Consensus view of correction may support market: Prime Sec

Participation levels are extremely poor and open interest levels in the market have come down quite dramatically, says N Jayakumar, president, Prime Securities. In an interview to CNBC-TV18, he says the Nifty looks comfortable at 5,200 for the moment and doesn’t see any kinf of panic selling for now.

He says investors are building on consensus as they buy protection because they see the market heading lower. “It’s that kind of a market where there are so many factors right now at play that to have one factor determining the course of the market is fairly difficult,” he says adding, that a consensus view of a correction may help in propping the market up further. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: Do you think this 5,200 support level which has held out for the last many weeks will hold out going forward?
A: Participation levels are extremely poor and open interest levels in the market have come down quite dramatically. I don’t see any kind of a selling frenzy that could break this. In all probability this should hold. I would say that 5,100-5,200 seems like a reasonable bet for the moment. Given that the information flow these days is near perfect across the world, one of the interesting things that I see is we keep looking for consensus to build up in the market place.
Right now, there is a fair amount of consensus that people have been buying protection. They have been buying out of the money options where 4,800 has become a new series that people have started looking to buy over the last week, the put options on the 4,800 series. So there is a fair amount of protection buying and some amount of consensus building that this market is headed much lower.
In that kind of a scenario, its best not to use your own brains but to depend on a consensus and hope that what’s going in market’s favour won’t breakdown because there is a consensus building up here. It’s that kind of a market where there are so many factors right now at play that to have one factor determining the course of the market is fairly difficult.
The only factor that I am looking at right now is as I said this consensus building up that the market is heading lower which gives me some hope that the market actually will hold out at these levels, albeit with low volumes and then will look for triggers if any or be stock specific in general for at least the next one quarter. Q: So relegated to a range, do you think some of the zing of the first two months will be gone?
A: We have been relegated to a range for a while. What’s been happening is we were relegated to the 4,500-5,000 range for a long time. People felt 4,600 would break at which point in time there is this flash of money which took the market up 20% and now we are probably consigned to a range of 5,150-5,200 on the lower side to 5,600.
Any positive triggers could have a fairly good upside potential with almost every negative factor having been accounted for and factored in by the market. So there is a lot that the market has absorbed and is continuing to absorb and any positive cues could actually give us a little bit of a surprise upside move as well. Q: The other thing which is making the market a little edgy is the fact that the rupee is once again headed towards that 52 level and it’s come a long way from that 48.5-49. What’s leading that you think? Is there reason to be nervous on that front?
A: I don’t think there is reason to be nervous at all. Let’s not forget that our biggest bull run in technology happened between 1992 and 2000 led by the tailwinds of a weak rupee. We maybe headed for the second round of if not a devaluation, but by all counts a move from 44 to 52 which was actually devaluation. But the dreaded ‘D’ word was never used. It was really a market adjustment as it were. The RBI has never mentioned that. Nobody has ever talked about the ‘D’ word in that sense. But compared to most other currencies, the rupee weakened principally because the fundamentals have been weak.
There is a second phase in my opinion of this rupee weakness that is coming through where the rupee will gradually weaken over a period of time making exports out of India, manufactured exports which are going to be very, very profitable. This is something that we have been talking about and especially in the context of China, the worsening labour position there, the position as far as the currency markets there where if you noticed this morning the trading range for the Yuan has been expanded from 0.5-1%.
China will move to free float over the next few years, they keep saying. In the interim, as their currency becomes stronger you will have Indian exporters becoming that much more competitive vis-à-vis their Asian peers and especially China. The story of the stock markets today needs to be seen in the context of not just the fundamentals affecting the markets directly or the company specifics but three-four other things.
For instance, this flow of money and the interesting parallel that I can draw here between China. You ask any international investor and he will tell you that China has made every right move, the move that investors wanted. The move of openness allowing FDI etc. So virtually every policy imperative that had to be done in China has been done for the last 15 years. Every policy imperative in India virtually that was expected over the last several years especially post the near-majority Congress government has been held back, not done or rolled back.
From that perspective, if policies ultimately have to guide the future of the country, you would expect that China would have done extremely well compared to India and yet for a two-three year period, five-year and a ten-year period, the Indian stock markets have outperformed their Chinese equivalent. We have today about 15-17% off our all time highs. The Chinese markets are 15-17% off their all time lows, or at least their last ten-year lows.
So whichever way we look at it, it’s not just government. At one level, India is moving ahead despite the government. India is moving ahead through a combination of divine intervention and accidents not necessarily by the policy designs of the government. If you take that into account, you will realise that a lot of things that we now expect to happen as triggers may actually not happen or will happen at the time when you least expect them.
I feel the RBI has been quietly weakening the rupee, so in the next six-nine months I expect the rupee to be in the 50-54.5 range. What can change this is what went on in Brazil and I am saying this because policymakers need to take cognizance of the fact that a lot of international players are keen to enter the Indian debt markets as well. At 8.5% government borrowing levels people are willing to come in, hedge out their dollar risk and settle for 5.5-6% dollar adjusted returns. But the government is steadfast in not allowing government securities’ limits to be opened up.
So if one or two policy imperatives that have nothing to do with political consensus, nothing to do with getting your coalition partners going, if that were to be done you would see a lot of money coming through. What India needs is foreign capital. That’s the only capital that’s actually coming in when domestic capital seems to be fighting shy of coming into the equity markets. To attract capital which is already predisposed and oriented towards coming in here is really the way of the future and a weaker rupee makes it a case for an entry point for this kind of capital to work into the Indian markets.
The second is this thing about divestment bonds that we keep talking about. If the government could actually go out there and issue paper at say 5% coupon, not 9% or 8.5%, but 5% coupon with warrants that allow you shares of ONGC or BHEL or whatever the investor wants to pick up for the next three or five years the price is the same. So that warrant can be converted in ONGC share that the government has or a BHEL share that the government has. That way the divestment process goes on and the government also starts borrowing much cheaper.
Today the real issue is not enough thought is being given to what can be done. The government seems too preoccupied with its own defeats at various polls if you will and is more constrained than it needs to be. When the prices of commodities go up locally, coalition partners get up and start screaming, but when a divestment program is undertaken I don’t even think most of them understand what the implications are other than the fact that fiscal deficits actually starts getting controlled.
Who really cares whether the ONGC share was sold at Rs 280 or Rs 290 or Rs 265. One day after the divestment program nobody remembers and yet the government seems hung up on the price and in a sense shoots themselves in the foot. So there are simple ways of getting things done but somehow there is neither an audience nor a willingness to go down that path. The government is not going to be the driver of the markets. The markets ultimately will get driven by valuations. Q: Infosys start was quite inauspicious for the market. Would you worry about earnings season and the fact that the market may come out worse than better from this quarter?
A: For a long time, we have been besotted if you will by Infosys and what it means to the sector and probably rightly so. But if you take it in the context of the fact that the market has continuously derated Infosys for the last at least five to seven years vis-à-vis its more sort of understated peers like TCS or Wipro, you will realise that there has been a reason that the market actually for the last five-six years has understood that the sector is bigger than Infosys and what Infosys pronounces.
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Infosys over a period of time I am not sure of the numbers but has been losing good people, has been losing key people who have either moved into entrepreneurship or other forms of activity and livelihood and somehow I get the feeling that Infosys from being the only company in the country in that space early 90s to now a problem of plenty as far as investment in that space is concerned. Infosys is not necessarily representative of this.
The reality is it’s not that you can paint the entire space with the same brush. These are company specific issues that have been to an extent magnified in the form of a walloping in the stock markets. The derating of Infosys has continued and will continue to do so until it delivers something different and uses its cash pile for making intelligent interesting acquisition rather than holding it as cash and paying out special dividends. Q: On the Kingfisher saga, what do you think is the endgame out here? If a punter is taking a punt on Kingfisher that some resolution will happen do you think he will come out on the right side?
A: Well, all I can say is that anybody even looking to acquire Kingfisher, which I presume there have been the sort of well informed planted leaks that keep coming out we will need to look at it only if the promoter’s equity is available virtually for zero. Just to take on the debt itself and assuming that the banks are only going to reschedule the debt in the form of extended repayments rather than haircuts, I suspect that the haircuts are only going to then come from the equity guys which are the promoter.
Otherwise I can’t see the end game being anything other than either a shutting down of the company, however harsh that might sound or somebody to come in very, very quickly with the promoter Mallya having to sell the equity virtually for zero value. Q: Numbers are due from Reliance later this week. Any thoughts on that stock and whether one can expect some kind of breakout at any point this year?
A: Frankly, there are many times in life when you look at other people’s wisdom than yours. If the promoters have announced a Rs 10,000 crore buyback and have not spent probably even 2% or 3% of that money, my own assessment is that the buyback which is supposed to be happening till a maximum price of Rs 850. So rather than looking at their quarterly results etc where I have not understood Reliance’s results for the better part of the period that I have worked in life which is now close to 25-26 years, I am not about to start understanding the dynamics that determine Reliance’s results now.
I would say that it’s best left to the promoters who have announced a buyback so I presume at current levels given the government noise on this KG-D6, if it were to subside, maybe it will bottom out here and the buyback of the company will continue is what I believe. Difficult to say in the context of the results. Q: Do you think we are going to get a rate cut tomorrow and followed up by many more rate cuts?
A: That’s a lot easier to address I suspect. I am absolutely sure we will get rate cuts because the bond markets are telling you this. The interest levels that we have been seeing as a wealth management house more recently from foreign investors on coming into the Indian markets for debt instruments has been absolutely mind boggling. Every day there are three or four sorts of queries on how institutional money can come into the debt markets in terms of limits available for corporate debentures etc.
I really believe that the low hanging fruit in a sense is the government securities debt market where money is thirsting to come in. In that context, I am fairly sure that the rate cuts will happen and bonds will actually start rallying. I am also a great believer in the fact that markets presage some of these things, so the government can keep denying the fact that government securities limits won’t or are not being relooked, but I am fairly sure that the markets are telling you that for fresh capital to come in, this is one way that markets will love it.
Also in the context of the fact that I personally believe that crude is headed sharply lower and Brent especially post the weekend talks on Iran which may have been inconclusive, but at least Iran is not going to war with the rest of the region, that will mean that Brent will cool off.
Already the differential is down from a USD 22-23 on the high between WTI and Brent to now as low as about little under USD 18. I think Brent could come off to USD 110 per barrel and the government again for no credit to them if you will, will find that with crude coming off they really don’t have to bite the bullet of increasing prices.
But whether to look at cutting duties as a means of holding back retail prices that may meet with some success even on the inflation front as also on the subsidy front. These are some of the issues that need addressing. Some external variables, with QE3 also being a little less likely now in my opinion, commodities are set for a correction.
If last year-and-half was a period when money went into the commodities market more than the equities market, the next 12 months may well be a period where money moves out of the commodities market and moves into the equities market in an overall backdrop of 0% to 0.25-0.5% kind of interest rates worldwide and expected to continue for the next two-three years. So money is really moving asset classes. This is the time when it is shifting from gold, oil and other fancied soft commodities into the equities markets. Q: Have you spoken with Samir Arora lately? He is convinced India has made a giant misstep. Do you hear an echo of that amongst other investors that this time around even the long-term guys could be giving up on India just because of the macro and policy events of the last couple of months?
A: Samir Arora is not the raging bull that we all knew he was. He is sort of weather beaten if you will by the frustration that the government continues to not do what its supposed to do. Actually there is nothing to discuss in the equity markets. It’s a stock pickers market.
You need to be out there with a lot of patience and it’s when people really get tired and almost don’t want to talk markets that you know that the next leg up in the market maybe coming. So I would say that it’s clearly a stock pickers market and boring, old economy, asset heavy, debt leaden companies which will benefit through interest rate cuts. I think those are the companies to look at.