Mkts will not correct to 2008 levels: Brics Securities

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The markets may not have been very rewarding in the past few days to some, owing to troubles in US and the Europe. But there is no reason to get apprehensive about the future just yet, believes Anand Tandon, director (equities) at Brics Securities. Talking to CNBC-TV18, he said the markets will not correct to the extent of 2008 levels. In fact, markets should move up a little if global cues exhibit stability. 

Keeping his faith in the beaten-down telecom sector, Tandon said he will wait to buy telecom stocks.

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee. Also watch the accompanying video.

Q: How are you feeling about the market these days at 5,500 and what did you make about the mild bout of volatility that we saw last week?

A: I do not think there is any clear signal that is emerging from the market either locally or in the international markets. Depending on what time frame you look at the data or what data you look at, you can pretty much be either bullish or bearish. Clearly the valuations are at a level, while not excessive, are not comfortable. At the same time there is still a lot of money coming into the system. The conflicts are very clear but the direction is not.

At this stage it is very difficult to take a bet on the market in either direction. The only thing you can now think of doing perhaps is to extend the period over which we are looking at an investment for any stock, because clearly in the near-term most of the upside is perhaps in the price and the downside if at all will come, will come in the form of risk, which is difficult to quantify. You have to look at the companies from a three-five year perspective rather than one-two year perspective.

Q: Can you see any pivotal event globally which can lend a major trigger to the markets direction? We keep talking about these weekly events like GDP data, unemployment data but anything globally which you think has the potential to alter the course of markets as we are seeing it now?

A: People are confused in terms of knowing versus discounting. Just because we know that the European economies are in bad shape does not mean that we have factored that into the prices. What we have chosen to do instead is ignore it.

If you look at the data the CDS spreads in most of the peripheral European states, they have started to move up. We had almost a trillion dollar bailout from the European Central Bank in June and the markets have gone nowhere from there. Clearly, the fiscal armory that the central banks have become somewhat blunted in terms of the efficacy in moving markets.

At the same time the issues of joblessness, of lack to growth or deflation, of credit growth not happening or the banks not being in a position to lend, all of it is there and it is increasing. The fact that some countries in Europe are today talking about not allowing shorts, tells you that they are preparing for a significant downside from here. Just because we have agreed that there is elephant in the room does not mean that we have done anything about it.

Q: Over the next three months, the jury is out and the opinion is divided on which way markets globally will head. What do you think? Will we get a deep correction or will we get back news, the Fed acts, liquidity fuels, a bubble in emerging market equities from here?

A: Your last statement is pretty much what we have been seeing so far. We have been looking at liquidity coming out from the developed markets into emerging markets as they look for higher yields. The near term target for what the market would be looking at is a new bout of quantitative easing coming out of the US. I have my apprehensions that this time around I do not think it will work.

The last time, to some extent, the market was taken by surprise. This time it is almost expected. Till we have a serious level of deleveraging which is complete I do not think that quantitative easing itself is an answer. What will happen is you will end up buying more of the longer term bonds and the mortgages because we still have a problem on the commercial real estate at least in the US.

The global markets will essentially look for one more level of quantitative easing (QE) and will continue to remain in no mans land. In that kind of benign environment for the emerging markets you would imagine that fund flow will continue to come. The question therefore is, for a market like India, do we have the ability to absorb these fund flows fruitfully or we will just allow the inflation to rocket the way we have done so far.

If we are able to create a policy such that we can absorb large amounts of money into infrastructure development then we can actually go into the next year with a fairly nice growth number. Remember we are coming close to the end of current year. From hereon as we are going into the next half of the year, you start factoring in 2012 numbers, so the market will begin to look somewhat more attractive.

Assuming that we do not have a hiccup in the global markets, as you go closer to December I think the markets can sustain and perhaps move up further from here. If we do have a hiccup in the global markets and in my view that is an even probability at this stage, then obviously there will be some amount of panic, money withdrawal from emerging markets. Because all said and done it has been overbought.

Can it be the same as 2008, very unlikely because the level of leverage at least in the local participation is much lower than what we had going into 2008. The panic will be equally suppressed. At least we should see some puncturing of asset bubbles like in real estate.

Q: A lot of people offer this as a theory that while everyone is expecting a correction and it has been three-four months with out a meaningful one, just the sheer fact that so many people are expecting it probably technically makes the market less venerable to one as people are prepared and expecting this correction. Is that too acute an argument or do you think there is some merit to it?

A: If you look at history that is partly true for a normal correction. If you are just looking for the market to come down I think if the market falls 5% you will have a lot of people buying. If it falls by 10% you will have even more people buying. If for some reason the problem is acute enough that it falls to 15% I doubt anyone will buy.

Everything has a threshold. You would probably find that if there is a serious bout of correction such that the sanguinity that people have right now about the growth prospects in India were to be withdrawn for some reason, then 15% lower and I bet you that nobody would be looking to buy they will be looking for a 30% cut. Till it is a nominal cut 8 to10%, I think you will find that all dips are to be bought. It is a question of what is the trigger for the panic if at all. It has to be a serious enough trigger for a serious enough cut to happen.

Q: Can you see such a trigger locally or globally? Accidents none of us can see and predict but locally some slowing of growth, earnings disappointments or globally whatever has been brewing so far and is visible do any of these factors have the teeth to usher in about a 15% plus kind of correction globally or locally?

A: On the local market I think the fact that earnings are slowing. The second half will show slower earnings. I think the best period has been up to now, including October. October being the festive season, most consumer groups will show tremendous growth and so will banking as so on. Up to October I do not think there is anything that locally will show any kind of problem but second half the base-effect will come in.

Therefore you would find that it will be difficult to outperform from current expectations. Along with that I still hold the view that interest rates can continue to head up here. May not be the benchmark rates by more than 25 to 50 basis points (bps). But the lending rates of the banks and the deposit rate that banks are willing to offer will go up by almost twice as much, it can go up by almost 100 bps or 200 bps respectively.

Higher interest rates and perhaps tapering out of growth at least for the near term is a bit of a wall to crawl up on. But I do not think it is enough to cause a sharp correction. That can be a 5-10% correction which will be bought into.

Globally the problems remain unchanged. We have done nothing to take away from the fact that there is a problem in terms of highly leveraged global economies with very poor growth prospects. The possibility of some of the European countries on the periphery still defaulting which means that you can easily have another bout of banking crisis coming through.

By now, most investors have become immune to the fact that banks necessarily have to be bailed out which is something which we should keep questioning all the time. There is a limit to how many banks can be bailed out and how long. We need to have a dramatic restructuring there. Till that does not happen it is a sword that will continue to hang over the market. That is the only issue which can take a 15% cut. A normal de-growth or slowdown in the economy will be bought into it is not likely to create major panic at least in the next six-eight months.

Q: Let us talk about a few sectors which can actually make a major difference to the index, starting with Reliance . What do you think it weighing on the markets mind?

A: I think the market had kind of factored in assumption that more gas will perhaps be discovered or will be at least notified. Nothing new has happened and the cyclicality of its petro-chemical business does not give you much chance of an upside. You were really valuing in additional gas coming in and for some reason that has got either delayed or postponed and also the production has not come up to speed as much as expected. It has drifted down more than anybody taking an active call to say that you should sell it.

Already most funds are underweight because of the fact that the weightage of Reliance is so high in the Index that the domestic funds cannot actually hold that much. You have a cap of 10% and Reliance is more than that of the Index. To that extent most of them are already underweight. For them to go out and sell is not something that I would expect.

I have been hearing arguments the index will move up because Reliance must now move up. Reliance has to find reasons for it to move up. For that we have to see a change in the general dynamics of the business. If it were to happen you can expect to see prices move up. Otherwise it cannot be that the index must move up and because of that Reliance must move up.

Q: Bharti Airtel has had a good run quietly up from Rs 280 to Rs 330-340. Do you think telecom can support the index?

A: The argument for telecom is still to my mind is somewhat weak. Can it get cheaper? Not very likely. The competition intensity has fallen significantly and while there is still money coming in, in the form of capital therefore to that extent some competition will remain. I do not see the possibility of raising prices or offering so high a value addition in terms of its other services that you can resume a very high growth path. Is it cheap at Rs 280? Yes it is cheap. Can you make a lot of money on it and should it go into a high growth trajectory again? I think there is still time before it does that.

So long as the new capital continues to come into the sector assuming there is some level of under penetration still there, you would find that players have to keep on fighting for market share. Give that it's a business where the fixed costs are very high and variable costs are almost negligible. there is no option but to reduce prices. If we do get to a situation where we have number portability, you will find another bout of volatility coming through. I do not think the sector is out of the woods but it is also at a level where you can't sell it.

Q: What is the best way to play this market now, when there is some uncertainty over the next two-three months? Do you create some cash or would it be a painful thing to do to create cash and sit on it right now?

A: If you look at the data that you get at least for the domestic mutual fund, most of them have reduced their cash position significantly, which usually means that there is also going to be a tiring out of the market. The insurance flows have been subdued and mutual fund translating on what would be the normal level of cash, 7-8%. It has come down sharply from 15% odd which it was a few months ago to now the normal level that you hold assuming some redemption will happen. Obviously we have seen that the flows have been negative.

Overall therefore at least in the front line companies there is that much to look for. If you are a private investor, extend the time frame that you are looking at because even now if you assume that the growth in the Indian market will continue to sustain, over a longer period of time, there will be companies which will be able to resister a 25-30% growth over a longer period. Largely what you have seen over last few months has been that. You trade down the curve, look for small companies which can sustain higher growth rates, assuming there is availability of liquidity. That is the core assumption that you are making. Liquidity will continue to remain and therefore companies will continue to grow.

The only way is to look for the broader theme. If you are bullish on construction, perhaps now is a good time to look at them because many of the construction stocks haven't moved in the last 6 months and therefore there is perhaps some upside in the next two-three years.