Wait and watch till financial woes settle: Dipan Mehta

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Markets witnessed two contrasting halves of trade today. Dismal global cues pulled the markets sharply lower in the first half, and then powered by short covering, they posted a handy recovery.

 

Dipan Mehta, Member BSE and NSE said there was a lot of nervousness as the index was touching 10,000, it is a psychological mark and the fact that it recovered from there is quite positive for the markets.  "Ten thousand also is a level generally we see that a lot of investors especially fund managers have been targeting to open their buying process and maybe that could have started at that point of time. The general consensus is that the markets get extremely attractive at those levels assuming that there is no major fall in the earnings for the current year and the next year. So, the market has had a good turnaround and hopefully we should try and build on these gains going forward."

 

According to him, investors should assess for himself that the worst is over and be confident about equities as an asset class and then it is a matter of detail whether you buy infrastructure or banking or software or maybe some of the other sectors.

 

Will Sensex hold 10,000?

Mehta said we are seeing forced liquidation in the markets. "There is relentless FII (foreign institutional investors) selling whether it is short selling or redemption pressure, which they are facing over there. So when you are in that kind of a panic situation, markets can go to any level because the person who is selling the stock has got no fundamental linkage with it. He just sells to raise cash and at whatever cost and when that kind of a psychosis is there, you sell whatever goes. If that cannot be sold then you sell the most illiquid ones 5-15% lower as well."

 

According to Mehta, it is difficult to comment on whether 10,000 will hold or 9,000 can come at this point of time given the situation but one can say that by and large whatever we have seen about the earnings is not bad. "There have been disappointments because expectations have been high maybe because of the operating environment in which these companies were for the past three-four months was a bit tough. It is not that the basic model or the long-term growth rates have got impacted or that margins have got completely damaged for a two-three year period."

 

How should one approach entire energy space?

Mehta advises to avoid energy space at this point of time. "Some of the oil marketing companies do look interesting and maybe you will get a chance to buy into them. Even if you see crude oil trading at around USD 60 per barrel or thereabout which would mean that these companies certainly become extremely profitable and valuation wise they have always been attractive. So I will be looking at the oil marketing companies more closely depending upon the fundamentals of the crude oil prices. But apart from that refining companies, the oil exploration companies those are to be completely avoided at this point in time."

 

Mehta believes that this could be a brutal recession and lot of analysts are predicting that crude oil prices could go as low as USD 40-50 per barrel and that will certainly impact lot of oil companies although oil marketing companies will benefit. So it's not a sector where one would like to be underweight if at all, he added.

 

Do the markets have a bottom in place?

Mehta said for us to have a significant bottom in place which could be a multi-month or even more than that, you have to have the situation where the market moves sideways for several months together. Volumes have to come down especially FII volume, which are 7,000-8,000 crore in the cash market. A buy and sell of the institutions has to more or less get matched, there has to be overall lack of interest in the market, news flow positive or negative should not have any impact on the stock prices and overall lack of interest, low volume that kind of phenomena has to observe for several months, he added.

 

"It's only then that we know that we have a bottom in place and the worst is over and gradually you will see fresh funds coming to the market. But that phenomena, that process never has taken place over the last 10-months or so. It's been the market corrects then we see spectacular rallies, it is at those levels for maybe a few weeks and then again makes a move. It's just that the moves are too sharp, and that is not the prefect environment for a trend reversal. So, I would like to look at all the other aspects about the whole market slowing down before one gets the complete confidence that the worst is over and now one could fearlessly go and buy in the market, he added"         

 

Will deleveraging process continue for midcaps?

Mehta said it is difficult to say at this point in time because each scrip is quite distinct and peculiar from the other one and the exact financial resource or the promoters also is not completely known. But given the way the prices are, most midcaps are now at about 20% of their peak levels. The whole process is coming towards an end and whatever little pledge stock has to be sold would get sold off in this month itself or by next month. So, that process should also come to an end at some of time and that could perhaps create some kind of bottom for these stocks, he added.

 

Is there any opportunity in the infrastructure space?

Mehta believes that one can selectively look at infrastructure in a positive manner. "End of the day these companies do have visibility at least for a year or two years or so and with commodity prices correcting the way they are and it is not just metals even cement prices have come down. So given that kind of benign environment for them, the pressure on operating profit margin should ease a little bit going into the next fiscal and maybe if we have the elections quickly out of the way we could see fresh order flow coming in around maybe April or March of next year. That could act as a trigger for those stocks at that point of time."

 

Mehta advises to watch this sector and selectively enter into it.  "It is important that the investor has to be convinced that we have a bottom in place and from these levels of market, trend by and large will be positive. If that particular premise is not in place then it does not matter whether it is infrastructure or metals or software or energy. All stocks fall at the same time maybe only exception could be FMCG or pharmaceutical, which is a defensive play."

 

Are there more policy actions on the way?

Mehta believes that the next round of policy action will be when the RBI comes out with its half yearly Credit Policy and at that time let's hope that there is interest rate cut. "Our markets desperately need it at this point of time and there is a solid case for interest rates to come down as well. So if that does take place then to that extent we will be better placed compared to some of the other global markets also a lot of foreign investors especially long only funds or deep pocket investors could get interested again if they are convinced that interest rates going forward would correct."

 

According to him, in India the biggest problem has been inflation and interest rates and if the government attacks that particular problem and eventually the fundamentals are not deteriorated as much that they cannot catch up. It's not that corporate profits are fallen off a cliff that they cannot go back to the old kind of trajectory what we have been observing over the past four-five years or so, he added.   

 

Where will the markets find a significant support?

Nepolian Pillai of Modern Shares and Stock Brokers believes significant support will come closer to 2,990 level which is about 62% of Fibonacci retracement of the entire bull run from 2003 to the 2008 top. "So, 2,990 to 2,950 is where the major support would come in. Today it's rallied from about 3099 exactly a 100 points above the major support, so on the upside, there will be pressure again to bring back to the major support of 2990 in the coming few days."

  

Disclosures

Dipan Mehta: It is safe to assume that I & my clients may have an investment interest in the stocks/sectors that have been spoken about