Mar 10, 2013, 12.58 PM | Source: CNBC-TV18

Current rally in indices may not sustain, says Tandon

Indian indices surged for the fourth consecutive session today. Both the Nifty and Sensex rallied 4 percent in this week itself. However, some analysts are concerned that uptrend in the market is unlikely to continue given that domestic cues will hold key next week.

Anand Tandon

Market Expert, Independent Market Analysts

Expertise : Equity - Fundamental

More about the Expert...

Indian indices surged for the fourth consecutive session today. Both the Nifty and Sensex rallied 4 percent in this week itself. However, some analysts are concerned that uptrend in the market is unlikely to continue given that domestic cues will hold key next week.

In an interview to CNBC-TV18, Anand Tandon, CEO, JRG Securities warns that this rally may not sustain if Reserve Bank of India chooses to maintain the repo rate and thus keeping tight liquidity.

"I would think that it is not necessarily a sustainable rally. I think it is going to be a little difficult especially if monetary easing does not happen in March. So I would be still somewhat circumspect," he adds.

Meanwhile, he also feels the rally is just a retrenchment of fall especially in the midcap space.

Below is the verbatim transcript of the interview.

Q: How are you feeling about the markets now? Do you think this is just a trading rally that could get sold into as easily or are we forming some sort of a base or a support here?

A: The market reacted negatively to the Budget that came through. To a large extent, I think what you are seeing is a retrenchment in fall, especially in the midcap space. Some of the falls were exceptional, not necessarily related to the Budget. Therefore, I would hesitate to read too much more.

Although, the expectation is slowly again building up for a rate cut in the next policy. Obviously, there is a lot of pressure on RBI from the government. You keep hearing statements from the ministry saying that we expect the RBI to do the right thing which is to cut interest rates, as if not cutting it would be the wrong thing.

But, that said, I think the expectations are slowly being built up again and you are beginning to see some rebound movement from the fall, towards the cyclical trend again. So at this stage, I would think that it’s not necessarily a sustainable rally. I think it is going to be a little difficult especially if monetary easing does not happen in March. So I would be still somewhat circumspect.

Q: If you look at the global equity space it seems like we are pretty much in line with what the European markets have done this week hence what would you give in terms of a credence of the Indian markets outperforming the global equity space or do you think we are just vulnerable to what we are seeing in the global space now?

A: We are extremely vulnerable. Unfortunately we haven't done anywhere close to what some of the larger markets have done. My argument, which I have been making for sometime now is that if you begin to see movement in the developed markets and you have seen a huge move up in the US market; a big question arises that why would you want to put money in emerging markets per se and in India particularly, when your own home market is doing exceptionally well. So, if the issue is that liquidity will drive markets, they will, but they are driving the developed markets a lot more and to that extent emerging markets have the risk of being out of fashion somewhat.

Q: Just to get the levels out of the way, a close above what level on the Nifty itself will convince you that this is not a relief rally?

A: I have absolutely no idea what the level should be. The view that I had expressed early in the beginning of the year is something that I still hold on to, which is that whatever rally has to happen will be front loaded. I think we have seen most of the policy action out of the way. After this, I am still somewhat circumspect on the earnings growth that the consensus seems to indicate.

My view is that Sensex will be pretty much at 21,000. We would have reached whatever level you can reach on the basis of fundamentals, which mean that if we get to that kind of level, you should expect to see market fall off and then perhaps come back again. But I would very much be surprised, if you get index which is significantly higher from here. I am not putting out any levels in the form of precise numbers because I am not chartist.

Q: You did mention briefly the Reserve Bank of India (RBI) policy but what exactly are you expecting on March 19th and how much of it do you think is possibly factored into the markets at this point?

A: Let me just take you back to what the economic survey said both this year and last year. This year for example they said, we should have an inflation indexed bond and the savings rate has fallen dramatically because financial savers especially in the household sector do not think that they are being adequately compensated and therefore they are looking at buying assets. What does that tell you? It tells you that the interest rate that you get for putting your money into a fixed deposit or an equivalent debt is not adequate for the kind of inflation you are seeing.

If you actually were to have an inflation indexed bond you would have to offer a much higher rate of interest, for the savings rate to go up from 30 percent to 38 percent that it was a little while back. Therefore for it to be credible you have to have a serious increase in rates. I read in one of the papers today that the proposal is that inflation indexed bonds should be offered to institutional investors. Where is the savings coming from? the household sector. Therefore logically what should you do? We should obviously offer it to institutional investors.

This is the kind of thinking which I find really amazing and difficult to understand. So, if you were to go by their own assumption that inflation indexed bonds are need of the hour to increase returns on debt instruments where is the question of interest rate cut.

Q: There are lots of papers expected into the markets and we now have the RCF OFS also. In your opinion, how much demand do you see for all of the supply coming through?

A: So long as it is from companies which are good and large, I would imagine that it will at least get taken up. What it does to the secondary market however it’s a different thing. Obviously, if you do have fresh stock coming into that extent, money has to move towards fresh stocks and not into the secondary market. So it may put a cap on the upside in the secondary market, but I would imagine that good quality companies will always have buyers.

Q: If you had to recalibrate your portfolio now in order to add some stocks, anything that you would have an overweight on right now, what are the stocks that you are looking at or sectors even?

A: Midcap IT. I believe that the rupee will remain under pressure for this year. If the economy in the US does a little better than what it has in the past, you are likely to see a resurgence of orders coming through. So both, the business outlook will be a little better as well as the kind of tailwinds that you will get from the currency. The midcap sector, though it has done reasonably well in the last few weeks, still companies are probably under priced.

Q: We have been speaking about the macro indicators which are out next week. In terms of an equity action which data points would be the most important to you? Do you think that it could possibly have a strong reaction on the equity markets at all?

A: Interest rate continues to remain the most speculated upon data point. The rest of it is mostly backward looking. The interest rate is the only one which will affect it going forward. So, from a market point of view that has to be the most important one.

READ MORE ON  Stock indices, Nifty, Sensex, RBI,


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