Lack of near-term trigger makes mkt vulnerable: Expert

The sell-off in global markets and Reserve Bank’s unexpected move to hike repo rate by 25 bps led to a sharp decline in the market with the Sensex and the Nifty losing almost 3 percent this week. The Sensex closed at 20513.89 and the Nifty at 6089.50.

In an interview to CNBC-TV18’s Sonia Shenoy & Anuj Singhal, Punita Kumar Sinha, Pacific Paradigm Advisors says she is worried about the market going ahead as valuations are not very cheap and lack of triggers in near-term make it vulnerable to bouts of volatility.

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Among emerging market currencies, India has performed slightly better as the index is down over 10 percent, but rupee is down only 5 percent. Sinha believes the main reason for the rupee to perform better than other emerging market currencies is due to tightening measures taken by the RBI to tame inflation.That is because if inflation rises, rupee will weaken further.

Sinha also adds that between now and elections, market will have both positive data coming out from election polls and some negative data coming out from emerging markets. “It will again have some positive data coming out from developed markets and so, it is going to be quite an interesting year and a lot of rotation is likely to be seen between stocks and sectors," she adds.

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Punita Kumar Sinha

Managing Partner|Pacific Paradigm Advisors

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Adding to the discussion, Amisha Vora of Prabhudas Lilladher says the asset quality issues for PSU banks will continue going head and they can be a trading bet but for the short-term, in a pullback rally, BANKEX will give slightly better returns.

 Below are the excerpts from their interview on the channel

Sonia: The global cues took center stage this week and pretty much pull down all markets including India. Would you be worried about that going ahead?

Sinha: I would be, because the valuations in India are just around fair values. At this level of valuation, I do not think you can have a directional trade that is easy to call either with way because the market is about 14-15 times, which is right in the middle of its historic range and closer to the top end. Also, compared to other emerging markets it is not very cheap market; there are many other markets that are looking much better on a valuation front and given what is happening in India with elections coming up, I think as it is with valuations where they are and lack of any near-term triggers, this market is vulnerable to being volatile and reacting to global cues.

Sonia: With respect to individual stock, the Bank Nifty broke down this week, down 7 percent and a lot of public sector undertaking (PSU) banks like Bank of Baroda, Punjab National Bank (PNB), State Bank of India (SBI) were all down about 6-9 percent. Would you use this as an opportunity to buy any bank stocks because in the past, when recovery comes in, some of these banks behave like high beta stocks, outperforming the market?

Vora: Bank Nifty will be showing a stronger pullback but within the Nifty basket, for a small trading bounce, PSU basket will still continue to reel under pressure as it appears and one of the key indication still continues to come from the fact that currency scenario will be panning out post tapering in the emerging market segment and also the inflation scenario, the way it still looks in India. RBI governor Raghuram Rajan did raise the rates by 25 bps but slowly he wants to make a real interest rate in positive to convert back financial savings. In the period of this adjustment, bond yields will continue to remain volatile and PSU banks are linked very closely to that apart from the fact that you have their asset quality issues continuing. So, they will at best be a trading bet but yes, for the short-term, for a pullback rally, I feel BANKEX will give slightly better returns.

Anuj: What is your call looking at the currency aspect, do you think it is because the Indian macro situation is much better or is there anything else playing out?

Sinha: If you look at the emerging market index broadly, today it is down over 10 percent, India is down only about 5 percent and some countries like Brazil, the stocks are getting hammered. So, it is a bit of a slowdown in China, what is happening in Latin America and therefore, the commodity oriented economies have got hurt more than India, which also has its domestic consumption story keeping it somewhat stable and it is not a huge commodity oriented economy. To that extent, India is slightly better but rupee looks weak when inflation is high. Right now, as economy is slowing down, inflation and tightening means inflation will come under control a bit. I do not know if it will happen but that is the expectation and therefore, it is anyone’s guess but that is why rupee didn’t react as badly because if inflation is high, rupee should weaken further.

Anuj: The next trigger for the market is election; we always had a pre-election rally and this election – almost everyone is talking about it, as being a bit of turning point for India. Where do you stand on that? Do you think we will have a pre-election rally, do you think market is factoring in a bit too much in terms of National Democratic Party (NDA) government? Do you expect old phenomena to play out, a pre-election rally and then maybe that fizzles out or once you have the actual outcome maybe even a bigger rally like we had in 2009?

Sinha: Some of the pre-election rally happened in December after state election results and there is a lot of expectation already built into the market that the NDA government is coming to power. That expectation is there and will probably remain all the way until election results. That is why, I expect market to be volatile because we will have various things happening, we are seeing potentially poll results coming in number of times, some may say that NDA will form and some may say they won’t. That will affect the market and create volatility because market do want – it appears the NDA government, but on the other hand we are seeing emerging markets slowing down and some capitulation hasn’t yet happened there, so there is more downside coming from the emerging markets potentially and all of that will resolve itself through the second half of the year.

Between now and elections, we are going to have both positive data coming out from election polls and some negative data coming out from emerging markets and then some positive data coming out from developed markets and so, it is going to be quite an interesting year and a lot of rotation is likely to be seen between stocks and sectors.