Fin crisis round 2 may not wreck mkts: Experts

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Q: Because of this event what's the downside? Do you think the Nifty can head back to 4,500-4,600 where we were a few weeks back before the smart pullback or do you think that's not a likely situation?

Shah: It's very much a likely situation and we are clearly in a consolidation phase. The last time we had a correction and the market went down to about 4,500-4,550. That becomes an important level for the market - not just from a technical perspective but even from some kind of a fundamental perspective.

But having said that on the higher side, levels above 5,000-5,200 are becoming to be kind of congestion zones and that's purely again because the valuations are no longer compelling at those kind of levels.

So we have to keep in mind that going forward unless we see any major global trigger, I think this is a kind of a market which will continue to play between 4,500 to about 5,200 for the next several months till we kind of start factoring-in things like the budget or reforms or the next earnings season. I think till that point of time we will have to kind of look at this kind of a trading range.

Q: Both on the downside that you see likely. Do you think 4,500 is the maximum downside and do you we now have an intermediate top at 5,200?

Agarwal: Top, I think so. Downside I think can be deeper. I do not think that's got anything to do with what's happening in Dubai or China at this point of time. Those are just triggers to start what probably the risks for which have been visible for a while.

The way I see it going forward into the next few months, we will have inflation which will become a real problem. Our own target for inflation by March '10 is 8.5% which is 2.5% ahead of what Reserve Bank of India (RBI) has been saying.

And also the fact that credit growth is not picking up at all this year, it is running in single digits, clearly tells us that corporate capex is not picking up despite so much of improvement in the market, sentiments, talks about pickup in economy etc. Whenever corporate capex doesn't pickup, it shows up with a lag on the broad economy a couple of quarters down.

So I think the downside can be deeper than 4,500. I also think that by and large 2010 is going to be a far tougher year than 2009.

Q: How much deeper because last time when we went to 4,500-4,600 there were a lot of calls for 4,000 Nifty, but did not go there. Do you think the market will find long-term money coming in and buying at 15,000 Sensex, 4,500 Nifty or could we go down to those 4,000 kinds of levels which is around 13,000 Sensex?

Agarwal: I think 4,000 in my mind is a distinct possibility, although by and large the market has been sort of used to buying the dips, you might find some short-term support at 4,500-4,600, try to bounce again. But at this point of time the risk reward is more on the downside. I do not see more than a 5-6% upside and a possibility of 15-18% downside.

Q: The last time the market went to 4,500-4,600, a lot of people held out with their purchases. They thought that they would get 4,000-4,100 and then in a week's time we were back to 5,000 nearly. Do you see this dip if it comes about as a buying opportunity or do you think it will be a deeper crack like Mr. Dhiraj Agarwal is suggesting?

Shah: I think clearly from a short-term perspective, it could present an opportunity. The reality is that despite all the calls, the reality is that this market has remained still a buy on dips market rather than a sell on rallies kind of a market.

But clearly from a pure investment perspective, one has to be very careful because even if one steps into buy at 4,500-4,600, you would experience strong headwinds at the level of 5,00-5,200 because I think apart from the Indian factors, we have to keep in mind that in 2010 the biggest theme which is going to play out is basically going to be related to currency.

I think if there is a weak dollar, you would clearly see a lot of the export dependent economies suffering because of that. If there is a stronger dollar then you would anyway see money flowing back into the dollar assets. So I think in either of the scenarios, the reality is that they are going to face very strong headwinds.

In terms of seeking out lower levels, my view is that that's something which will play out only somewhere in the middle of 2010. You cannot rule out a possibility of 4,000. But that's something which our sense broadly is that it will happen probably sometime in the middle of 2010.

Q: On the infrastructure stocks in India, some of which have exposure to Dubai. Do you expect any troubles with payments, deferments, etc, or do you think those fears are exaggerated?

Shah: I think to some extent most of the fears and apprehensions are exaggerated. I think most of our companies have turned a lot smarter and have been able to try and protect that downside and have been prescribing stiff payment norms. I don't think there is going to be permanent loss of capital for some of these companies. But it is quite possible that there might be delays in receivables and that is something which is basically a part in parcel of any business. I think a lot of our companies which are anyway present in the Middle East or in Dubai, do not have a disproportionate chunk of their revenues coming in from that geography, barring one or two companies. But otherwise, I think by and luck most of the companies, I don't think have more than 15-20-25% of their revenues coming in from that geography. So I don't think there is going to be any material impact as far as the outlook on these companies go.

Q: What about the global factors-so far this more dollar weakness and therefore strength in global equities and commodities has played out to the 'T'. Do you see any disruption in that theme as we go forward in to December-January?

Agarwal: I am not a big believer in these correlations because one common mistake that keep on committing in the markets all the time is just look at the last seven or eight months' data and think that that's the sustainable correlation. If you just look at dollar versus SPX or crude or gold correlation over five or ten year, there is no correlation actually. But in 2003 to 2007, dollar, crude, gold and equities were going up. It is only in the last six months that we have found dollar weakness is equal to rise in commodities prices and these can change any time. I am not to sure whether one should read too much into dollar correlation.

The second believe that I have is the moment the whole world start watching one particular factor, second by second and tic by tic, its start loosing its effectiveness. This whole talk about dollars' correlation has become pretty loud in the last one month and you can already see the correlation breaking. As you said last three-four days the dollar has been weak but crude has been coming down too and US markets have not really been rallying on the back of a weak dollar. I think highly probability that the correlation is about to break or change or become ineffective.

Q: What do you think could then trigger off global correction? Do you think per se the recent performance warrants a correction and it doesn't require trigger or do you think something like a China tightening and the Shanghai Index coming off might be the trigger which people are looking at, if Dubai is not in your eyes?

Agarwal: I think if you go back and see most corrections actually start without a trigger. Since we are always asked for what the trigger was, we look back and see that was the trigger, in effect the trigger already exists at this point of time. Fed has been continuously talking about the fears of fueling an asset bubble in the US and in the Asia, Central governments around the world have started talking about the need for an exist strategy and some amount of tightening. So triggers are already there. It is just that if the market falls, we will call them triggers; if they don't fall we will just sort of ignore them. Domestically also the Reserve Bank of India (RBI) for instance, in the last credit policy was pretty categorical that the upper end of tolerance for inflation is 5% and RBI's own forecast for inflation for March 2010 is 6.5%. So you have it there in front of you. RBI is telling you that I won't tolerate inflation above 5% and I believe that it will be 6.5%, you add two and two together and you have your answers.

Q: So far the hiccups which have come for global equities have been arrested in a couple of weeks' time, they have seemingly looked threatening but they have never been able to break the back of the market beyond a week-10 days or 7-8% in terms of price. Do you think we might enter a different kind of phase where liquidity starts tightening and people globally start getting the sense that the party that they have been playing for the last seven-eight months is temporally at least coming to an end?

Shah: I think liquidity will surely tighten; there is no doubt about it. Many central banks, the world over have already given adequate indication to that effect, including our own RBI has already given an indication that inflationary expectations are rising and therefore there is a need to tighten liquidity. In addition to that there is now an increasing belief that the liquidity which is been unleashed the world over has in effect re-flatted asset prices rather than generating an economic recovery. So to that extent I think that there seems to be now a building consensus that liquidity will tighten, these zero or low interest rates cannot sustain forever or for a very long period of time.
The issue is really in terms of how the liquidity will get tightened, is it going to get tightened over the next three months or three quarters or maybe even a year. I think that is going to be basically the mood point. But the reality is that we are definitely going to be entering into an era of tighter liquidity and when that happens, you would clearly see that liquidity which is been playing such an important factor in driving up asset prices including our own stock prices, I think that will actually have a negative or a reverse effect. I think it is only then we will see any kind of a meaningful correction in the market place. But till then I think to some extent most participants are going to use s strategy of buy on dips.

Q: Of the two you clearly appear more circumspect, so what would be a tactical approach to the market. Would you start building cash levels at these levels of just below 17,000 and in terms of buying would you still be playing the waiting game?

Agarwal: I think so; I think that would be my strategy to build some cash, to go a little bit defensive and to wait for a more meaningful correction and more meaningful dip in stock prices, so start buying risk again. My views on the short-term and long-term are very different. Over the next two or three years, I think infrastructure is going to be a big story in India. But it will be fairly important to buy some of those plays at their right prices.

Q: So you would be selling out of high-beta sectors like real estate, even infrastructure, metals at this point?

Agarwal: Yes, I think so, at least reducing weights in some of them. Of all the three that you have mentioned, real estate has already seen some amount of bashing so has infrastructure but not metals. So of all the three I would be a lot more cautious on metals right now.

Q: We are talking about the possibility of a correction-this terms out on hindsight as another 7-8% correction and by the time the year is out or it will be a starting 2010, the markets take out their intermediate highs and gallops to 5,300-5,400. How much of a probability would you assign to that event?

Shah: I think the probability of such an event is again as much as the probability of this market of taking support at the levels of 4,500. Earlier also I had indicated that 4,500-5,200 is going to be a good range. This range can kind of exceed itself by 50-100-200 points on the Nifty on a very momentary basis. But I don't see those levels sustaining. I think the reality is that above 5,000-5,200, the headwinds are numerous. We could say in terms of valuations, the valuations become challenging there. It is quite possible that the earnings growth which is expected next year may not materialize to the extent that it is expected. The third is of course the whole outlook on currency, I think clearly 2010 will be challenging for emerging markets in either scenarios whether we have a weak dollar or a stronger dollar. Fourth I think in terms of reforms; a lot of reforms are expected next year whether it is basically the direct tax code or the introduction of GST and if there are any kind of delays reforms than I that it itself could also lead to some kind of de-rating and act as a strong headwind for this market. So I think that we have to keep in mind that above levels of 5,000-5,200, the headwinds for these markets are numerous and are not going to be easily overcome.