Mkts to trade volatile till October: Pranav Sec

There seems to be no end to the mayhem on Dalal Street. Markets continued to tumble deep into the red. The Sensex breached the crucial psychological level of 13,000, while the Nifty slipped below 4,000. The Nifty finally closed at 3,896.75 down 143 points, while the Sensex shut shop at 12,904.09 down 557 points.

Excerpts from CNBC-TV18's exclusive interview with Rajesh Jain:

Q: The market is smelling panic. Has that got heightened a bit more today?

A: The factors that really caused this market to start slipping mid-week in the expiry of the June series have not really let up. We have not seen an absolutely clear picture emerge in the politics of the country. So, that continues to be a question mark.

At the same time, crude refuses to let up. Today, the currency factor has got added to it with the rupee really looking for a very sharp depreciation, in case it goes below the 43 mark versus the dollar. If that happens, then it has a cascading effect on the balance payments and the current account deficit. With the worsening crude oil price, the fundamentals start looking bad both for the companies as well as for the macro economy.

Since these two factors are not letting up, the selling continues. But what is notable about today is that volumes have been high. So, there is some amount of buying interest even as the selling continues. But selling seems to be overtaking the buying. As a result, the tickers are continuing to go down.

There used to be a phenomena which we observed in the markets during the bull phase. People would compare sectors and then look for stocks, which had not really moved up with the rest of the market. Today, with telecom finally falling to the sharp downward trend on prices, this trend is now becoming the mode of the day as people now look for stocks that have not fallen in sync with the rest of the market and weakness tends to accelerate out there. So, these are a couple of takeaways from today’s market. But we could be getting into a zone where buying should emerge sooner than later. If you are caught on the wrong foot on a long position, then you need to have a little more patience because the bounce up, whenever it happens, should be equally sharp.

Q: The start has been bad. What is your sense of how the series might shape up? We do have a fairly important cue, which are earnings to wade through by the time we are done with it.

A: This is a long series and will be punctuated with corporate earnings. At this present moment, it appears that the IT numbers could be the ones providing a bail out. But if you look at the DLF or the Unitech numbers that came out recently, then one wonders whether the cracks will start showing up.

We had an excellent FY08 numbers announcement through the last quarter, which helped the market through some of its bad times. They were significant to build up confidence and even buying at lower levels around the 4,400-4,800 zone on the Nifty. There people did buy for the long-term on a portfolio basis but Q1 could give the first hints of fundamentals starting to erode the combined effect of interest rates, inflation and currency coming in and a possible demand slowdown.

But the demand slowdown will get confirmed only in the next quarter. So, it will be the October numbers, which will really have to be watched if one has to take a fundamental call. But through July, the market having fallen so sharply, there will be a lot of volatility and some of it on the positive side because the earning season will begin on a positive note with positive numbers from Infosys.

Q: For a lot of people the bottom or the near-term bottom will come when they feel retail will show signs of finally panicking. Are you seeing it happening? Are retail or HNI throwing in their towel yet?

A: You are seeing a lot of that in the side market and some of the momentum counters that have joined the decline today are also a pointer to that. Essentially, selling has started even on the fringes by the smaller retail players. The trend that we have been witnessing since January is that people were eager to buy because the market was rewarding over a two-three year horizon. Such people have now finally started believing that this market could give better levels to buy. So, if you have the cash to buy quality stocks, you are perhaps better off waiting for a lower level.

Ever since the closure of the June series, this market has given almost close to 100-point dips on the Nifty every day because of which all the buying that is waiting to happen on the fundamental long-only portfolio basis, even from retail is getting postponed.

The signals that you are getting now is that the momentum pack has started giving in a big way on side market and that should be bringing us closer to the bottom.

Q: Are things looking like they have reached a climatic phase right now?

A: There are two factors that this market will have to continue to grapple with. You do not know whether earnings have got damaged and what is going to be the impact on the bottomline of all the negative macroeconomic developments as well as the possible demand slowdown. That is something we will know only after H1 numbers are out. So, until October 2008, expect the market to keep giving up every time there is a search back.

The second aspect, which was just brought out is the fund flow situation. Unless and until you have some leadership buying, a sector that provides a leadership in terms of appearing to be the next place to make your investment money or trading money in, you will not see the return of confidence.

In the absence of such a scenario, the quantum of buying required for the market will start getting back to decent levels. So, one should really be prepared to see pullbacks and sharp come offs over the next couple of months or at least until October when the first call on fundamentals would be taken and possible return of funds to India should happen.

Q: How do you think it is going to shape up for this entire midcap space? Do you think it is going to be another very long and arduous process for participation starts picking up again or interest starts coming back?

A: It is a same story that repeats itself whether it is 1996-97 or 2001-02 and now you have the year 2008. The side market is where the retail investor or the small investor gets really hit hard and a lot of the institutional money is also caught on the wrong foot in a lot of these tier II or tier III or tier IV counters across the breadth of the market. Some of the momentum favorites have really lost out sharply and despite greater than 5% falls; the falls continue to take place on consecutive days.

It is finally signaling disillusionment with these counters because you expected an RNRL to get back to Rs 150 but when the stock continues to capitulate even below Rs 70, it finally signals that retail or the big HNI who was trading aggressively in a counter like RNRL is finally disillusioned and is selling out all that he was holding, either in terms of portfolio positions or trading positions. This is the kind of disenchantment which will grip all kinds of traders and players in the market across a spectrum of the side market. It will take a long time before investment interest returns to these counters.

Q: To effect a pullback in prices or even in sentiment, what do you think it is going to be? Will it be when the market finally sees that inflation number cooling off? Will it be the way crude has moved?

A: Crude would have to come back to the USD 130 level for people to start believing that Indian companies may not be hit as badly as is being envisaged at this point. Even before that, one will have to see some very definitive bulwarking or underpinning for the Manmohan Singh government. Let us hope politics sorts itself out by July 3-4. If the nuclear deal goes through and the government survives it, it will be big thumbs up for the market.

Finally, we will have to see at least three days of negligible or no FII selling for this market to start taking heart again. 

Q: Will you pick anything from this debris at all?

A: There is a lot I would love to buy, not having been able to catch the amazing bull-run we had last year. I have been offered another chance to buy some great businesses yet again.

Even if I have ready cash, what is holding me back is the generally negative environment for equities and the fact that there is a huge pullout from Indian equities by FIIs. The extent of damage that the Indian corporates have suffered is something you will come to know only after the actual numbers start coming out in October.

So, we combine a negative funds flow position with bad macroeconomic data and the fact that corporates are going to get hit on the topline and the bottomline. All these three together would make me a hesitant buyer. Even though there are mouthwatering levels in some of the stocks that I always wanted to own, I am still not a willing buyer. I expect the current levels to be revisited again and again, even if there is a recovery and perhaps lower levels also being offered to me to buy the same businesses, as a result of which I would postpone my buying.

Q: At the moment, the market is 12 times FY09 earnings. What would be the numbers game?

A: I am not looking at a multiple number as a target. I am just looking for the crucial sentiment turn for the crucial fund flow turn. If that happens, even at a P/E level of 14, I would be a buyer. What is stopping me from buying is not the valuations, it is the general negative sentiment and the negative fund flow.