Time to go short? Market eagerly awaits elusive correction

Moneycontrol Bureau

The medium to long term trend still looks good, but bets on a short term correction are rising after a 35 percent rally in frontline benchmarks since early February. Many experts feel a pullback in prices would be a good thing as it would help the market consolidate and build a strong base for the next leg of upmove.

The Sensex and Nifty fell for the third consecutive session Thursday as investors are worried of an earlier-than-expected interest rate hike in the US, which in turn could shift global capital flows away from emerging markets in the short term. Also, a strong pipeline of share issues and expensive valuations are making investors circumspect.

"I don't think the correction worries me at all. On the contrary it is quite positive... it gives an opportunity to people who were left out, it gives an opportunity for the additional money to come in at lower price points, lower valuations," Kunj Bansal, ED & CIO, Centrum Wealth Management told CNBC-TV18 in an interview, adding that overall the market continued to be in an uptrend.

The US Federal Reserve's next policy meet is on September 16-17 and Geoffrey Dennis of UBS expects the first rate hike just before the middle of next year. He expects a 5-7 percent correction across emerging markets, but said valuations were not "particularly stretched."

As for India, he said its fundamentals were much better than some of its emerging market peers.

"India will suffer during any correction but I wouldn't particularly expect it to be a big underperformer because the fundamentals are better than some of the other markets," Dennis said in an interview to CNBC-TV18.

India's GDP grew 5.7 percent in the June quarter, raising expectations that the economy is finally on the path to recovery.

Jyotivardhan Jaipuria, Head of Research, Bank of America Merrill Lynch, expects corporate earnings to double over the next four years, as the economy looks up.

However, he thinks global cues, especially rate hike by the Fed, could spoil the party for Indian equities.

"We have to remember that the emerging markets have done well globally and that has been an additional factor helping us," he said in an interview to CNBC-Tv18.

"So we monitor emerging market flows, we have some tactical indicators there and one of them is now flashing that probably we will see a tactical correction in emerging markets itself. So that is one thing which one has to be worried about," he said.

An Ambit report says that while sustenance above the 8130 -8150 region should amount to yet another breakout for the Nifty, it believes such "a sustenance is suspect given the widespread complacency in markets currently, as also supported by record low Nifty implied volumes along with near absence of options protection for FIIs".

According to the report, the net options' protection bought by FIIs is at multi-year low, suggesting a near absence of hedges. Even the Nifty-implied volatility has almost been at the lowest level seen in the last decade, which again reinforces the widespread complacency.

"Moreover, the broader markets are not following frontline benchmarks to newer highs. Both CNX Midcap and CNX Smallcap indices have been underperforming the Nifty since the early July peaks, indicating deterioration in market breadth," said the Ambit report.

"Overall, while staying positive on Indian equities for the longer term, we believe a near term correction should serve us well to shrug off complacency and bring back a healthy level of skepticism," the report said.

Posted by Kankana Roy Choudhury