Wait for 3-4 days before rally finds legs: Religare

Patnaik feels that one needs to see how the conditionality clause is fulfilled and how the sterlilization takes place. He does not see liquidity coming in with immediate effect. "We will not expect liquidity to come in immediately because Spain has to first ask for it, Spain goes for its first bond rollover in the next week or so immediately after the German court’s decision. If they ask for a big bond demand then we will see buying coming in from the ECB."

Patnaik believes that the market is pricing in a diesel price hike. "From a reform perspective, one has to see a diesel price plan. The market will be much happier if the government comes up with a tentative time plan in which they raise diesel prices over a couple of quarters to bring it up to market parity over probably one-two fiscals. But knowing that the diesel price is inevitable, the market is also pricing in some part of that success story."

According to him, the Nifty will cross 5,450. "That should not be the problem if the approval comes out from the German court and if the government delivers slightly more on the diesel price hike. Although from a fair value perspective, we will expect to remain at around 13 times on the forward multiple, which should be around 5,100 or so."

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But in the near term, until these factors play out and the FOMC takes a call on what they intend to do with QE3 once the maturity extension programme gets over in December, the market will see some upside for the short-term, he added.

Here is an edited transcript.

Q: How far will this global rally sustain?

A: We will have to see a couple of points that Mario Draghi made yesterday. One of the points was conditionality, the second was sterilization. I will come to the second point first; they are saying that they would put unlimited amount of money into the markets, and that will essentially push the markets up. They have also made the statement that any amount of bond buying that will happen in the near end of the yield curve would be sterilized at the end. So one has to see how essentially the sterilization takes place. If you are talking about trillion dollars of sterilization, that will eventually happen, one has to see how the ECB will manage to do it.

As far as conditionality is concerned, they have said that money would be available only if countries comply with their fiscal austerity restrictions and they have roped in the IMF to monitor that. That’s again something that needs to be seen. Third, one has to see what will happen from the German courts. These are some variables that will need to play themselves out over the next couple of days before this global rally finds legs. We would wait for about three-four days before seeing legs to the rally.

Q: Do you expect clarity on the points that you mentioned in the near term or do you think you can expect more liquidity to come in over the next few days?

A: I think we will not expect liquidity to come in immediately because Spain has to first ask for it, Spain goes for its first bond rollover in the next week or so immediately after the German court’s decision. If they ask for a big bond demand then we will see buying coming in from the ECB.

Q: How much fuel to fire can be added to this rally in the near term because of fuel price hikes next week?

A: Fuel price now is inevitable; the negative margins on diesel are about Rs 17. This has risen from Rs 9 only six months back even though crude has not gone up. But diesel spreads have gone up from USD 15 to USD 23 now. So, diesel price is inevitability. How much of it will happen? Will the government fall back on their ways of having a big spike in the diesel prices and then getting back a bit to end up with small price?

Anyway, for instance, they might raise diesel prices up Rs 5-7 and then bring it down a notch by Rs 3. But for the market, from a reform perspective, one has to see a diesel price plan. The market will be much happier if the government comes up with a tentative time plan in which they raise diesel prices over a couple of quarters to bring it up to market parity over probably one-two fiscals. But knowing that the diesel price is inevitable, the market is also pricing in some part of that success story.