Sell into strengths; Nifty may go below 4800: IIFL

Prabodh Agrawal of IIFL believes the risk/reward is unfavourable for the market and advises investors to sell on strengths rather than buy into weakness. Levels of 4800 or even below are possible on the Nifty, he adds.

On all the four fronts - on the economy front, on corporate earnings front, on liquidity front and external factors, the newslfow seems to be worsening every day says Agrawal in an interview to CNBC-TV18. He does not see situation turning around at least for the next four quarters. Also read: Sept-Oct ride to get rougher; need reforms, says Ramesh Damani Below are excerpts from his interview on CNBC-TV18 Q: For four days, the markets have been rallying, at a time when the economic data whether it is the gross domestic product (GDP) or the HSBC August manufacturing purchasing managers’ index (PMI) pointing to abysmal picture, what is your sense about the markets and how we may proceed from hereon? A: If you look at the macro data; the economy, the corporate sector, on liquidity front and on the external front - on all the four fronts the newsflow is worsening by the day. I don’t see things turning around in the next four quarters or so. On the economy front, the Q1 GDP numbers were very disappointing. We were looking at 4.8 percent GDP growth for the full year but the risk there is on the downside. Given what has happened in Q1, the government expenditure is going to slowdown significantly in the second half, which will pull down the overall GDP numbers even though the rural economy is doing well. Similarly on the corporate front, the earning growth continues to weaken and we have been cutting our numbers with every result. We were forecasting some 14 percent growth for the Nifty companies in the beginning of this fiscal. However, now we are forecasting 5 percent earnings growth. I would think that the risk is further on the downside. We may have to cut our numbers further. On the liquidity front as well the foreign institutional investors (FIIs) flows continue to remain negative at the margin. The FIIs have pulled out nearly USD 3 billion in the last two to two and a half months. At the margin they would remain sellers or would do nothing but I do not see any meaningful inflow happening. The domestic institutional investors (DIIs) and the retailers would also remain net sellers. So, from liquidity perspective also, I don’t see the situation very favourable for the market. Finally, on the external front, we are all worried about the quantitative easing-3 (QE3) withdrawal and the weakness we are seeing in all emerging markets (EMs) given the threat of QE3 withdrawal in the US. So on that front tool there is need to worry for the markets. So I would think the risk reward is unfavourable for the market and I would advise investors to sell on strength rather than buy into weakness. Q: That was your call in last week of August itself and from that point; we have had a significant rally. Would you use this pullback as well to lighten positions? Which pockets of market would you say are most vulnerable if a second round of selling has to resume? A: I would say that we have seen this rally. This is a good opportunity for people who are looking to exit, not in panic but when the markets are strong and when there is a good exit opportunity. So the view has not changed from what we had said a few weeks back. I feel that it is still early to play into sectors which are leveraged to recovery. We still do not see any meaningful upside in industrials or capital goods or metals or utilities or energy We have seen some major upside in some of these sectors which I mentioned but I would say that those are partly because of the rupee depreciation and partly because some of these counters had been oversold. However, I would still use this as a technical position to lighten. I would still prefer sectors where we have decent earnings visibility. These could be IT, pharmaceutical, everybody is recognizing that those sectors are benefiting but perhaps you could also see select private banks or select utilities or some of the auto companies, which could also be used to move into in this rally. Q: You said the risk reward is not favourable at current levels, how bad can things get from hereon? Last week we went to levels of closer to that 5,100 mark, would you say that at least in the near-term that would be a bottom for the markets or even 4,800 is possible on the Nifty? A: I would think 4,800 or even lower is possible because Nifty currently trades at about one standard deviation below its long-term average. Given the confluence of bad news on all the fronts as I mentioned earlier, the Nifty can go down even lower than one standard deviation. Just to give a perspective, Nifty was trading close to two standard deviation below its long-term average during the global financial crisis of 2008-2009. Although the global financial crisis was a global event, for India economically, and from a corporate sector point of view, things are probably worse than they were in 2008-2009. So that kind of downside is definitely possible.