Don't expect a strong bull rally right now: Enam Secs

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Nandan Chakraborty , Head Of Research at Enam Securities feels that currently the markets are seeing a bear market rally. The Indian household and corporate sector is in fine shape with respect to the rest of the world, he said. He thinks that there is a need for the current cycle to turn before a bull market can re-emerge.

 

According to Chakraborty, the government is unlikely to solve most problems before the elections. He does not anticipate a strong bull rally right now.

 

Excerpts from CNBC-TV18's exclusive interview with Nandan Chakraborty:

Q: How have you read this pullback from 12,500 to 15,000? Do you think it is essentially a bear market rally?

A: Of course, it is a bear market rally, and obviously bear markets rallies are very sharp and swift and some of them can be misleading traps. On a fundamental basis, there are three sectors which matter for our country--the household sector, the corporate sector and the government sector.

The household and the corporate sectors of India on an absolute basis, are fairly fine and settled; relative to the rest of the world. Incrementally, the household sector will possibly improve over the next few months with the dole-outs that have been given. The corporate sector at the margin is worsening but compared to the rest of the world, that's also is in fine shape. The government sector is the one which is in a mess and that's the one, which has actually taken off a little bit of problems from the other two sectors. So, compared to the rest of the world, the things which matter are solvable. The government problem is not insolvable for us.

On the other hand, for the rest of the world there are serious problems in the household and the corporate sectors. For instance, the government sector in the US is facing problems and is very difficult to solve. So there will be a time when we will again go back into a sustained bull market and the problem is that you have to wait for the cycle to turn. We have had a lot of positive confluence from the last few years. So there has been a disfluency of thoughts over the last one year for example, supply disruptions in commodities, oil, etc. So it will happen.

Right cyclical timing is important and that's probably going to be after elections. The government cannot solve most of its problems pre-elections. For example, some divestments issues, some money off the 3G auctions etc. So the real solution of the government problem will be only after elections. So I don't think you can anticipate a great bull market rally right now.

The very fact that the household and corporate sectors are settled, proves that the prices to earnings are actually reasonable. It's not low compared to the rest of the world given our growth rates.

Q: Your report also points out that any sustenance of strength for the equity market depends on what happens with crude. How do you read the situation for that asset class over the next few weeks or even months?

A: Next few weeks, one can forecast nothing because there are speculations about what will happen to Presidential elections and therefore will there be problems in the Middle East because of that or any other reason. These things cannot be forecasted. These are one of the situations where we cannot take a call on oil in the short-term.

India does far better than the rest of the world as far as the stock markets are concerned. When the rest of the world slows down in terms of demand, and conversely, whenever there are supply disruptions in finance, like it happened with the US crisis or in oil or commodities, we get slaughtered because as the nature of the thing is, we are one of the few countries which are a net importer of finance as well as commodities. Most of the countries such as China, US, etc. are not importer of everything - so we will have to bide our time. 

Q: What is your best guess of when we can have a resurgence of the bull market or do you think it is too simplistic to say that start of next year, when inflation cools down, interest rate will start easing off and then the bull market will resume. Do you think it is that simple or there are risks to the hypothesis?

A: There is one single risk--oil prices cannot be forecasted. Whether it will go down to USD 100 per barrel and again will go up to USD 150 per barrel, or it will go up to USD 150 per barrel first and then fall, is completely unforecastable. So that is something one cannot take a call on and that affects a lot of things. So let me read that out as part of the equation. In terms of our P/E, apart from the other macro thing that I have mentioned, basically there are three factors that have affected things - one is the corporate growth slowdown due to interest rate and oil. I think in terms of the corporate growth on an incremental basis, there is still some deterioration to come but most of the hit is over. So I think over the next two quarters, the lagged effect of the interest hikes, etc. are going to play and lot of that has been disguised in the previous quarterly results, where lot of companies did all sorts of things--inventory profits, depreciation policy changes, forex and so forth that will play out over the next six months.

The second problem - our P/E went down because of visibility, which is to do with politics and oil. Our visibility horizon has reduced. So with respect to that there is no hope before elections. The third reason is that interest rates are going up and therefore, the P/E is coming down. We expect at least one last interest hike or a CRR hike to come in the next couple of months. After that, the interest will be steady. If the US dollar rises, there will be pressure on interest rates globally. In such a situation it will be very difficult for India to control interest rates, which they will have to before elections.

Interest rate is one of the main triggers for the market; obviously far more important than inflation - it is liquidity easing and that does not seem to be possible in the next few months. Mathematically, inflation rate will peak out around October and one will have a lot of money, which will be given to the household sector, etc. Some of that money will have to be tightened through liquidity measures, either interest rates or CRR. So I am looking at only the first two quarters of CY09, where some stability in interest rates can happen.

Pre-elections, there will be considerable uncertainty in terms of which parties make up the Parliament. So, one may have a sharp bear market rally over the next few months. Thus, on the basis of the three factors, I would say that if one wants to take a sustained bet, post elections would be a good time.

But before that one may get much sharper pullbacks, which are extremely swift and also stocks may crash out to pathetic levels. Moreover, they all do not happen in the same day. So, one will have various stocks cracking out in various months, which is why in the latest strategy report, we have done the stressed valuations exercise for the top 100 stocks of India. Therefore, we are saying at this price one can have conviction on buying those specific stocks.  

Q: Where does the currency fit into this entire equation and how would you approach some of those sensitive sectors i.e. the technology space?

A: Technology has had a sort of defensive premium over the last few months. Four sectors--FMCG, pharma, telecom and IT are defensive in nature because there is a defensive premium being built in over this calendar year. With respect to pharma, there are no liquid stocks really worth investing. The market caps are quite small in the entire sector. FMCG has only two sizeable stocks. So, telecom and IT are the only ones that have a defensive premium because these two had at least three-four stocks of that size.

IT is defensive and over the next few months as the US dollar goes up, IT's defensive premium will go up but that's not a sustainable run because IT will be more and more commodity in nature. So PEs will decrease. Thus, it is a risky bet putting money in IT over the long-term. In the next couple of months it would be fine but then in the US dollar also, there is a problem in the sense that if the Fannie Mae and Freddie Mac bailout is through monetization, then the US dollar will crack. However, if it is through bond issue, then the US dollar rises and other currencies will also come under pressure. So it's not a clear call in that sense.

Therefore, one cannot take a unidirectional bet on the US dollar rising. First of all, the Fannie Mae and Freddie Mac bailout may not happen at all - things may then get into shape. So, it is a very iffy call to take in IT bet just because of defensive premium and the US dollar. It is not cheap enough, neither is it expensive.

Q: Which sectors are you training your guns on? If the call is that when the market cracks sharply during the course of this bear market and you look at opportunities there, which are the three-four top sectors where you would like to pick from on panic declines? 

A: The sectors that are most leveraged to unidirectional factors are commodity and interest rates sensitives.