Experts rule out rally in short-term, advice sectors

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Q: What about liquidity? Until now, the market has not had any problem digesting all this primary market paper, whether its an IPO or a QIP. Things have moved along pretty well for the secondary market. Is that likely to become a problem for us in the months ahead, or do you think the market will tide it over and there will be plenty left for secondary market as well?

Subramaniam: Let me crunch that map for you a little differently. If we go back to the dark days of late March and the early April when the recovery was just underway, it's important to remember that between the first week of March and the day before the election result came out, this market rallied 50%. It didn't really get too much by way of liquidity. Then, you take the price levels on the day after the election result came out and today, the market is up only 18%. The day after the election result till the low that we saw in the middle of this month, the market was up only 6-7%. During this period, it had absorbed close to USD 10 billion of liquidity. The reason you did not see prices do better is because so much of that got sucked out by paper issuance.

Even if money flow is there, the paper supply is equally large. One must also remember that there is divestment programme which will start to take a lot more in terms of pipeline over the next few months. The government is quite clear about going ahead with it, so that will prove to be a magnate for a lot of money. It will suck out the money that is waiting on the sidelines. Literally, it has taken USD 10 billion to get this market from 15,000 the day after election results came out to 17,000 today, which is not very good bang for the buck in that sense. If that is the rate that is required, we might require another USD 15 billion to get you to 21,000. The bang for the buck has come down and that is because of supply of paper.

Q: If the coil were to snap though, what looks likely on the downside - back to 4,500 or could it even get worst than that?

Subramaniam: My view from here is that it is a coil spring. When it breaks this time, the move will be a either be a 20% move driven by positive seasonals. The DXY continues to stay weak, money start to come in, talk about the budget, all of that, so this is one of the most favourable seasonal periods historically for the Indian markets. We are at that point. What can gatecrash the party is the fact that the global correlations are so tight that if for any reason the DXY and some of this stuff starts to reverse, you will find that all the equity markets will initially behave as herd and move in one direction. So, that is the two possible outcomes of this, right now.

Q: We were talking about some of the commodities. A couple of side sectors over there have moved, for instance shipping. Where do you stand on that?

Kumar: It is relatively small sector in the context of the market. It is extremely volatile, so we do not have any informed deep research view on that. I would like to highlight that the shipping cycle is linked to the global economic cycle. Obviously, the wheels are moving again within the global economy. But as I mentioned earlier, it is going to be a slow grind back for global growth recovery. In this volatility, in those types of sectors whenever there is a strong move up, that would probably be a time to take the profit rather than go chasing it.

Q: What about sugar which has been a very politically sensitive subject through this week? We do not have that fair and remunerative price (FRP) anymore. How are you approaching sugar?

Kumar: In the short-term, all companies are going to see extremely good profitability. But the time to buy or look at the sector favourably is those types of extreme cyclical commodity sectors where the sector profitability is at its bottom. I think the sector profitability is probably more at the peak rather than at the bottom. This is the time when some of the existing investors would take profit on sugar. You could well have the sector's companies giving fabulous numbers over the next one-two quarters, but the returns will be harder to come by because returns on those sectors depends on incremental positive news flow. Given where the sector is already in terms of its current profitability, it will be a needle which will be much harder to move. So, not a sector where I would suggest entering at this stage. If anything, I think it should be taken profits at this stage.

Q: If the call is to be in defensive, what kind of cash levels would you keep in your portfolio now?

Subramaniam: That's mixed. At this point, we are pretty much at a fork. It can be a sharp 20% move either way. It depends on what kind of tactical strategy you want to adopt. This is the time to sort of stay with the base fundamentals, stay with the domestically-oriented names and back them at least over the medium-term and ride out whatever volatility you see over the next three-six months.