Sensex will touch 19,000 mark by Diwali: Ambit Capital

If government takes some material steps to deal with issues in the power sector and fiscal deficit then the current rally might extend further. However, till that happens, the Indian market is largely in the hands of FIIs, he added.

Below is the edited transcript of Mukherjee’s interview with CNBC-TV18.

Q: What have you made of the reaction? We have got some effort from the government, quite a bit on the reform side as well. CRR cut, not so much which is expected by the markets, but nevertheless we still have come off from the high point of the day and now below the 5600 mark. What’s the way forward for the markets?

A: It’s good to see the market is showing circumspection and being reasonable about what’s happened over the last 72 hours. Our reading is that 19,000 on the Sensex is roughly where the market should head towards over the next couple of months. There are three reasons why I think this rally will be a fairly slow burn rally rather than a runaway rally to 21,000-22,000.

The political situation remains volatile, however we look at it, there are allies of the government and parties who have been supporting from the outside who will hold their cards close to their chest. The winter session of parliament in November-December will be a fraught affair. So, the political volatility will act as a check on the market.

Secondly is the whole structural issue around coal, power plants and SEBs. Those are fairly tricky structural issues and we are yet to see credible steps to disentangle that mess. Until we see credible steps on that front, the market is right to be circumspect about the rally.  The third thing is the sheer amount of paper that looks likely to hit the market in FY13.

The government itself is trying to get close to USD 3 billion as part of the disinvestment program. It would be good to expect QIPs as well from the private sector. In totality, you could have USD 4 billion of fresh paper hitting the market. In all, these three factors are acting to check the market and that’s a good thing. Until we see more tangible evidence of a power sector reform or indeed fiscal consolidation, we will be circumspect about raising our Sensex target.

Q: What is your sense about the shorter term reaction of the market? Do you think almost all the expectable good news is already there and now we could see a somewhat elongated round of profit taking. What kind of flows do you think this market can touch?

A: It is worth interpreting the market events of today and Friday in a slightly different light. The Friday rally was as much Federal Open Market Committee (FOMC) as our market. If you look at markets around the world, a 2% rally was the norm in equity markets and that was more FOMC than our own reforms. Today 0.5% that we have seen is a mild optimistic reaction to the events of Thursday-Friday. I don’t think the Indian market has got that excited about the events of Thursday-Friday.

Those events are welcome. They are encouraging potent for further reform. But, the market is right to take it with a pinch of salt. What I think will drive the market between now and Diwali is FII reaction.

Our reading of what the FOMC did on Thursday is that it’s a very aggressive move. It will unleash a lot of liquidity in the coming months and that’s the main driver of the market between now and Christmas, FII liquidity coming and pushing the Indian market up.

If alongside that we can see fundamental reform in our country on the power sector or on the fiscal side that will add to the rally, but at this juncture the Indian market is largely in the hands of FIIs who in turn are going to react to the cues that the Fed gave on Thursday.

19,000 remains our base case by Diwali. If we see something else which makes us more optimistic we might revise that number upwards, but at this juncture we are contained to stay with a 19,000 Sensex target which has been our target actually since the beginning of this year.

Q: What in your sense will the FIIs be chasing from here on?

A: There are a couple of things they will look to do, my reading is that investors whether FII or DII will swing away from FMCG and IT to some extent and towards cyclicals excluding banks. Among cyclicals Indian banks have peculiar problems, which will prevent them from participating in the rally fully. But infrastructure construction, engineering stocks, auto and auto ancillaries is where a lot of money will swing towards.

FIIs will look to do is in their home markets in America and in India, they will look for tangible evidence of economic growth turning around. Our economist says that in second half of FY13 Indian economic growth should turn around and that is something FIIs will look to see. Has the Indian economic growth bottomed out and if so, you will see much more coming in.

My sense is there will a swing towards cyclicals ex-banks, away from defensives. And the second thing that investors will look to see is, is economic growth in India picking up, and is investment in India picking up. Those are the real reactions that the market will look for before they pump a lot more money into our country.