General trend downward; not sure if 6900 is Nifty bottom: Udayan

The current rally has all the symptoms of a bear rally, and while the general trend is downward, there will be periodic sessions of strong pullbacks, is the word coming in from CNBC-TV18's Consulting Editor Udayan Mukherjee.

He says the Nifty is likely to face resistance at 7250, but at the same time he adds the rally may not last beyond 7550.

As far as PSU banks are concerned, especially in light of the commentary from Bank of Baroda, Mukherjee says credibility of these state-run banks is low and in fact advises investors to use rallies and exit them.

He also feels the global rally may extend for some more time. Below is the verbatim transcript of Udayan Mukherjee’s interview Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What does it look, this sharp short covering rally that we saw yesterday? Do these bear market rallies have a lot of legs? A: As you described it, this seems like a bear rally because it has all the classic symptoms, it was beautiful as it played out, it looked better than even a bull market rally. The worst stocks led it, which is the PSU banks, then metals and the good quality stocks like IT, pharmaceuticals and good quality private banks got left out of the rally. So, when you have poor quality leadership, a ferocious rally attended by short covering and some long formation and then it comes on the back of an extremely oversold market, I think you would have to conclude that this is no more than a powerful bear rally. The question to ask now is how much more will it extend because these bear rallies can be so powerful that they could actually sometimes extend more than you think. Therefore, if you don’t have a strategy for the bear rally phase, then sometimes you miss out on the market. So, it is important to ponder over what could lead this market even higher from that big rally that we saw yesterday and whether there is a strategy for traders and investors that they can utilise or they can use in such a phase. So, I think given what has happened over the last couple of months, you will probably see this to be the tone of the market for some more weeks and months to come that the general trend might remain down, punctuated by this ferocious rallies and that will become probably the par for the course that you will have to deal with. Sonia: Do you reckon that the short covering rally could continue and a lot of the beaten down names like the PSU banks, the metal stocks, the real estate stocks, similar to what we saw yesterday?A: I think it could extend. We have just had one day of a pullback, there is nothing to suggest that it cannot extend a bit longer. I will tell you why because world markets seem terribly oversold, technically and also fairly short at this point in time. We have just had a couple of days of a pullback and I think some optimistic voices are floating to the surface as well, so I would not be surprised at all if this global rally were to extend a little bit longer, maybe even for a few days, couple of weeks is possible.It is not like every day the Sensex will go up 500 points but we started from that level of 6,900 which was anyway as chartists will tell you some kind of a pattern target for them and from there the market has taken support and bounced back. So, the first port of call is the big support level that the Nifty broke on the way down which is around 7,250. So, I think its first date that level which is probably just about 70-80 points away; we could hit that today as well and that is the first point where you start and sort of look back and say we have covered 300 points, what do we do now from here on. If you get global support, which is very conceivable over the next few days, that level might get taken out and the next big level, not a technical level but the next big level is the support or the resistance where the market turned from just about 10 days back, that was the level of around 7,550 which is where the last pullback rally ended. I would not give this market more than that at this point in time. There is an outside chance with a slim probability of going all the way back to 7,700 but my guess would be that 7,250 might get taken out and you might get somewhere close to 7,550 by which time the familiar demons will start coming back to haunt the market globally. Latha: The stock of the morning continues to be Bank of Baroda (BoB) and it had a very strong rally, 22 percent rally yesterday. You watched the numbers; I assume you read a part of the interview as well, what did you make of this stock? A: I would not get too excited. I know there is a lot of excitement about how a public sector bank has come out, worn its heart on its sleeve and said I am taking all the mark downs in one go and next year I will ride back to profits. In my book, the credibility of a public sector bank management now is close to zero. I would not believe a word that they say because remember they were at the helm when the banks were riding into these kind of crisis and they did nothing to stop it; in a sense that they orchestrated the crisis. So, if somebody tells me that I brought the bank down to its knees and I am going to fix it, then on the back of it I would go out and buy the stock – heck no, never in my life. So I don’t attach a lot of significance to what happen to BoB yesterday. I think it is a great exit opportunity for a lot of these public sector banks actually and that is the point of these bear rallies that periodically you will get very good exit opportunities for investors in many of the weaker sectors, metals included and at that point you can’t get carried away and say the stock has gone up from a beaten down pulp level, 25-30 percent and therefore it is heralding some kind of a bottom and I should go out and buy it because of a statement or two. I would not get excited at all. Having said that, these public sector banks look like they have got more juice left in them, in this pullback rally. I won’t be surprised if many of them went on to rally another 10-15 percent more even from here on after how much they rallied yesterday. These are the nature of bear rallies but I think for investors who are stuck in them, they probably should look at them as exit opportunities and not as buying opportunities at all. Latha: What stands out for you, in this bear rally do you just keep out because value stocks for a longer term investor will be available at cheaper prices, a longer term investor doesn’t participate now? A: No, it is important for a longer term investor as well because I think the one call that a lot of investors need to take, other than people who are going to be married to stocks for the rest of their lives and it doesn’t matter if their stock prices go down 30-40 percent, that is a different kind of investor, probably broker, fund manager who have no recourse but to be in equities, for them the dilemma is different. For people who are retail high net worth individual (HNI), for them it is important to understand or take a call on what kind of regime are we sitting in now. Is this a bullish regime globally and locally for equities? If you think the answer to that is no then it might be prudent to use some of these pullback rallies to probably even lighten your equity exposure because you don’t want to lighten your exposure when stocks are down 20 percent. You want to lighten it when a good exit after a good bounce that you are seeing in the market right now. So, I would submit that, periodically look at your portfolio now as an investor and say I have got ‘X’ rupees, Rs 100 in the stock market now but looking at the turf generally, I think equities might languish for a while longer and maybe it would be prudent for me to cut down that Rs 100 to Rs 50 or Rs 60 and let me utilise these 20-30 percent rallies in stocks to cut down that exposure from Rs 100 to Rs 50 and then see how the cookie is crumbling during of the course of the year. If after three months it looks like this is not going to be a vicious global bear market, then I am going to start upping this portfolio once again or equity exposure once again from Rs 50 to where it was, Rs 100. However, I don’t know now and I don’t want to believe other peoples advice on this so let me just see which way the wind is blowing, for now let prudence prevail and let me cut down my equity exposure using these trading rallies. So, I think it is important for the investor to utilise and keep an eye on these trading rallies and not just dismiss them as something which is only for the trader. Sonia: You would not recommend the longer term investors looking at some of the credible or relatively credible quality stocks and buying into them right now?A: The point is what is credible quality; that is the big question. Also, my sense is that there will be a lot of time to buy these credible quality names as well. There is no tearing rush because the question that everybody would have asked yesterday is that did we hit a bottom at 6,900 and then have we bounced off and are we not going to see that level again. My sense is bottoming is not a reaction from one particular level, bottoming is a process. After such damage that has happened to this market, the market will not be formed in one day. If history is anything to go by, you will probably go back, retest levels from where bounces have happened, spend time out there figuring out whether that is indeed the bottom. So, the process of bottom formation actually gives investors a lot of time and opportunity to accumulate stocks. However, we don’t know that 6,900 is the bottom so contrary to the advice that you will hear more often that you must buy right now because value has emerged, my only problem with this kind of analysis is that we have just walked into two months of very volatile markets and we don’t know where the world is headed.So, at this point, to just talk about PE multiples in India and go about rushing into buying stocks, is probably not a very prudent strategy. So, I would frankly sit with a lower equity exposure at this point in time and see how things develop and not be in a tearing rush to buy as you said high quality stocks.Latha: So basically cash, fixed deposits or gilt funds, gold? A: Gold I don’t like but gold has come back into play and this is the problem with a lot of retail guys who bought over the last 18 months because they got in saying there is no other investment opportunity, everything else is dead – a fixed income is heavily taxed, gold is crumbling, real estate is crumbling, stocks is the only place to be and this month suddenly everything has turned around and are saying equities are falling, gold is almost back to Rs 30,000 per 10 gram.So what has happened, this whole analysis has got out of the window. So, it is not an easy time for portfolio allocation that much is for sure. However, I think cash proxies which give you 8-9 percent during the year, I think you right now should have a majority of your portfolio, most of your experts will not agree with me, but I think right now discretion is the better part of valor. Sonia: We have been having this discussion time and again about how to approach the Budget and this time it looks like it is the impossible trinity of high capex spends, fiscal consolidation and implementation of that 7th pay commission. Are you getting a sense that this Budget this market could be in for a bit of a shocker post Budget perhaps once again retest of the lows? A: As I said, I don’t think the government will have the courage to do any of those things now in these market conditions. I think it would be extremely foolish to come out and say something like long term capital gains or impose something like long-term capital gains. Small nudging up in service tax and all, that will happen probably, because the government needs revenues but things which really rattle market sentiment, the government would be extremely foolish to do something like that, attempt anything like that. So, it might be a tough Budget. It might have some elements which the market likes like maybe some kind of announcements on banking and how to fix it, the banking problem. However, all these things are going to cause volatility for two to three days, no more than that. I am amused about all these talks about how great structural reforms will be announced to fix the banking problem. I don’t think that will happen, a band-aid will happen and that is already getting priced in because of the very fierce rallies that we are seeing in some of these PSU banks. So, I don’t think the Budget will do anything to change market mood or market direction beyond a couple of days. It might dent it by doing long-term capital gains which I don’t think will happen but otherwise it will come and go and not make too much difference. Keep your eye focused on what is the underlying reason for the market falling off so sharply over the last couple months. The rest is just technical which will pass which is short covering, periodic shorting, all that volatility is basically technical in nature. Our problem is fundamental, let no body else fool you about that. Sonia: What is that one indicator that will convince you that the market texture is turning for a long-term investor between either global cues or even a recovery in earnings?A: It will take time. I don't think it will happen in a week or a day or even a fortnight. I doubt whether there is anything in the horizon which will convince you from a longer term perspective that the market has turned. I think it will be a process. So, right now we are in the vortex of a lot of technical events, so we might see volatility continuing out there.The longer term bottom formation will probably take a while so I am not sure that any event over the next few days will turn the market around. It might lead to some small rallies and some short covering. If the Budget is not good, it might be another reason for the market to go down but you guys were talking about Sakthi Siva in the morning, and that is the thing which stands out. The problem that she highlights is that, she is calling out India as an underperformer and this is a very different tone from what you have heard all along that the world is in trouble, India stands like a lone shining jewel and that will continue to outperform.However, even the market performance of the last few days in the fall, there have been days when Europe is up 2 percent but the Nifty closes at the lows of the day. That is telling you something. It probably tells you that this is a stock, like a stock or an asset class where people are very heavily overweight and then suddenly they have had a lot of bad news which tells them or leads them to question whether they should be so terribly overweight on it. Therefore on every rise or even on good global days India is meeting with a lot of selling pressure.So, my sense is a little bit of the aura around India has come off in the last few weeks and therefore some of these calls of underperformance are also coming about which I would be fairly alarmed by because it is one thing to say the world is in a bad place and we are going down with the rest of the world but if the world starts talking about India specific factors and therefore makes a case for underperformance given the overweight stance that most funds still have on this market, then that is a fairly damaging kind of a prognosis.Latha: Just to come back to that issue about gilts and alternative investments into which people should be putting their money if they move out of equities, the gilt market also is not giving gains and now there isn't so much that you can expect by way of even rate cuts. In that context how would you look at the fiscal deficit number itself. The bond buyers have indicated no further appetite for bonds, the state development loans have been rejected outright, some of them are even devolving or the yields are really rising rather sharply. In this context will reneging of the fiscal timetable be taken very badly?A: I am afraid it will. Of course the government will try to couch it and slice and dice it and present it in a way that it will look like it is an acceptable deficit number and we tend to be so gullible about some of these moves that the government tends to bring about by presenting what looks acceptable but actually hiding what looks very ugly and I think the fiscal deficit is one glaring example of that.The bond market, the way it has moved, it has already told you that it is very suspicious of what the government is attempting to do and yields have stuck in a range and that is another problem with asset allocation right now as you correctly point out. The fact is that fixed income, yields and fixed income returns are also on their way down this year.So, if you look at the range of fixed income instruments, some of the higher quality paper, people who are invested in AAA+ kind of paper, their returns I think are no more than 7.5 percent this year. Therefore, I find this very disturbing trend of a lot of the fixed income funds going down the value ladder and trying to pick up AA, A+ kind of instruments. So, there are some FMPs which are still giving you 9.25 percent. I think one of the large mutual fund houses are closing an FMP this week which is 9 percent plus, that has an excellent return. This is a three year FMP. However, you should look at some of these papers, it gives me the shivers, we are in a very difficult liquidity cycle and some of the paper that a couple of these FMP kind of mutual funds are investing in, I think is fraught with grave risk and I won't mention names but you should do this exercise of seeing the top 10 paper of some of these FMPs.So, in their hunt to give you 9 percent, I think some of these fixed income managers are taking inordinate risk and I hope they don't have to pay for it like the public sector bankers have to do over the last couple of years. So, fixed income investing is also fraught with uncertainty this year. If you want to stick to quality, your returns will not be great and substantially lower than over the last couple of years. However, the only reason I mentioned fixed income investing is not because returns are superlative but at least has a reasonable chance of keeping your capital safe and one cannot say that for equity at this point in time.