Experts see cheerful end to 2009, choppy mkts in 2010

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Experts see cheerful end to 2009, choppy mkts in 2010

The market has been playing its tricky game, as always. With the year drawing to a close, the big question remains, where will the Nifty and the Sensex head from here—how would they end the year and how would they go into 2010? Ashwani Agarwal of Demeter and Alroy Lobo of Kotak discuss.

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The market has been playing its tricky game, as always. With the year drawing to a close, the big question remains, where would the Nifty and the Sensex head from here-how would they end the year and how would they go into 2010? Ashwani Agarwal of Demeter and Alroy Lobo of Kotak discuss.

The market would see higher levels sometime in 2010, said Agarwal. However, he was unsure whether it would happen in January-February or towards the end of the year. "We might see a 10% or so upside from here in the very near-term till about sometime in January and after that the inflation, monetary tightening etc will come into play, which can cause the market to do nothing or go down for the first six-seven months of the year and then recover again to the second half as the economic recovery takes route."

Though he agrees that the markets would be on a rollercoaster ride in 2010, a 20% upside, he said, towards the end of the year couldn't be ruled out.

Though liquidity had been driving the markets for the past three-four months, it was unclear if the situation would remain the same in the near term. However, Agarwal said, "Liquidity should continue to take markets higher."

Agreeing with Agarwal, Alroy too expects the markets to be choppy in 2010. He believes that monetary tightening in January may result in knee-jerk reactions, post which the uptrend would resume. "The market will react more to fiscal policy because there would be a withdrawal of fiscal stimulus given the high fiscal deficit. That is the time when you could possibly see the longer end of the yield curve moving up."

After that phase is over the market would not see major negative triggers for some time, he added. "But as we approach the second half of the calendar year, the global markets would start focusing on possible withdrawal of stimulus from the US."

Here is a verbatim transcript of an exclusive interview with Ashwani Agarwal and Alroy Lobo on CNBC-TV18. Also watch the accompanying video.

Q: What is your sense - can we build on 2009's performance going into 2010 or are you apprehensive?

Agarwal: I don't know what you mean by that. If you think the market can double again in 2010 - the answer is a clear no. But will we see levels higher than this sometime in 2010? The answer is absolutely yes. The question that I am unclear about is whether that happens in January and February or it happens towards the end of the year.

I am unclear if the current liquidity momentum takes the market up in the very short-term and beyond the recent highs that we have seen. So we might see a 10% or so upside from here in the very near-term say till about sometime in January and after that the inflation, monetary tightening - all those macro worries come into play, which can cause the market to do nothing or go down for the first six-seven months of the year and then recover again to the second half as the economic recovery takes route. That is scenario one.

Scenario two is that the market is not able to take out its new high or its recent high right now and we have a little bit of a correction as the monetary tightening and inflation fears in the first quarter play themselves out followed by a gradual rise by the end of the year. So I would say a 20% upside for 2010 is possible towards the end of the year but its going to be a rollercoaster ride.

Q: How would you answer that tactical question because that is what is exercising everybody's attention right now? Do we correct first and then move up or do we move up now in a straight-line and then correct after everyone who is waiting with cash has sucked in?

Lobo: The market is already expecting some amount of monetary tightening in January and yet the market seems to be still holding up, which clearly means that when monetary tightening really happens, the reaction would be more knee-jerkish at that point in time and once again the market would resume its journey upwards. Having said that, my sense is that, the market would react more to the fiscal policy because there would be a withdrawal of fiscal stimulus given the high fiscal deficit. That is the time when you could possibly see the longer end of the yield curve moving up.

The monetary tightening that would happen in January would more or less affect the shorter end of the yield curve. But the longer end starts getting impacted that is the time you start getting effects on equity prices. After that phase is over the market would not see major negative triggers for some time. But as we approach the second half of the calendar year, the global markets would start focusing on possible withdrawal of stimulus from the US. In which case, the reaction in the market could be far more decisive at that point in time. So I would agree with Ashwini that this is going to be a choppy market ahead. One could see higher levels but one would also see opportunities to buy in at lower levels as we proceed upwards.

Q: What about the other scenario that you were talking about that you rally through from here straight into January-February - people do not get an opportunity to deploy the cash in a correction and they are forced to buy at higher and higher levels may another 10-15% higher? What could propel that?

Agarwal: It's just liquidity. What we have seen in the last three-four months is just a sheer power of liquidity taking over. Many of us who have been here for sometime have been feeling a little skittish about stretched valuations. In conversation with various fund managers etc, the common refrain seems to be that there is no value left among the frontliners but that hasn't stopped the market from going up. There is a considerable amount of foreign liquidity that continues to pour into our markets, a lot of it is passive money via index funds etc, but the fact is that there is money continuous to pour in, it's a function of excessive liquidity any elsewhere in the world.

So that has what has taken the market up after the dip that we saw immediately post budget in July and that is what will take the market up even now. The problem is that should the markets go up more from here at the margin the economic news that is coming out from the rest of the world seems to be improving, some of the diehard caution may actually be forced to reconcile with higher levels and get sucked in. That can happen, it's going to be very painful but we have seen that happening in the past and it can happen again.