Nifty may trade between 5000-5180 in Dec: India Info

Even as the market trend remains bullish on the back of dollar carry trade (in which investors borrow US dollars at near 0% interest rates to invest in high-growth asset classes in emerging markets), India Infoline’s CMD Nirmal Jain says Indian stock markets may consolidate in the month of December. “I expect the Nifty to trade between 5,000–5,180 in December,” Jain told CNBC-TV18 in an interview.

The key risks to equities ahead remained unwinding of the carry trade, Jain said, and a resulting fall in commodities. He added that he was wary of the large primary paper (initial public offerings) coming into the market as it may absorb capital from the secondary market.

On stocks and sectors, Jain said he was bullish on midcap IT, pharma and consumer durable sectors. “We are also betting on midcap infra and power equipments,” he said.

On Mahindra Satyam, which has seen a steep fall recently on investor concerns on fundamentals, Jain said the stock price had run ahead of what its value was.

Here is a verbatim transcript of an exclusive interview with Nirmal Jain on CNBC-TV18. Also watch the accompanying video.

Q: What is your expectation for December? Is it another good month or are you cautious?
A: December normally is a relatively lower volume and a lackluster month. The underlying markets have been very good because of the US Dollar carry trades. The interest rates in the US are close to zero and a quarter percent. Therefore, hedge funds are borrowing in US dollars and investing in emerging markets like India. It is a liquidity driven rally and fundamentals, to some extent, have supported it. The month of December is generally a holiday month in the US from where the markets are getting cues at this point in time. In December, we will not see the rally in the way we saw it in November. The markets would consolidate in a very narrow range, maybe 1-2% plus or minus. The markets will then see directions in the month of January based on foreign institutional investor (FII) allocation, particularly the long only funds in the next year.
Q: Have you consolidate at these levels or any likelihood of getting past our intermediate highs?
A: The Nifty at around 5,100 levels, the Intermediate high has not been too far from the current levels. Therefore, I would see that as a big resistance for the market. On the support side, the market will see support at around 5,000 levels, which is a psychological barrier. So the markets should stay in 5,000- 5,150 or 5,180.
Q: What is the call after you see the Nifty powering to 5,400-5,500 levels in the new year? Do you think the correction back to 4,600 is more likely?
A: I would bet on the positive side and the bull run to continue for some more time because there is huge liquidity and interest rates are low. So money has to flow to equities. India’s economic fundamentals on the macro side are far better than the other markets. There are very few markets that can absorb capital like India and China. Between the two, India can be a favored destination. So the rally may continue for some more time on the back of policy reform expectations from next years budget and so on.
Q: What will drive markets from here? Is it just dependent on the liquidity or dollar from here on do you see any fundamental triggers between now and February next year?
A: The market has been driven by liquidity and particularly of FII money. The US dollar treats and that situation is likely to continue. So the biggest risk is that if something goes wrong in the US and the commodity bubble bursts then we might see huge pullback from the money that has been invested in the recent past in markets like India. Other than that, liquidity will drive the market. Liquidity is getting into all the emerging markets. Within that, our allocations will depend on how have corporate earnings and economic policies come in the first quarter of next year. We have to be careful about the kind of paper supply we get from government and private companies because historically we have seen that after markets gets into a bullish mode, and then the paper supply becomes too large. The deluge can absorb all the liquidity or can basically cause concern about it. We have to watch out for these two-three events, which are large public issues, the budget, the corporate earnings and the cues that we get from the global markets.
Q: November had it a very diverse performance in Asia, China and India with an up of 6-7%. Markets like the Hang Seng are actually down this month. What do you hear when you interact with your institutional clients? Is fresh money being raised for markets like India? What exactly is the nature of this investment or liquidity?
A: After this economic crisis, India and China have shown the resilience that they can grow at 6.5.7%. It had many foreign investors who were not fully invested in markets like India and China because they found them extensive. They are now trying to catch up because they realize that whatever happens to the world, if there are two economies that have to grow, then they are going to be India and China. So if you have some equity money that has to be invested, there is no way you can ignore India and China out of your portfolio.
Q: On the subject of fresh paper, you have managed the Cox and Kings issue. What kind of response did you see across various investment categories?
A: The response has been very good and that shows that if the issue is of a good quality company and reasonably priced then the retail investor can also participate. We have got more than 50,000 applications in this particular issue. There is appetite in the market. However, if valuations are very aggressive then investors burn their fingers. This is the background to this issue because in the earlier issues, the retail investors have not made that money. So there are concerns whether the retails will participate or not. However, we are very happy that retail investors also participated very well in the issue.
Q: After a consolidation, the market will eventually break out again on the way up. What would you back in terms of sectorial clusters to outperform in that scenario?
A: Midcap IT, pharmaceutical and FMCG will outperform because the growth is driven more by domestic and inward looking companies. I would also bet on infrastructure, power equipment, road, etc. These are sectors where large investments will continue and all the policy indications that the government will roll out a very favorable environment so that our infrastructure can continue to grow.
Q: You like midcap IT. Do you have any thoughts on Mahindra Satyam? The stock which was punished yesterday because of investor concerns about liabilities, would you be nervous about something like that. How is it shaping out?
A: In case of Satyam, the stock price has risen too much ahead of fundamentals because when it reached Rs 120, the market cap was 3 billion, which is almost three times the revenue. People are talking about USD 600 million of cash and that of cash valuation is more attractive. Now, there will be questions about the networth. The cash, which people have been talking about, will it last or not, is a question. In case of Mahindra Satyam, we are yet to see audited balance sheet or results after the fraud has happened. So I would be very cautious because you don’t know the financial fundamentals and the strength of balance sheets.
Q: Some of these concerns are quite well documented. Is there anything else the market has been picking up these past two days that has caused such a deep cut?
A: This is more of a technical correction because whatever has come in newspapers is unlikely to affect the future of the company. The stock had an excuse to correct and it got done in this news.
Q: Is it true that extension of trading hours maybe put on the back burner?
A: I have been hearing and reading similar things in the news papers. I don’t think we are going to see trading extensions very soon.
Q: A quick word on Reliance. It has gone ex-bonus today. How are you guys mapping the journey of this stock from here?
A: Fundamentally, nothing much has improved in Reliance. Its dependence is significantly higher and the refining margins are pretty low. While oil and gas prices have gone up and in terms of Reliance’s businesses, retail continues to bleed. The big event is how Supreme Court decides this issue. Till then, I would be cautious and concerned about the stock at this point in time. The bonus and ex-bonus is a book entry. I don’t think that should affect price in any which ways.
Q: What’s the downside risk going to the market here? If things turn a bit sticky globally, where do you think support will fall will it be 4,900 or lower than that?
A: We have to see how badly things go globally. If you have a crisis like the one which we saw in January 2008 with Bear Sterns and with Lehman, then the market can go down maybe another 10-15%. However, it has the minor crisis then what you are saying that the market may find support at 4,900 level.