Mkts not out of woods yet: Experts

Ajay Bodke, Senior Fund Manager, IDFC MF; and Sudarshan Sukhani of Technical Trends feel markets are not out of the woods yet.

 

According to Bodke, global cues would continue to be negative for sometime to come. "We are truly in a global recession. Globally, the attempt will be to try to pull back the economy. So, the delay breaking process that is on will continue globally for sometime. It is still a few quarters too early on a global scale to be out of the woods.”

 

Sukhani said the primary trend is down. "We are in a bear market. The intermediate trend, which was up for a few days, turned down when we made lower highs. The minor trend has been down as we drifted today to almost 2,700,” Sukhani said.

 

Here is a verbatim transcript of Ajay Bodke and Sudarshan Sukhani’s interview on CNBC-TV18. Also watch the accompanying video.

 

Q: What is your own sense of what kind of path this market is mapping by the time we are done with this year, more to the upside you think or to the downside?

 

Bodke: As you rightly said, we are not out of the woods yet. My sense is that global cues would continue to be negative for some time to come. We already have seen Japan and Korea going into recession. The US posted a -0.3% GDP in the last quarter — the third of the calendar year 2008. It is widely expected that the GDP will de-grow quite sharply in Q4 calendar year 2008. Overall, the IMF is estimating that the global economy will grow at just 0.2% in calendar year 2009. Anything below 3% is considered recessionary by them on a global scale.

 

So, truly we are in a global recession. The bonded effort from central banks globally to aggressively ease monetary policy but again in countries like Japan, it is 30 basis points from 0%. In the US, although the target Fed Funds rate is 1%, the effective Fed Funds rate is just 0.25%. So, to that extent, the maneuverability of the monetary stimulus is becoming more limited – the diminishing gains.

 

So, now I think what is left clearly is a global coordinated fiscal stimulus. We already have seen China giving USD 586 billion of stimulus over a two-year period, although some people are questioning how much of it is incremental because a large part of it also has been something that has been announced previously. We have had Japan giving a USD 125 billion stimulus; we had America giving a very large stimulus. Germany has been lagging behind with a very small 12-billion euros stimulus.

 

But as we move ahead we would see more and more governments — despite being deep in the red in terms of the fiscal position — forgetting that for the time being and trying to revive the economy because of the big scary word: depression, it is something that we are looking at.

 

So, globally the attempt will be to try to pull back the economy. So, the delay breaking process that is on will continue globally for some time. It is still a few quarters too early on a global scale to be out of the woods.

 

Q:  What’s the problem with private-sector banks; today the relatively stronger ones like Axis Bank touched a new low, all of them actually, what’s bothering the market there?

 

Bodke: The concerns for the banking sector as a whole are sharp spike-ups in delinquencies that are expected in next couple of quarters. In my interaction with some of the bankers — both public and private — the fears of certain sectors like real estate, textile, steel, auto, auto-ancillaries, and a slowdown hitting these sectors, some of the companies announcing a halt in production, all these issues are going to lead to a sharp spike in non-performing assets. It is the asset quality concerns that have suddenly come to the fore and have led to sentiment getting impacted in these banks.

 

At the same time, the Reserve Bank of India has rightly taken these counter-cyclical measures in terms of reducing the standard provisions from 2% to say 0.4% in case of certain sectors and certain mortgages of above Rs 20 lakh from 1% to 0.25%. At the same time, they have also reduced the risk rates but here again the concern is that is this basically portending the fact that the asset quality is going to deteriorate. Hence, the banks have been given some sort of levy. This is the concern that has been dogging the banking sector.

 

Q: How much would you read into today’s Nifty pullback or do you think the trend remains firmly down?

 

Sukhani: The primary trend is down. We are in a bear market. The intermediate trend, which was up for a few days turned down when we made lower highs. The minor trend has been down as we drifted today to almost 2,700. In two hours, we saw a pullback — that’s good but there is nothing much to read in it. These small swings are going to continue but that doesn’t change the trend of the market which is clearly down. I don’t even think day traders can catch much of these moves. Swing traders cannot even try to catch them. So it is a volatile market. It sometimes moves up and it sometimes moves down but the clear direction is downward.

 

Q: The other problem is that a lot of stocks made new intraday lows compared to what we saw on October 27. Does that become the benchmark even technically – that market or stocks are trending towards the October levels again?

 

Sukhani: Yes, I think so. Some of them made those lows today. Some of them are likely to make them in the next few days or next few weeks. The trend is that we went up to 3,240. Next time when we went up, we failed to touch 3,240. We made a lower high. Today we have decisively made a lower low. That’s the classical pattern for a bear market and we are in one since the last ten months. So these new lows are expected and they are just the affirmation that yes, the bear market is alive and kicking.

 

Q: We spoke about banks earlier but [it is] not just banks. Look at all the interest-rate sensitives – infrastructure, real estate – all of them sold off quite sharply. Is the market getting apprehensive that more rate cuts will not come very soon?

 

Bodke: The market is expecting that aggressive rate cuts will happen and happen very soon. In fact on the back of the aggressive CRR cuts [that happened recently], the market is even expecting further CRR cuts, further repo rate cut and further reduction in the SLR. All three should happen.

 

There are also a couple concerns on the infrastructure side. The first concern is that it takes a good 15-18 months for someone to do the initial groundwork to put in infrastructure project up for tendering. Clearly the sense that we are getting after talking to lot of large construction and engineering majors is that the risk appetite has got reined in so much that the belief in the PPP, or public-private partnership, model itself is now being called into question. They [infrastructure majors] don’t want to take any balance sheet risk.

 

They want again to go back to the contracting business simply because they are not able to raise their part of the equity for a financial closure of a project. Foreign funds have totally dried up. Access to equity markets has been choked off. So that is a concern that is dogging a lot of players in this sector. Secondly, and we have seen this whenever any large elections are announced — roughly three months before and three months after any elections — there is a kind of a freeze that sort of happens in so far as the bureaucracy is concerned. So that apprehension again is there as we moved closer and closer to general elections.

 

Thirdly, clearly the sharp up-moves that one had seen in commodities and interest rates have led to apprehensions in the minds of a lot of entrepreneurs. So all these put together the most vulnerable sector among the three engines of growth: exports, consumption and investments; I see investments as one of the large vulnerable sectors.

 

Q: What are these two charts telling you now: Axis Bank and Punj Lloyd?

 

Sukhani: Much to my disappointment, banking has again literally collapsed. Axis Bank is telling us that there is more pain and more downside. It is one of the better banks but that doesn’t help anything at all. PSU banks were a favourite. Axis Bank in the private sector was one of my best choices but this is not a time again to go and buy banks.

 

Punj Lloyd is a much better opportunity in the construction and infrastructure sector. Whenever this market bottoms out, even if it is ready for an intermediate uptrend, I would say that sector should outperform and Punj Lloyd should outperform in that sector.

 

Q: What about the trading favourites now which got smashed today – stocks like Chambal Fertilisers and HDIL?

 

Sukhani: People have forgotten what HDIL was once. I don’t think real estate needs to be commented on — just stay away from it. The fertiliser sector has been smashed again. This is a bear market. I don’t control it. The market has its own wisdom. So sometimes, the momentum stocks are pushed up — some favourites are pushed up — Reliance Capital fell to Rs 565 today. The idea is: don’t try to buy. At least don’t try to take a long position without a stop-loss. We assume these things will continue to happen.