Be ready for a correction, enough negatives ahead: Dalton

Foreign fund flows have begun to thin and domestic funds continue to sell steadily, causing indices to end lower five days in a row. This trend could probably continue, feels UR Bhat of Dalton Capital Advisors, as the likelihood of the US Fed trimming its bond purchases has increased with US employment data turning out to be better than expected.

“This taper talk is probably going to be back on the table pretty soon with the strength in the US economy. So one should really budget for that,” says Bhat. In addition, there is also the breakdown in Iran nuclear talks and the downgrade of France to contend with. “So there are enough issues out there which could change sentiment. So near peak levels I think we should really budget for a possible correction especially in the wake of FII flows ebbing away a bit,” he said. Bhat sees the Nifty being restricted in a range of 5850-6350, with 5865 being a crucial support for the index. He continues to be positive on IT, pharma and private sector bank shares, and is bearish on the power sector. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Your broad trend on the market? Udayan was just telling us that we saw this pro developed markets, anti emerging markets trend playing out from May 22 almost dated to Ben Bernanke’s tapering statement all the way up until September. September and October we saw this corrective trend of money flowing back into emerging markets (EMs), is that flow back now over, should we now prepare for a serious correction in the markets? A: I think it is good to budget for that because with the sort of strength we have seen in the US numbers from the economy, it looks like as if there is a non-zero probability of tapering, being back on the table in the next month or two. In fact, on May 22 just talk of taper even though there was no agenda started all the problems. This taper talk is probably going to be back on the table pretty soon with the strength in the US economy. So, one should really budget for that. We have also seen that the flow of Foreign Institutional Investors (FIIs) money on a daily basis has slightly weakened and the selling by the domestic investors has overruled that because till now domestic investors are always probably sellers but the FII flows were much higher. However, in the last three-four days we have seen that the domestic selling is much more than the FII investment that is why you have seen some correction. This trend could probably continue. Given the fact the nuclear talk in Iran breaking down, the French downgrade – there are enough issues out there which could change sentiment. So, at near peak levels, we should really budget for a possible correction especially in the wake of FII flows ebbing away a bit. Q: Should we budget for something as bad as 5200 or should we budget for just a lower range, is it probably going to be 5800-6200 or 5700-6000 range, is that what is the more likely way in which this scenario will play out? A: The 200 day moving average being somewhere near 5865 or something, that is a very important support and that could be broken only by some action by the Reserve Bank of India (RBI) like further tightening the monetary situation, with the 10 year yield going substantially above 9 percent, and the rupee volatility coming back into focus. With a potential taper, the dollar would continue to strengthen and that could be bad news for the rupee because at least the policy makers thought that all problems are solved but actually that was a result of the dollar weakness, nothing really about the rupee. And if the dollar comes back to strength as it is doing now, then all those measures seem to be really ineffective. Rupee is a very important constituent of the view of FIIs as far as India is concerned, plus the 10-year GILT above 9 percent is terribly discomforting and plus if the PSU bank results are anything to go by, we really have no legs to stand on. Banking is the most important constituent of the index. So, there is really hardly anything for us to seek comfort from and I am sure domestic investors are selling based on that. Q: If this is still an up trending market as most people believe it is, at every dip do you think it is a good time to accumulate and if yes what would be the stocks or the sectors that you would watch for closely? A: Buying is really when the 200 day moving average doesn’t get pierced. So if it bounces back from 5850-5860 couple of times then you can really see that there is some strength, at least at those levels. The sectors are the same; IT sector has done well, pharma or FMCG too, and in case of private sector banks today we really know why exactly the private sector banks have been fancied by most big investors.