QE likely with Obama win; Indian market looks good: Damani

The probability of quantitative easing in the US has increased with the re-election of President Barack Obama, feels Ramesh Damani, BSE broker. In an interview with CNBC-TV18, Damani says that Indian markets should do fine in near term, unless the squabble among US lawmakers over the Budget gets ugly. He says recent trends in Indian shares point to a young bull market.

"Liquidity flows are good. The leadership we enjoy in the market among various sectors remains very good. It is behaving more and more like a young bull market," Damani says.
"News comes, stocks react, markets react for a day or two and then come back and make new highs. So the market tends to want to go up. That seems to be the path of least resistance," he says. Below is an edited transcript of Damani's interview on CNBC-TV18. Q: With Obama now re-elected do markets cool off, correct from here or could the rally continue?
A: No, I think they correct. I think the market would have rallied if Romney had come to power. I think the markets were not expecting that. So I think the rally yesterday was some faint hope coming around from the tracking polls, from insiders that Romney had a chance including people like me who believe that Romney had a chance, so that was a rally that we would get Republican majorities in the house and in the Oval Office, but I think given the fact that Obama is coming into power, the house is with the Republicans, the Dow Futures is indicating that the market will be nervous near-term. Q: Do you expect a meaningful correction or just a one day kind of a kneejerk after which the markets fall into bit of a consolidation kind of range or do you think now we are bracing ourselves between now and the fiscal cliff resolution by the end of the year for a 5-6 percent kind of a pullback?
A: We probably could see that, because I think markets will remain volatile for the next few days, but the next agenda on Wall Street is not the presidential election, but it will be the fiscal cliff which talks are going to start in December once all the dust settles from the presidential election and there is just no easy solution in sight. Both parties are entrenched in the position of whether say to renew capital gains tax or not. One party says no, one party says yes. One party wants increases in taxes other party does not even want a USD 1,000 increase in taxes.
Washington still sets a tone for lot of economic policy in the world. I remember John Kenneth Galbraith was ambassador of US to India used to say in the 60s when America was the preeminent economic power that the Finance Ministers of every emerging market should reside in Washington and not in their state’s capital because Washington set the tone for global economic growth. While clearly it is not that important anymore it still sets at least the pace. Q: Does it have any big bearing on flows into markets like ours? Could markets take heart from the fact that maybe monetary policy there remains very loose and we will bask in that glow of that liquidity for the next one year or so or do you think the market is too focused on the fiscal cliff right now to think about quantitative easing prospects?
A: I would tend to give you the former. I think that is what Obama has done. He has basically thrown money at the problem. QE1, QE2, QE3, QE4. Ben Bernanke’s chances of being re-elected as Fed Governor I think have increased. Romney was very clear. He is not going to get him into power. China remains a mute spectator. Romney had said that he would pick a fight with China almost on the first day of his new administration. So I think quantitative easing will continue and that as we have seen tends to help emerging markets in a good fashion.
A large part of the liquidity from risk off trade comes to emerging markets like India. So in that sense I think the Indian market will probably be okay. Unless it gets very, very ugly in Washington in December it is too early to start making any predictions. We will have to see once all election results are down how the Congressmen come and vote. What have their constituents told them during the election process? But my sense is we should be probably ready for another prolonged fight for the US budget. Q: So you are saying that there may not be a big Diwali rally this time around, a rally into Diwali party? 6000 Nifty may have to wait for a bit?
A: It may have to. The undertone in Indian market remains very good. If Romney had come back we could have seen the Dow go back to its all-time highs and test that level. It is only 5 percent away and I was expecting that would be the event that would take the Dow back to its all-time high. Markets go where they have to and the market may still go back to its peak levels. It will not shock me if it did that. But I think India particularly the undertone seems exceptionally good.
Liquidity flows are good. The leadership we enjoy in the market among various sectors remain very good. It is behaving more and more like a young bull market. News comes, stocks react, markets react for a day or two and then come back and make new highs. So the market tends to want to go up. That seems to be the path of least resistance.
Of course we have our own parliament session coming into play and we will have to see the viability of the economic measures that the government has passed in between, but clearly the undertone suggests that you want to be in the market rather than out of the market. Q: Even at the event of a correction where is the base set you think? A few months back when we spoke we were discussing the prospect of 4800 being the base firmly for the market. Would you have changed that base around? Where would you set the Nifty’s floor at this point?
A: Probably much higher than 4800. I am not sure of the clear technical level, but let us say 5400 is a great base for the market. One thing that really amazes me is that there has been so much FII buying, so a lot of the floating stock has now been absorbed by them and Indian retail public as well as high networth individuals have been huge sellers into this market. If you actually go and look at stockholder list in India, the top 50, the top 100 it almost seems like people who own stocks live within a 50 mile radius of Dalal Street.
The rest of India does not own equity. There is such a deep under-ownership of Indian equity that I believe that in the process of this bull market or the process of the next few years this almost has to be corrected. We are not going to have a USD 4-trillion economy in the next 5-6 years perhaps and have Indian equity ownerships at the low percentage as they are now.
So I am going to be really brave and say that the Indian public is going to wake up sometime in the next few yeas and realise that they have extremely under-ownership of Indian equity and they are chasing the last rally in real estate and gold and when they start correcting and moving to equities we are going to have a very, very buoyant second stage of this market. Q: Going into fiscal issues, how do you see asset classes like gold performing?
A: I had been quite bullish on gold a few years back. Though gold has had a good run, somehow it does not excite me anymore maybe until I see deeper prospects of US inflation. It is not an asset class that I favour at this point in time. I have been bullish on gold and since the global financial crisis, it has gone from USD 500 almost to USD 1,800.
But at this point of time, I would rather be in equities which give you yields that compensates for the low interest rate environment. Gold does not give you that yield and you are investing in a productive business which is almost better than gold. Gold is very high on the fear index and that fear is now well-known and well-discounted. So I am not particularly a fan of gold at this point of time. Q: So you suggest that if Obama does win today, the markets will choose to focus on the fiscal cliff almost immediately?
A: I do not expect a honeymoon for Obama. I think that Wall Street is going to read this as a sign of a return of the gridlock in Washington. The Senate is now going to be controlled by the Democrats by a slim majority which is not veto-proof. The situattion in the US House of Representatives almost similar with Republicans controlling the majority. So neither Obama nor the Republicans could clear any legislation, which is a great recipe for gridlock. But increasingly the atmosphere in Washington is so acrimonious, that Wall Street will recognise that and realise that not only the US has been downgraded, it again faces the prospect of a fiscal cliff. So Wall Street will not waste time and that is one of major worries.