Market may slip further, Nirmal Jain says invest in gold

Nirmal Jain of IIFL too agrees that the market could see further downside as foreign institutional investors (FIIs) are concerned due to rupee depreciation. General Anti-Avoidance Rules (GAAR) and a possible review of Mauritius Double Taxation Avoidance Agreements (DTAA) are worrying FIIs, he said in an interview to CNBC-TV18.

As an investment strategy, he advises increasing exposure to gold. He is also overweight on IT and pharma stocks.

Continuing bearish outlook, Jain explains that investors will be cautious on emerging markets in a rising risk-off mood. Adding that retail investor sentiment has reached a historic low, he warned that participation is likely to be less in 2012.

However, according to Jain fall in crude oil price could support market. Even clarity in GAAR issue could pull the market upwards for a few sessions, he added.

Here is an edited transcript of his comments. Also watch the accompanying videos.

Q: What would you tell your investors to do at 16,500 on the Sensex and 5,000 on the Nifty? Is there more downside here?

A: There can be more downside and one has to be very cautious. The way things have evolved in the last few weeks at home as well as internationally, the underlying trend seems more bearish.
 
Even if there is some news like resolution on General Anti Avoidance Rules (GAAR) or some positive statement to soothe the nerves, it will not last too long. On one hand, the rupee is quite weak and the government and the central bank have hardly anything to do there. Our current account deficit is almost 4% of GDP and imports are inelastic.

We don’t have any plans for capital inflows whether on debt or equity to meet this on a sustained basis. So if the rupee weakens like this, foreign institutional investors (FII) will be quite concerned because if they bring in money then without doing anything, their portfolio will depreciate. Further, there are uncertainties related to GAAR and the Mauritius Tax Treaty.
 
Globally, things seem to be now headed for another crisis because Hollande has won in France. In his election campaign, he had declared that he does not believe in austerity on one hand, and on the other, he has asked to levy tax of 75% on the rich.

These measures indicate that we are headed for an unstable global environment. In fact, Greece has been in recession for the last three years and most of us were optimists. But it looks like we should be prepared for a more bearish kind of a market this year.
 
Q: A large part of the correction started playing out from last week itself. What would you say looks like the downside risk now for the market?

A: This kind of market reminds me of 1998. Most of the money with equity, mutual funds and FIIs was getting into the IT sector, when the economy was not looking great, the rupee was depreciating and this sector was doing well. Now, the sector’s demand growth is not as robust.
 
But I think the market downside in terms of indices may be around 15000 or 4900. Things can change everyday so one has to wait and watch. The key variable to watch here would be crude oil prices.