The Hindu Business Line : ‘Indian equities not in a bear market yet’

You can add value to decision making by looking at the longer term using technicals. These methods help in understanding where we are in time cycles and then try to focus on the near term.

JEFF HOCHMAN, DIRECTOR, TECHNICAL RESEARCH, FIDELITY INTERNATIONAL

Lokeshwarri S.K.

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The risk aversion among global investors caused by the turmoil in the credit markets and the threat of recession in US has made the going difficult for equities across the globe. But Mr Jeff Hochman, Portfolio Strategist and Director, Technical Research, at Fidelity International, remains positive on the longer-term prospects of the equity market, affirming that the current correction offers an opportunity to buy stocks at better valuations.

The Nasdaq Composite and the S&P 500 are close to losing 20 per cent from their recent peaks while others such as the Nikkei and Shanghai Composite have lost almost 30 per cent. Are equities globally facing/entering a bear market since the definition of a bear market is a fall of 20 per cent from the peak?

The 20 per cent is used in the context of the US markets where the market is very big and very wide and also less volatile. 20 per cent might not be enough in emerging markets that are more volatile; the fall can extend to 30 or 35 per cent. But it is an arbitrary number. There is no textbook definition of a bear market. There is no definitive answer. It cannot be said that a market has fallen 21 per cent and so it is in a bear market. I don’t think you can look at it in isolation.

I do think you can look at the number of stocks that have been appreciating or depreciating to tell you more where you are. That is why I like to look at the advance decline lines. The market breadth (global markets) has been poor for over nine months now. It is only the market index that has held higher. But the average stock prices have been falling. From that perspective, the US markets have been in a bear market for six months already.

The advance decline numbers for the Indian markets have however been robust over the last one-year. That is one of the reasons why the Indian market continues to look attractive.

The global equity markets have been in the corrective mode for the last three months. How much time do you think that the equities will take to build a base to launch the next up-move?

We need to finally find the base. Once we get to the base, the base-building is expected to take three to six months. So somewhere between next month and two, in mid-summer, the base ought to be formed. I think things will get better in the second half of the year.

There was a prolonged bear market in India between 1995 and 2003. Is there a possibility of the markets getting in to such a protracted sideways range again?

It is possible that the market does nothing for a while. But that can come about only if the de-risking and credit problem stays. The sentiment can stay out of sync with the fundamentals for a long time. The market can go through a digestion phase during which it moves sideways. It will be interesting to see what makes it move up to new highs again.

The general perception is that short-term traders employ technical analysis and long-term investors can do with fundamental analysis alone. What is your view on this notion?

My view is a bit different. I definitely think that you can add value to your decision making process by looking at longer-term using technicals. These methods help in understanding where we are in chronological time cycles and then try to focus on the near term.

If the markets were correlated strongly with fundamentals and earnings and they did not deviate, then we could let the quant analysts do all the work and they would always have all the right answers. If the earnings were always perfectly forecasted, then we — you and I — wouldn’t have to work either. So there is room for everyone (fundamental, technical and quant analysts) in forecasting the long-term.

What is the weight a fund manager or an investor can assign to fundamental and technical analysis in stock selection?

I think they complement each other. It is not, us against them. Everything has to fall in to place together. You don’t want to buy stocks (using just technical analysis) that are fundamentally weak with bad growth prospects or stocks that over valued or are under-performing. Conversely, if only fundamental analysis is used, a stock might be picked whose valuations are attractive, but the stock price may not move up in a long time. So there is an opportunity cost since the money can be invested in a different part of the market.

At Fidelity, technicals are used as a value added tactical tool to the strategic fundamental research. They are used as a reality check to the assumptions made by the analysts and fund managers. It is also used to provide an element of risk control for the retail and institutional funds.

Are there any specific technical tools that long-term investors can use?

The first thing that they can do is to look at longer movements instead of the daily movements. That is why I prefer to look at monthly and sometimes quarterly charts because they take away the noise so that you get a longer-term view on what is volatile and what is not. If you see red coming down the screen, it can be put in proper context, as was seen in the monthly chart of Nifty. Though the Nifty is moving lower, the long-term trend line has not been breached yet. It cannot be said that the Nifty is in a bear market yet.

Investors can get lost if they look at the jagged intra-day movements. The trends and the cycles are more clearly defined in longer-term charts.

Do you believe in trend forecasting methods such as Elliott wave theory, Neo Wave theory and so on?

I believe in the principle that they represent. But I do not use them because they are difficult to use to give consistently accurate predictions. There may be other people who can do it better than I can. So I do not spend much time on it though I understand the principle structure and agree with it.

What is your view on frontier markets such as those in Ukraine and Vietnam that outperformed the other markets in 2007?

We do track these markets and we have the EMEA fund that invests in emerging Europe and Middle East and Africa. Though these markets are small, the base is very low and their correlation with the other equity markets is less. The lack of liquidity does present a risk but their longer-term growth prospect is great. I have some my own personal money invested in these markets.

What is the portfolio allocation that you would advise between equity, debt, commodity, real estate and so on at this juncture?

We are positive on the commodity cycle. All the commodities are strong from a two to five year perspective though a 10-15 per cent can be expected anytime.

Equities are preferable to fixed-income bonds; I am speaking more about Europe, where the interest rates have been moving lower and inflation has been high that there is no value in buying government bonds where the yields have moved down to a large extent.

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