variable to watch here would be crude oil prices.


Over the weekend, we have seen that there is some fall of USD 4-5. If there is some significant fall there then our current account and fiscal deficit situation can improve. And in that scenario, we can attract FII money but 15000 is at least the near term support level.
Q: Will the GAAR clarification be a make or break or generally should people expect to see acceleration in outflows this month?

A: I think GAAR will be more of a technical thing. If there is a clarification, it might rally for a few days. But the underlying trend will not reverse just because of GAAR. There are larger concerns on currency particularly because most of the institutional investors and FIIs are worried that if rupee depreciates then they would rather wait.
Even the forward cover forex if you see one year is at 6-6.5%. So today you can sell dollar at 57 a year later, which is not a very healthy situation. I think they are more concerned on the macro front, which is current account balance and fiscal deficit.
Obviously, the global factors will impact them because there is some crisis in Europe. If you see, China is slowing down, even the US recovery is mixed, it’s not that there is a clear recovery and we are headed for good times there. So most of the investors will be worried because risk aversion will again be on; the floor to emerging market will be halted. People, at this point in time, are very cautious and concerned.

Q: What is the expectation on the GAAR clarification? Is consensus opinion that it will get pushed back to next year or is it that some broad sweeping changes will be announced?

A: There are some people who think that it will be pushed back by one year which will give time to FIIs or many people to move to Singapore. But I don’t think it makes sense because as it is government has lost a lot of credibility. This will cause more confusion. To my mind, it’s not something which will change the sentiment because the sentiment is impacted by much larger macro factors.


Q: Do you think the recent correction will push back the retail participation even further?

A: Yes, unfortunately retail is decimated very badly. In fact, in my entire career, I have not seen retail being so badly reduced in terms of their equity exposure and their sentiment. I think they have been completely washed out. If you look at cash market volumes, on the face of it, they are 8% which itself is very bad.

But within that, there are some reports; their significant volumes are algorithm based trading, which are not genuine retail volumes. So the genuine retail client volumes are probably now at 10-year low or maybe worse than that. I don’t think that they will come back in a hurry because whenever they come back in a one-two month rally, they have been very badly mold by the market again. So I think retail looks quite grim for the rest of the year.

Q: How would you position your portfolio now for the rest of the year?

A: Although it is not good for country’s finance and balance of payments, but from an individual point of view, gold is a relatively safer bet today because it is a hedge against currency. We used to recommend increasing weightage in gold although it’s little paradoxical because the government would like to discourage this.

But purely from a selfish interest point and from the point of view of managing individual portfolio rather than country’s finances, fixed income again should be significantly higher.

So equity, which is typically at 30-35% should be reduced to 20-25%. Within equity, significant weightage should be in the IT sector, followed by pharma because they benefit from currency depreciation.

Q: People keep harping on consumption or consumption still being strong. Can people hide in faces like FMCG anymore because even a lot of brokerages are pointing out that most of north India and key markets like Uttar Pradesh are seeing a sharp slowdown in consumption?

A: Earlier, I had recommended FMCG but now it is time for investors to book profit and reduce exposure to FMCG and move that money to IT sector which may benefit more from currency depreciation.

When you look at FMCG stocks like ITC, Glaxo, Nestle or Hindustan Unilever, there are different trends. Within FMCG, there are several sub segments, some of them benefit from fall in commodity prices like milk or wheat; some of them get impacted by currency because edible oil prices are benchmarked to food prices.

 So it’s a bit of a mixed basket. But at this point in time, I would say that one should reduce exposure to FMCG and book some profit because this sector has done well.


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