Taper talks back to terrorise: Blackridge

Market is keenly eyeing the outcome of the assembly elections in the five states of Delhi, Rajasthan, Madhya Pradesh, Chhattisgarh and Mizoram, which will be announced on December 8. The widely held view is that the market may tumble if the BJP does not fare as well as is expected of it. However, Arindam Ghosh, MD & CEO, Blackridge Capital Advisors feels the market has already priced in the poll results, and hence that would not be a key trigger from hereon.

Meanwhile, the much awaited US non-farm payroll data, which will decide the future of QE taper, will be announced on December 6.

The manufacturing activity in the US has hit a two-year high, so if this data happens to be significantly higher, as expected, then one cannot rule out the possibility of stimulus withdrawal happening in December or January, Ghosh told CNBC-TV18 in an interview.

"It could well be that more than the domestic event of a poll outcome, taper talks are going to haunt and come back on the table," he says. He cautions that markets are choppy and in a risk-off mode.

Below is the verbatim transcript of his interview on CNBC-TV18
 
Q: Do you think that our market has underplayed taper fears, how much would you worry about the non-farm payroll numbers for Friday and therefore any chance you think of tapering starting in December itself?

A: Globally if you see the markets have had a spectacular ride. If you look at different asset classes, equity has been definitely leading all other asset classes. As we get closer to the end of the year there is definitely a bit of circumspection which we get to see so investors are getting into some kind of pause mode to see if there is going to be some kind of a pullback and before they commit for the capital.

Of course we have on Friday the US payroll data which is going to play a big part in how the tapering process is going to play out over the course of the month or probably in January.

Q: Are you also looking at the Sunday event, do you think the markets could move very dramatically lower if the numbers didn’t come to the markets’ liking, how are you approaching that day itself, will it just be a one-day wonder or will it linger?

A: I think we definitely have a domestic event which is coming up before even we getting to the FOMC meeting of December 17. Market has already been priced in outcome on either side. So, I don’t think from hereon that is going to play a major part.

However, we have seen the manufacturing activity in US being at a two-year high. The expectation and belief is that their non-farm payroll data is going to be significantly higher. So it could well be that more than the domestic event of a poll outcome the taper talks are going to haunt and that is going to come back on the table.

The issue is whether we are going to have the possibility of a taper sometime in December or in January, or it is going to get pushed into the second quarter of next year but if the data points are extremely strong then there could be definitely some kind of a symbolic taper and possibility of that happening in December or January cannot be ruled out.

So markets will probably more rely and depend on global cues from hereon and accordingly adjust and readjust. So our sense is that markets are going to be extremely choppy and we may probably well head into some kind of a risk-off mode.

If one looks at how the FII flows have played out over the last quarter; if you look at November FII data, it has been about half of September and probably about one-third of November data. This month of course we have started on a positive note. But this is again a event heavy month so we will have to see how the entire month plays out and how FIIs react to a whole lot of domestic as well as global issues.

Q: A lot of government paper will be hitting the market from now till next three or four months and a lot of the domestic money could get sucked into that. How much pressure do you think that could put on the market’s upside?

A: We do not foresee liquidity to be a big issue. Overall from an economic point of view, our sense is that incrementally the economy has been improving in terms of macros.

Today, we are in a situation where the current account deficit is no longer a big macro challenge. We have currency which has also stabilised, of course we will have to see how the taper affect plays out and it is going to put further pressure on the currency and therefore again in that kind of an event how liquidity plays out. We have seen the bond yield to be stubbornly at 9 plus kind of level.

So whilst there have been an improvements,  the situation continues to remain somewhat fragile though bulk of the macro challenges have been addressed and handled quite well on the basis of various measures that have been taken in the past.

Export, we have seen a pick up but we cannot expect that kind of a double-digit growth to sustain.

So, there would be pressures but overall we are much better prepared than what we were few months back.

_PAGEBREAK_

Q: What do you think 2014 will bring, do you see 15-20 percent returns from the market or do you think not so much because the May event may actually turn out to be not very market friendly?

A: Our sense is that equities probably would start doing a lot better purely from a domestic point of view largely because of the improvements that we have seen in macro environment.

Obviously, once we have this interest rate hike cycle playing out fully - probably a couple of more rate hikes and then probably get into some kind of a pause mode before we actually see the monetary environment starting to get a little more supportive, it could well flare up and ignite equity markets.

Whether it is going to happen over a period of 12 months that is 2014 or 2015, I would say probably 2015 is going to be a much better year where we can say with a greater degree of confidence that probably 15-20 percent is possible. However, it also means that long-term investors therefore need to build positions from now on. These are good levels purely from a stock perspective, don't get misled by where the index is currently but purely from a stock specific perspective one can build quality portfolio from here on.

Q: Since you are cautious for the very shorter term and you do believe that the markets could enter risk-off mode which are the sectors or specific stocks that you would be most cautious on right now where you would advice taking off some positions?

A: It is history repeating itself so again if we get into some kind of risk off mode with the fear of tapering getting to haunt us again we will again get to see the defensives again despite the very expensive valuations again being the favorites.

In fact, it would be a little unfortunate if we see the kind of broad based activity that we had seen across sectors with the hope that the economy has actually bottomed out, GDP has actually troughed out and therefore there is early possibility of the investment cycle starting to kick up.

Therefore, the kind of activity that we have seen across capital goods and metals, if investors actually move away from that then they would well be doing a good job if they actually stick to that conviction with a slightly longer time horizon.