The Hindu Business Line : ‘16,000 looks difficult for Sensex this year’

With political troubles within the country and global uncertainties, investors are naturally reluctant to buy. But better value may emerge in the next couple of months.

— MR NIRMAL JAIN, CMD, INDIA INFOLINE

Mr Nirmal Jain , Chairman and Managing Director of brokerage firm India Infoline, shares his prognosis for the stock market. Here are some excerpts from a CNBC-TV18 interview:

What have you made of the selling pressure that has suddenly appeared in mid-cap stocks these past few days?

The market as a whole looks quite bearish for the time being. A few developments over the last few weeks indicate that in the next two-three months, we do not have too much of hope on the horizon. Politically, as you know, the government could collapse. After that, neither the BJP nor the Congress would be in a position to form a government, at least the opinion polls do not indicate that, and there will be a prolonged phase of uncertainty.

On top of that, we have global uncertainty because everybody knows that the worst is not over. A lot more bad news can come and whatever we have heard till now is only scratching the surface. Similarly, hedge fund leveraging is very high, and yen carry trade unwinding can increase. When you have so much uncertainty around you, it is very difficult for investors to step in and buy.

In 1997 too, there was the Asian crisis, but India came out quite well from that. But things have changed since then. Now we have huge FII exposures. The mark to market value of FII investments in India is almost $150 billion, and a significant part of that is from hedge funds and through Participatory Notes.

All that is risky money and it appears to me that for the last few days, FIIs have been selling quite aggressively. Also, let us not forget that now, FIIs have invested in about a thousand companies so they have a huge exposure to midcap stocks as well. Ten years ago, they were invested only in 70 companies, but now they have a significant stake in mid-caps as well.

What has you more worried, politics or the global situation?

At this point in time, all the bad news seems to have come together. Politics for India will be particularly bad because in last four-five years, we have not seen the kind of a crisis that we are seeing now.

If you look at all the States, it is very difficult for even the BJP or the Congress(I) to come out with anywhere near a majority, and it is also difficult for the Prime Minister to come out of this situation.

The market has seen negative breadth over the past few days. Do you think problems might arise by way of margin calls, and so on?

Unlike May 17, 2005 and May 2006, retail investors are not significantly leveraged at this point in time. That’s why you do not see a sharp drop of 10-15 per cent. I do not think that there is a crisis in terms of retail investors or local operators; they are not heavily leveraged now.

Thankfully, all the tightening measures by SEBI in the last couple of years have probably controlled that. Although you see a large open interest position in the futures market, I am sure that a significant part of that is by FIIs. So we do not see a 10-17 per cent drop the way we did on May 17. But those markets fell for couple of days and started recovering in a couple of weeks.

Now it appears to me that there may be a bearish phase which can last for two-three months, if you are optimistic, or six-nine months if you are pessimistic. But if one is a real long-term equity investor with a three-five year horizon, one should do well. There is no problem fundamentally within the economy, but one has to pass through this phase.

How much downside do you see in this phase from here?

At this point in time, I would not be surprised if the market dips another 10 per cent from here, but it is dependent on how things sort out on the political front. Actually politics has become relevant for the first time in the last four years since the collapse of the last government. It was never a crisis situation the way it is now.

We will have to keep watching the news on both the global as well as political fronts. It appears that fundamentally bad news has to come, at least on global economic front in terms of credit leveraging.

But we cannot predict today how far that can be deferred. I think that market should look at much stronger support around 12,500 levels where we see a new set of long-only investors as well as domestic high net worth investors coming in.

If we still have some tough going for the market what are the chances that we go back or even get close to that 16,000 mark a lot of people are talking about for this year?

It looks very difficult now, at least in this calendar year.

Would you start accumulating now at all, or you would wait?

I would wait for maybe two months at this point in time. In fact, I will wait much longer because everything is not going to be sorted out in a hurry.

There is quite a bit of value in the market today, but better value may emerge in the next couple of months. So, for an investor, it is better not to do anything for the next couple of months.

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