Sept-Oct ride to get rougher; need reforms: Ramesh Damani

No, market’s pain is not over yet, we are in for a tumultuous ride going ahead, cautions market expert and BSE member Ramesh Damani. September and October may prove to be ominous as globally these two months are noted for causing major meltdowns, he added.

He explained that the US Federal Reserve’s meet on QE, currency crisis in India and conflict in Syria are all flag bearers of impending tough times. The fall in rupee versus the US dollar has shaken investors’ confidence and it's time the government announces economic reforms rather than pushing populist policies, Damani added. Also Read: I am positive on India, says Rakesh Jhunjhunwala “The confidence we used to have as Indians from 2000 onwards that we were a tech power and rupee carries a value is all gone. While everyone has assured us that there is no capital control and I do believe them, it certainly means that we should fight not with timidity,” he elaborated. The recent bloodbath on D- Street was triggered by large caps and FII owned stocks. The Nifty had cracked 5100, but for the time being, it has come back in full steam and is hovering in the upper band of 5500-5600, he added. In these turbulent times, one can consider buying select midcap IT stocks. Damani is also positive on Tata Elxsi and Geometric. Below is the edited transcript of Ramesh Damani’s interview with CNBC-TV18 Q: It has been a tumultuous August, things have moved all over the place. How are you reading the next few weeks before we come down to a more medium-term view? A: You are a student of economics but if you would have been a student of literature, you would know when an author writes, the Ides of March are here, that is portent of something bad to happen. The financial equivalent of that is September and October. Many major global meltdowns have happened in September and October. Look what we have on plate for this September and October - Fed tapering meet, which is usually important to the markets, currency crisis in India and conflict in Syria. So, September-October is going to be very interesting months and it will be very tumultuous ride. Q: The problem is perception in the global eyes as well. I have been reading some notes about how India is viewed as possibly one of the top-10 problems for the global market going into the New Year, would you say we have had a big drop in terms of perception and that is the biggest problem for India right now? A: Absolutely. There is no dispute about that. The prime minister was on the floor of parliament saying that the depreciation helps industry and you can keep doing that every five years and keep impoverishing our country overall. A stable currency is a sign of a good economy, not necessarily of a bad economy. The rupee has shaken the confidence to its roots. The confidence that we used to have as Indians from 2000 onwards that we were a tech power, that we could go out, rupee carries a value is all gone. In fact some of the measures come in – I grew up in the 70s, I am old enough to know what happened at that time. To give you an anecdotal example, when I went abroad to study, the Reserve Bank of India (RBI) used to give us USD 5 in our pocket before you boarded a plane. Some of the measures are coming back. While everyone has assured us that there is no capital control and I do believe them, it certainly means that we should fight not with timidity as we are fighting, but with boldness that India is a country that has a destiny. We need economic reform to push us ahead, not necessarily only populous policies. Q: Do you think 5,100 is a floor for this market or do you think there is a probability that in the couple of months, we could even go back to those levels of 4,600-4,700 which one thought this year that we would not see again in a hurry? A: Between you and me, I could argue both sides of the coin. I could be the bullish guy or bearish guy. It is hard to say, but what would be more prosaic perhaps would be to suggest to you that 5,500-5,600 where the Nifty is trading right now perhaps is the high amount of mark for a period of time. The previous range of 5,500 to 6,000 has been broken, the market collapsed to 5,100 and now it has come back full steam ahead to the higher end of the range. So what the bottom is in a bear market, nobody knows. But for the time being and maybe after September 18 when the Fed announces its tapering decision, we might see a rally depending on how the decision goes. But for now, I agree with your submission that 5,500-5,600 seems the higher end for the market. _PAGEBREAK_ Q: You have also had quite a few midcaps in your portfolio for many years now, what is your sense of that pocket, would you say at least the carnage in terms of price erosion is done or if the market were to nosedive at the top end, it would probably take these midcaps down as well? A: The sense I am getting is that the carnage is done in midcaps. Sector has been brutally murdered. We looked at this sector very aggressively, but in the last fall that recently took place last month, midcap sell value did not go down further, it was led by largecap, FII owned stocks, the HDFCs and HDFC Banks of the world. Even for example in America, the Russell 2000 has outperformed the S&P500 which has outperformed the Dow30. So, the smallcaps in India are out of favour, but they will come back to favour, there were absolutely abnormal values lying out there. They might lie there for another year, six months, who knows but I certainly wouldn’t get discouraged buy smallcaps at this point in the market. Q: The one word I haven’t heard all of August ‘election’? A: That will be hugely bullish. The outcome will be good. We don’t give the Indian public enough credit, they have voted for economic change and reform. If elections were announced today, the market would have a huge rally. _PAGEBREAK_ Q: On that subject about the US markets, the big stars are the IT faces. You’ve owned a couple of them in the recent past, how are you feeling about IT? Is the market overdoing it with the enthusiasm or is this genuinely the place to watch? A: I am thanking my stars that I own some of them still. It is a great place to be in (when it comes to) the Indian market. As growth in North America and Europe resume, you will see growth in these companies and the depreciation will start helping them. We will have to find, which ones have pricing power. But what we are suggesting to people, who ask us, is that while the largecap still looks good, you should start looking at the midcap tier of IT companies because they are still trading at no premiums -- at 6-7-8 P/Es -- and with fairly good visibilities. So my sense is that technology will have a renaissance like it did in 2000 and while the biggies have led -- Tech Mahindra, Infosys, Tata Consultancy Services (TCS) -- the smallcap and midcap stocks will now tend to catch up. Q: For people who look at these kinds of phases in the market to accumulate stocks, do you think their patience will be tested? The wait for reward this time could be longer than what one might have thought earlier? A: I would think so. It doesn't seem that. Let us take September 18 and give you my view for whatever it is worth. I think the Fed will not be able to bite the bullet and start a tapering programme, which say USD 85 billion a year has now been flooded by bond purchases, which is about a trillion dollars in a year’s time. Will they do any significant more than 15 percent? I seriously doubt it. In fact, with unemployment still high, inflation still below 2 percent and Bernanke still on the Fed chairman seat, at best he will do a modest 5 percent downgrade in the tapering programme from USD 85 billion. In which case, I expect to see a rally in global markets maybe even in precious metals, maybe in commodities. So September 18 is the dividing day where we will get a better sense of where the global liquidity flows will go. We could see a rally from that point of view. If for example, the Fed decides to tighten the screws and cut it down by 20-25 percent, the tapering programme, then all bets are off. Then the markets are going to — emerging markets have seen the top for a while and be a very slow, painful grind ahead. Q: On the point about midcap IT, how do you approach this? What looks like an interesting buy because even in that pocket, valuations are quite polarized? There has been the Tech Mahindras and the Hexawares on one side and then the rest of the gang. A: It started with a couple of ideas at the beginning of the year and they haven’t worked out so far but they still look okay to me. One is Tata Elxsi, which had a lot of losses due to its animation division, due to a bad fall in Japan. Now, all that is now cleaned out and is a part of its past. The company pays almost a dividend payout ratio of upto 60-70 percent and growth is back. They can grow at 15-20 percent sustainable for the next few years particularly as electronics is now becoming the area of focus in India for in terms of manufacturing. So they are ancillary services to that. Of course, S Ramadorai is the chairman and look what happened to Tata Consultancy Services (TCS). So, I am hoping some of the magic will rub off on this company too. It is an old favourite of mine. It has done nothing for the last few years. However, I think better times are ahead for that. I own the stock as I suggested to you. The other one that I bought, and has disappointed me in terms of the earnings and probably have another bad quarter and they are hedged until next year, but after that they are in a sweet spot of product development called Geometric Software. So, they are trading at about 7 times earnings. So these are just ideas to start with. If I am right, we will see a broad base rally in midcap technology stocks.