Citi advises booking profits, says Nifty may lose 600 pts

Despite all the hoopla surrounding the positive newsflow from global markets, Mohammed Apabhai, Asia Pacific Trading Strategies Group of Citi advises maintaining a cautious stance on equities after the recent rally in the fourth quarter of 2012. He says all equity markets have hit targets in November, adding a Nifty fall to 5,400-5500 will not be "surprising".

In a recent report, Citi Asia said it expects a 10 percent tactical correction before second quarter starts (Q2FY14). Citi says early inflows could see markets topping out soon. Full report: Early signs of bearish talks emerge even as equities party Interestingly, Apabhai says, there is not really much evidence to show that there has been any significant pullout of funds from India over the past few years. So, he says, what you could get in India is just a biased trade. "Even across Asia, we have seen over USD 1 billion of net inflows coming into the market through out Citi desk and yet you do not really see the equity market responding as aggressively as you would. What this would indicate to me is that some of the more informed investors who have been buying since October are actually using the opportunity of these start-of-month inflows to actually exit their positions," he told CNBC-TV18 in an interview.  Apabhai, who expects a sizeable pull-back in risk assets soon, has been asking clients to book profits on all long positions. Below is the edited transcript of his interview to CNBC-TV18 Q: Tactically you seem a bit cautious going into January and February. What is making you circumspect? A: We are turning lot more cautious by being quite positive for the fourth quarter. This is really a play on global liquidity. We are concerned that the European Central Bank’s (ECB) Longer-Term Refinancing Operation (LTRO) is going to result in a sharply lower amount of liquidity. Probably it will be 20 percent of all the liquidity that they have injected since LTRO began in November of 2011. That is likely to come out of the markets by the end of the first quarter. We are also seeing signs that there is going to be a rally in the dollar. As that happens, it is going to be negative for risk, for Asia in particular and for the markets like India, Hong Kong and Korea as well. Commodities and gold could also be vulnerable to a pullback. There is going to be a return of concerns in the US over the fiscal deficit and the deficit ceiling. In the first round of the fiscal cliff it was easier for the Republicans. They were effectively voting for tax cuts and this time around there is going to be a much bigger battle. It would be between welfare spending cuts and tax rises. So, all those issues are going to come back. There is a question about whether funding stresses return for European banks? If they give back the money for the LTRO does that mean that they will remain as creditworthy as they are right now? It is not to say there is going to be a complete collapse. However, there is going to be a fairly sizable pullback once the start-of-year flows finish. So, for the time being we are still seeing start-of-year flows. After that things are going to become a lot more concerning. Q: How much would you give the market in terms of current momentum? How much more could we run in this current leg without the market topping out you think? A: We are limited to anywhere between 2 and 4 percent. So, we are not saying short right here right now. However, given that we have been long for sometime, we are giving our clients notice to lock profits on long positions into any strength. Interesting part is that we have sent out a range of liquidity targets for equity markets. That diverges India, Korea, Japan, Australia and the US on November the 8th. They have all hit the targets within the space of around 24-48 hours, all coincidentally. So, it basically it mean that if there is a risk off environment it is going to hit everybody. India will be impacted. As it is one of the markets which benefits from excess global market liquidity or global central bank liquidity. _PAGEBREAK_ Q: The kind of money which India has attracted do you think is vulnerable to a short-term pullout if the events or contraction happens over the next few weeks? A: I think what happens in India is, one does not actually gets the money pulled out. Interesting part about foreign investor flows in India is that when the market goes up the foreign investors are buying and when the market goes down the foreign investors stop buying. There is not really much evidence to show that there has been any significant pullout of funds from India over the past few years. So, one could get only a biased trade in India. Even across Asia month-to-date over just two or three trading sessions we have seen over USD 1 billion of net inflows coming into the market through out desk. Yet one does not see equity market responding as aggressively as it should. This indicates that some of the informed investors who have been buying since October are actually using the opportunity of these start-of-month inflows to exit their positions. For example, in markets like Indonesia and Hong Kong we are seeing equity inflows coming in. However, the currency is actually weakening. We think that is really what is happening right now. In terms of India, from a trading strategy point of view we are still bearish on the INR. We like currencies like the Korean won and the Australian Dollar against the INR. This is purely from a real rate perspective. The dollar is probably going to be resurgent in this first quarter. It would appear that the Fed is going to print less money and it would appear that there maybe some sort of control being imposed at least on the fiscal deficit side. Q: If a correction were to set in as you are suggesting, how deep could it be in your eyes? A: We are looking for roughly 10 percent across markets. So, it is going to be a fairly tradable correction. It will be at least that sort of magnitude but the markets which are impacted by an excess not only by international liquidity but also domestic liquidity. It could be a lot more. The markets seem to be the ones that vulnerable will be Hong Kong and potentially India given the domestic liquidity situation. The markets to outperform could be Japan and potentially China, Asia. Those would effectively be in some ways more closed and isolated markets that haven't had huge amount of foreign flows. There the governments are continuing to print a fair amount of money or to stimulate the economy. So, that is going to be a lot more defensive than earning some of these other normal traditional risk-on sort of markets in the next three months. Q: So you are saying from where we are in India right now, roughly from 6,000 Nifty to a level of 5,400-5,500 in this correction would not surprise you? A: No. Q: I take your point about liquidity contraction but do you see an event triggering it off either the US negotiations on the debt ceiling or any other event which ushers in this kind of risk-off that you are talking about? A: It is going to be a combination of things. I think it is going to be that the deficit ceiling that will be talked about again. It will be people absorbing the implications of the Fed minutes from last night. There they are talking about potentially cutting off QE in June of 2013. Although the Fed is buying USD 85 billion of assets, the QE4 USD 40 billion that was being most recently announced is just to keep the Fed balance sheet pretty much flat. The original USD 45 billion if that is the only amount of expansion that is happening. However, that is going to be offset by the contraction from the ECB. If the European banks and the Bank of Japan (BoJ), puts back their capital and also the pace of their balance sheet expansion is moderating in January. For some of these markets with high exposure to soft commodities like China and Hong Kong to a lesser extent India as well inflationary pressures will continue to remain there. This will be for the more developed markets like Korea and Taiwan. They are going to find that liquidity will tighten. Their inflation rates are going to go even lower, which means that their real rates go higher. That is not going to be so positive for equity markets. For the time being we are not finding things very cheerful. We think that by the next five-six trading sessions, the markets will have bought a lot of shares that they want to. Even if you look in India and the American Depository Receipts (ADRs) of banks like ICICI, they are trading at a premium for the first time. That is indicative of just the chase for equity that we are seeing in the market at the moment.  Movements in the bond market also are going to start raising some concerns. However, it is still early days. We will have to see how that all pans out as well but again that is going to be a dollar-positive event.