Market may be in for a surprise rally: N Jayakumar

N Jayakumar, president of Prime Securities says participation levels in the market are very low at the moment.  

However, investors breathed a sigh of relief, lifting the rupee and pushing stocks into positive territory after they had lost nearly 2% earlier in the day.  The rupee opened higher on Tuesday as global risk sentiment improved, while the postponement of GAAR by a year and an active RBI has also helped bolster the rupee's sentiment. According to Jayakumar, the GAAR clarification and crude oil prices cooling off will support markets in the near-term. He foresees a sharp correction in crude oil prices. The vagueness of the original plan, which was unveiled as part of India's budget for the fiscal year beginning in April, caused uncertainty among foreign investors, putting an already weak government on the defensive. Removing some of that uncertainty, Pranab Mukherjee yesterday said that the burden of proving tax evasion would lie with the authorities rather than with overseas investors. Jayakumar says the government’s deferral of the GAAR is a significant positive. "I think we have a good set-up right now for a surprise rally in markets," he told CNBC-TV18. However, he remains bearish on commodity market at current levels. Also read: Nifty may hold 4950-5000 in near-term, says Udayan  Below is the edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying videos. Q: More than the Nifty, which is grinding around 5,000, the damage in individual stocks over the last three-four weeks would have hurt a lot of traders and investors. How are you approaching the broader market now, outside the Nifty? A: At the moment, the participation levels are at such abysmally low levels, you never had a situation like this in recent times. Figures are bearing me out, literally on a week-on-week basis, we hear that open interest levels in Nifty and other stock futures are at five-year and seven-year lows. That clearly tells you that lack of any conviction has been the theme and the sort of guiding principle over the last several months. We talked about it last time as well. If there is a positive, without necessarily having to use one zone logic or brains, it is that the consensus is stay away, we are not sure of this, we are not sure of that. I think a few things have happened over the last couple of weeks, which make for very interesting reading. We have been bemoaning the fact that the government has been suffering this decision paralysis. We may be uncharitable and keep sort of badgering this. But if you look at it, I think they are attempting to do a few things. The rollback of something like GAAR, which almost had become an ego point at one point in time over the last few weeks, to my mind, is a pretty significant step. When I say rollback, I am saying in some sense a modification and who knows in what form it will be introduced a year from today. Crude has come off almost 10-12% from the highs in recent times and looks to be heading significantly lower. The rupee is being, to an extent, aided by Reserve Bank of India (RBI), which is substantially more proactive now. If you look over the last three-four months, rupee may have weakened 3-4%, but crude has cooled off almost 10-12%. So, I think there are a few takeaways. If you assume that the government will be in a sense bolstered by taking a few more decisions, the presidential race is sort of decided the next couple of weeks and we are through with that, we may be in a situation where some news may become good news rather than no news is bad news kind of thing. So, all is not lost. I think the index has come down, much to the chartists’ delight, to test all key supports. It has even broken the 200-day moving average (DMA). To my mind, there will be a false breakdown and the market may continue its grinding. But the big takeaway is that the big buyers in the market today continue to be promoters and insiders. I have been saying this now for the last six months that the biggest buyers in midcap stocks are no one, but promoters and insiders with full disclosures and a whole bunch of companies where they are increasing their holding because rules of the game have changed. Midcap companies are not getting funding very easily and listing is becoming a bit of an issue now where the currency, which is listed, is not allowing them to raise capital freely. So, whether it is FCCB redemptions, MNC is buying out, local company promoters increasing their stakes, and complete apathy by domestic investors, I think the scenario is absolutely picture perfect for a good strong rally to emerge, catching everybody off-guard, much the same way it happened between 4,600 and 5,600 in the first month of the year. _PAGEBREAK_ Q: How would you characterise that rally? Are you feeling more confident that 5,000 will hold as a base? Does it get back to the same target we touched at one point, which is 5,600 or do you think the sheer weight of despondency may take the market even higher? A: Ever since the rally took out 5,000 on the way up, we thought that the range is shifted from 4,600 to 5,000, which was in the last quarter of last year, to maybe 5,200 to 5,600 or 5,100 to 5,600. I pretty much maintain. There maybe a day or two where the market may threaten to break 5,100 and go down to 5,000 levels like it did yesterday, but I think these would be feared far between. My own sense is that these levels, give or take 100 points, will be a very strong base for the market. Valuations are on our side, forward multiples are now at 13.5-14 times, I don’t think you have got this cheaper than now. Were the government to start making a few pronouncements, which I personally have expectations of and the public has none, I think those expectations will be met with very strong responses in the market. Because level of participation is so low, the impact cost of any big player coming through like a long-only fund, a sovereign fund or a private equity fund, is very high. So, if a new USD 500 billion fund were to deploy their surpluses in the market today, I dare say you could have a 6-8% move and it could happen very quickly. I think the market bull walk or support is coming from promoters who are essentially increasing their holdings because they haven’t seen valuations like this. As interest rates hopefully ease off further, you will have even leverage companies benefitting. The government will sort of be the little tailwind that may help a few project implementations going through. I believe a lot of spaces like education etc, which are unseen, uncharted, may become good pockets of stock market activity and investor focus. The government is keen to do a few things. I am not sure what they can or what they are hamstrung by. But I think the fact that a few pronouncements of the kind that we saw yesterday in the Budget or the revisions atleast give me hope that the government is willing to go out and stick its neck. That after a long time is a reasonable positive. Q: Public sector banks particularly and infrastructure stocks have been butchered over the last few days, do you find attractive valuations there? A: I think some of these have been clear the flip side of people’s perception on yields and the rupee. As the rupee has been weakening quite dramatically, other than the last few days, but because the rupee has been so weak and yields have shot up to 8.7%, the first to get hit are obviously banks and interest sensitives. That includes the infrastructure space. Their ability to access capital gets seriously threatened. There has been value in many of these. I think if you just take a straight deal like the Zee Management picking up whether it is a portfolio or a hostile or a largish stake in IVRCL, I think it is indicative of a few things. It is indicative of the fact that clearly there is some consolidation in the infrastructure space that is beginning to happen. There are people with large cash balance who are looking at this space and seeing good money being made. Most of these valuations are at way below realizable book. From that perspective, I think they will continue to attract buying interest. Even if you look at banks, I think most of them at least the PSU banks are quoting at such small multiples to book, if any, many of them are quoting at below book or very close to book, I think inevitably value will come in. I think the real takeaway in this market for me is that the aspect that is not tracked by people more often is the exchange rate. I think therein lies to my mind the big takeaways for the next few months at least. That is if you want to know if there is a problem in Europe, you need to look at the euro. Yesterday, the euro went off from 1.31 down to a little below 1.30 and closed above that. I think it clearly indicates that we and the rest of the world probably overreacted, when it came to looking at the way change in governments are being looked at, as far as political realities and also in terms of what economic future will hold for some of these countries. From that perspective, I think the other thing that happened was last night the US bond yields went down to 1.87%, which after a very long time equaled the yield that the stock market was giving them. So, in a sense, the stock market yields and the bond yields being similar indicates that you have never had a smaller disparity between a risk asset and what has seen as a less risky or a bond asset. So, given those kind of tailwinds, I think you will have a scenario where flows into equity markets worldwide will continue to be reasonably positive, will come out of bond markets and move into equity markets. The market that will take it on its chin or the biggest casualty to my mind will be the commodities market. I am extremely bearish on commodities, given the kind of a growth prospects in most countries and the kind of demand destruction that high commodity prices have created, whether it is China, India, many of the BRIC (Brazil, Russia, India, China) countries. The very fact that the Brazilian real has gone from 1.73 to 1.93 indicates how bearish the commodity future is because the currency there is a leading indicator of the future for commodities in a sense. I personally believe whether it is soft or hard commodities, there is just too much money from QE1 and QE2 that has gone there. The last refuge of commodities, traders or the bull traders in commodities, has been the fact that another QE maybe coming along. Despite all the sort of negativity around the recent economic activity in the US, QE has not been announced. In the next few days, I expect one more downdraft begin and wouldn’t be surprised if the Brent was to go down to a level of USD 95-100 per barrel and the WTI go down to USD 80-85 per barrel. I see a very sharp destruction because these have been markets that we have built on extremely high speculative activity and much more liquidity than the underlying fundamentals, demands are justified. _PAGEBREAK_ Q: Has the risk of individual midcap blowups risen. The fall we have seen on IRB, it is now down to 30% in three days. Last week, there were corporate governance issues circling Educomp. How do you approach those developments? A: Individual blowouts or blowups have been a part of every market in a sense. I think we should not confuse an IRB or Educomp has been even remotely representative of the midcap universe in any sense. If the IRB promoter has been alleged to be involved in activities that are seriously either immoral or otherwise or dubious, I think in no way does it cast a shadow on any of the other midcaps. So, I think these are very individual company specific things. You will have Veritas report now and then talk about one company or the other which will indicate misdeem has done. That is the risk of the midcap space in a sense. But you cannot paint every picture with the same brush; similarly you cannot call midcap midcaps. I think the moment you go into stock picking mode, you may end up buying midcap because the fate of the market is such that many of the largecaps have become midcaps in a sense and many of the midcaps have become very smallcaps. But barring that kind of nomenclature, if you are doing stock picking, you take the risk of some of these promoter misdemeanors, but that is where your stock picking comes in. I would be very quick to sort of clamp down on any categorisation of one or two companies with the rest of the universe.