Nifty can see a 300-400 point slide: Fortune Equity

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Abhijit Chakraborty of Fortune Equity Brokers has a downbeat view on our market. Yesterday's pullback wasn't a one-off correction. This liquidity driven rally which propelled market upwards nearly 900 points can see a pullback in the region of 300-400 points.

Going forward, Chakraborty feels there is more credence to the call for a correction in the market because the market is not giving importance to the CPI inflation index. He doesn't believe the RBI will cut interest rates which is something the market is largely banking on to push it higher.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: You have been a bit cautious on this market move. How did you read yesterday's developments? Do you think we are ripe now for some consolidation or was it just a technical adjustment that we saw?

A: I was of the opinion that market should consolidate between 5,200 to 5,500 and 5,600 levels on the Nifty but the market kept on going up and after a 20% rally we were getting closer to a pullback which is due anytime. I don't think it was a one day correction. There is going to be a pullback and it can be to the region of 300-400 points. We have seen about a 900 point rally on the Nifty at one go and the pullback could be almost half of that because it's liquidity driven and a mean reversion of the stocks which were beaten down last year those are the ones which have rallied the most this year.

Going forward, I feel there is more credence to the call for a correction in the market because the market is not giving importance to the CPI inflation index that was released which showed that the index is at 7.6 and the market expectation that WPI which is the policy benchmark rate will continue to fall and will therefore force the RBI's hand for an interest rate cut.

It might not materialise because February's inflation is once again going to be above 7% on WPI because of the fact that manufacturing inflation, commodity prices and food article prices which have also started going up. So till the time inflation convincingly comes and stays at around 6 or below 6% I don't think the RBI is going to cut rates. So there is a case of disappointment which is coming up for the market in terms of expectation of interest rate cuts. Let's not forget that this year the budget has to be harsh; there is no avoid on that.

Q: What kind of markers would you set out for the index in the next one month time because the pre-budget period generally tends to get very volatile? We have other heavy newsflow in the form of the monetary policy and the election results as well?

A: To put things in perspective, this year 2012 could be a repetition of 2009 where though the underlying fundamentals were weak, recovery was expected but the market rallied big time for the full year and this year is going to be a repetition of that. Global liquidity is going to continuously pump into the market throughout the year right from US to Japan to England to ECB, everybody has planned asset purchase programmes as well as further infusion of liquidity and that liquidity is definitely going to chase commodities and emerging market equities specifically.

So there is going to be a sustained rally for the better part of the year and analysts like me might be struggling to find reasons to attribute to it but the liquidity will continue to drive the market. Having said that, in between those sustained rallies we are going to see pullbacks which is the case with every bull case scenario and if there are factors which are more fundamental in nature, the fall could be more precipitated.

Between now and the next one month, until the time we look at the monetary policy and budget implications I am looking at about 300-400 points slide on the Nifty but again towards the end of February we are going to see liquidity infusion coming from ECB so that should also provide some kind of a downside protection, so maybe 5,200 should be the base for Nifty in the short-term.

Q: Would you concur with the view that banks can see some more pressure because SBI saw a big knock in trade yesterday?

A: In this fall, rate sensitives are going to do particularly poorly. My logic comes from the fact that once again inflation is gong to spike up and the expectation of sooner than expected rate cut from RBI may not materialise. At the same time we have seen deteriorating asset quality concerns coming up in SBI.

For the banking space, the asset quality issues are not behind this and most of these stocks have rallied almost 40-50%. So in the case of a pullback, it would be negative on rate sensitives, not only on banking but also on real estate which in some cases is almost like a 100% rally and with no material change at the ground or any cost of funding coming down for them. So real estate, banks would be top shorts for me.

Q: There will be news coming through on ONGC very soon. It seems like appetite is high for the issue this time around. How do you approach a stock like that?

A: It's very difficult to take a bet on ONGC as we have seen in the past that after the first issuance the government went back on its commitments of how the subsidy is going to be shared, which does not provide clarity for long-term investors. ONGC is a stock where a lot of large long-term investors would be looking to take a bet but the lack of clarity on subsidy sharing is something that the government is yet to address.

As per media reports, there are a couple of large institutional investors who have already become anchors for the issue which will see the issue go through and there could be some kind of trading opportunity in the stock given the fact that its going to be a more public participation. Beyond that on fundamental level until the time we have clarity on subsidy sharing, this stock cannot have a call taken on it.

However, in the very short-term because of the fact that crude is where it is at USD 120 per barrel and post elections there could be an expectation of a price increase in both diesel and petrol which could be positive for not only the oil marketing companies (OMCs) but also for ONGC in terms of subsidy sharing burden. From that aspect there could be a trading opportunity in ONGC in the short-term.