Ajay Srivastava of Dimensions Consulting told CNBC-TV18 that the economy is likely to contract for next few quarters and political agenda will rule the global markets.
It is advisable to 'travel light' in this market, he added. Margins are likely to shrink that will lead to a downgrade in valuations of companies.
Speaking to CNBC-TV18, Srivastava said: “The capitalisation will come when domestic investors throw in the towel.”
In this market, focus should be on import subsidy equivalents. No policy initiatives are visible now that will boost demand and push economy growth.
Below is the verbatim transcript of Ajay Srivastava's interview to Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Sonia: There is just no place to hide it seems for long-term investors. If you thought your money was safest in fixed deposits over there also they went and had this huge rate cut yesterday what are you doing now in the market?
A: There was a place to hide; we all hid in this place called the bond markets. The gilt yields have done wonderfully well. The portfolios have done really good. So, I think there was a good place and mutual fund gilt was a good place. I am not sure it will continue to be a good place. That is a problem. But what you need to do in this market is travel light. This is not the time to be brave and build up portfolio on the basis that things will change overnight because two things are happening at the same time.
Internationally we are seeing the yields going up for the US dollar, domestically we are seeing rupee going down which means less people want to come and invest in this country which means pressure on rupee. You will see partly the margins on the raw material imports which had built up in the past 24 months will now start to shrink. If there is no volume expansion and you will see margins shrinking, you will obviously see valuations going down of the companies.
This is a time when you got a pinser movement, a domestic demand crisis and an international yield crisis. So, travel light is the word and travel where the dollars are I think that is the where you have got good companies who are either import substitute equivalent like Hindalco which you mentioned, where it is Index to US dollar prices, so where landed prices go higher and higher and your margins go up or you go to export oriented companies except IT.
Anuj: We have seen so much foreign institutional investor (FII) selling. Do you think we are near the capitulation? That is the point one brokerage also made in the morning that we could be nearing capitulation. How much more can you sell down in HDFC and HDFC Bank, the largely owned FII stocks?
A: I would say capitulation is not going to come from the FIIs. Capitulation will come if and when the domestic investor throws in the towel because there is obviously institutional buying with very heavy nature in the last five days. Some of it could be government directed, some could be natural flows coming into the mutual funds. We do not know which is how much. But the stage is come where the domestic investor will have to take a clear call on their portfolios.
Capitulation will come from there because right now it is balancing itself. FII sells, domestic institutions buy, either at government directive or voluntary, whatever you want to call it. But capitulation will only come when domestic investor throws in the towel. So far, they are still on hook that this is the best buying opportunity, etc. but if the way the market is travelling, the way the rupee dollar is moving, some realisation will star to fall on people that this is not going to be the one-way street, one.
Number two is partly capitulation is not happening is because every single buying on dip has worked in the last one year. So this is again one last gamble that people are making that yes, it will go up again.
And third is, what will be the impact of falling interest rates on corporate borrowing and their balance sheets. So, there is a negative on US dollar and imports and there is a positive on import costs. So, these three things are holding it steady. So capitulation will come from domestic market in my view, not from the international side.
Anuj: Metals are doing phenomenally well and lot of this could be the Trump focus on infrastructure. We have seen global commodity rally as well. Do you get a sense that from being oversold this is now becoming overbought or not quite yet?
A: I am not sure it is overbought because I think if you look at the most portfolio that we look at metal is not a big part of it and for whatever reason in spite of the built up is not being very well kind of bought securities, so it is concentrated to a large extent. I don’t think even if we look at mutual fund buying has been very scattered so it is also very difficult to buy metal shares because you don’t know how to track them really speaking.
It is not like a banking sector where everybody has bought it, so therefore you see the strength in the rally because more people are getting added on to the bandwagon of buyers in this thing.
Unlike a banking which started with a broad base and continued with a broad base, so my belief is that I don’t think metal is kind of a sector where it is overbought at this stage. It still has long legs to go because there are not many people participating in the rally even today.
Sonia: Do you think we have entered into a bear market?
A: Don’t utter the word, not on the weekend. It is a bear market and I will say why, I think you are looking at economic contraction coming up in the next few quarters. I think you are looking at a global market becoming more attractive certainly US becoming better for us than compared to India. I still think that the political compulsions are going to dictate the economic agenda in this coming two or three quarters into the election season.
So, I personally don’t see there could be populist measures you could see loan write off etc but I don’t see any policy initiative today that can revive the demand cycle and bring the economy back to power.
So, which necessarily correlates the fact that if you are seeing the demand compression you would see the market also getting into may be temporary bear market, but I think it is more as I said sell on a rally and the bear market will truly get confirmed when the retail public sell. Till that time I will hold my judgement but my view is we have already entered it the day on the November 8th.