Srivastava says it would be at least a couple of years before the macro-economic environment normalizes. He says the RBI may even be compelled to raise rates in its efforts to protect the rupee.
The market could bounce on short covering, but investors would be better off not buying into the rally, feels Ajay Srivastava of Dimensions Consulting. If at all investors want to buy equities in this market, they should focus on companies with dollar-denominated earnings, says Srivastava. He is bullish on Divis Labs , Oracle Financial Services and Tech Mahindra .
In an interview to CNBC-TV18, he says it would be at least a couple of years before the macro-economic environment normalises. He says the RBI may even be compelled to raise rates in its efforts to protect the rupee. At the same time, given the chaos in global markets, there is little the Indian government can do on its own.
On the index, Srivastava sees in slipping below 5500 after a brief pullback and then trade in a range between 5450-5500.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Huge volatility playing out globally has the time come for you to look at some stocks or you are still sitting on your hands?
A: It depends on from where you started; our position was almost zero in the market. Tactically, we must focus on companies with export rupee-dollar earnings and that is the bottom-line. Anything which is leveraged is a no-go in this market, it does not matter how much it falls, because the kind of pain they will go through to handle rupee at 60 or 65 to a dollar is almost unimaginable.
One would like to buy some stocks but we are saying that we need to buy the stocks which have got clear dollar-denominated earnings and zero leverage balance sheet.
Q: Just because it has fallen already though, do you think the market is ripe for a short covering bounce or not yet? There could be more damage given what is happening on the sell side?
A: Tactically, you are right perhaps that market might bounce back for a little while if the shorts take up profits today, maybe sometime by 11.30 am to 12 noon or just before or after Europe opens. There is a need for the shorts to take profit, because for the last two and half to three years we have not had such a good reign for the shorts in the long time. One was afraid that central bank would intervene, and the markets did go up every time the shorts came in the market.
For the first time we have a unbridle run on the market to say we can short with impunity based on fundamentals, demand-supply and fully knowing that the Fed will not come and step in. What the Fed can do is already stated now.
For first time in many years, the shorts are getting a right to be participant in the market; they may or may not book profits today, if not today then maybe tomorrow, so it is just a question of a day or two. So, there could be a rally, but this rally is not to buy into. This pain is not going to go away with this two-day fall in prices. It is going to go much deeper; whether it is in our banking system and our leverage balance sheet. For instance, Reserve Bank of India (RBI) I am not going to be surprised if the United States (US) yield going up as you saw yesterday, RBI may actually have to reverse and increase the rate and that is the possibility that we are examining now. So forget, reduction of rates, they might have to increase the rate. You saw the bond auction yesterday, allocation of quotas etc. That is telling us that the rate increase might come if we have to protect the rupee, protect the currency. Otherwise, it is almost like a free fall.
Q: Of the high quality names that you are talking about, do you think that even those names are vulnerable to foreign institutional investors (FIIs) selling in the near-term? So, while fundamentally they might look okay, technically there could be an overhang if a few billion dollars go out of our market?
A: Some of the names like Divis Laboratories, Oracle Financial Services and Tech Mahindra there could be an overhang, but the supply is not as much as the damage they can do to the other stocks, like the private banking stocks.
There everybody is loaded up to the gills in terms of stock. We saw HDFC Bank , which went up from Rs 630 to Rs 730, although their earnings were flat, it was Rs 1,000 crore net profit for March 31 and Rs 1,000 crore for December 31.
Those are the stocks, which are more vulnerable today especially stocks where there is heavy ownership, the performance has been sub-par perhaps and it is easier to sell the stocks.
These stocks which are dollar earning denominated like we spoke about Divis, Sun Pharma, there the ownership is there, but not of the magnitude and easily liquidity available compared to the banking sector on some of the bigger names.
So, we believe that even if pain comes it will be much lower and perhaps could be an opportunity to keep accumulating because in one or two more years, these stocks are going to outperform the market purely on currency, forget the performance on operating levels.
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