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Saturday, November 14, 2009

Market Future India: Sensex may drift down to 12500, -ve on RIL: Shankar Sharma

Market Future India: Sensex may drift down to 12500, -ve on RIL: Shankar Sharma

Sensex may drift down to 12500, -ve on RIL: Shankar Sharma

Shankar Sharma, Vice-Chairman and Joint Managing Director, First Global, says the Sensex can drift down to 12,000-12,500. He feels the next 3-4 months would to be challenging for equities. "We are looking at a 20% fall in global markets, so India would sell off more if they fall."Shankar advises investors to stay away from high beta stocks. He is negative on Reliance Industries
Q: It looked like global markets were getting ready for a deep correction last week, and then suddenly things have turned around and the S&P has gone right back to 1,100 again. Do you think the correction is over?
A: No. In fact, when the correction happened, I was of the view that we would get another bounce. Call it a sucker rally or whatever but I was personally of the view that we would see about 16,700–16,800 on the Sensex and US markets would probably go back to their highs or close to their highs. I think the Nasdaq 100 did get back to its highs yesterday.
What is interesting is that the emerging markets are still reasonably far away, good 2% on the aggregate from their highs whilst the US markets have made their highs. That is an interesting disconnect because usually emerging markets should have made their highs a lot earlier than the US markets ought to have but that has not happened this time.
Even today the follow through from the emerging markets (EMs) is far less vigorous than what one would have imagined given the size of the move yesterday on the US markets. Even yesterday, EMs were not that robust except the European and the Latin American end. But Asia was by and large quite tepid, and even today, I don’t see much sort of vigour in the move.
So that is beginning to, at least, surface a slight disconnect between what is happening on the EM side versus what is happening on the US equity side. My sense is that EMs will begin to lag significantly and that usually happens when markets fall rather than when markets rally because it is hard to imagine that EMs won’t participate in any big rally in global equity markets from hereon. So if EMs lag, that is usually a precursor to sell-offs rather than big rallies globally. My sense, therefore, is that over the next month or so, you are going to start seeing the reversal of what began in March this year and the next three–four–six months could be extremely challenging for equity markets globally be it India or be it the rest of the world.
Q: We are at that Sensex level you just talked about. So what seems the more likely move from here that we get into a trading range or that this market corrects faster than the others?
A: If markets do sell off India will sell off a lot more and my view is that markets globally will sell off rather than rally. They could do 1–2% here or there that’s fine but by and large I would on the side of the trade that I will wait for a chance to get shorts in rather than big longs round here globally.
If markets do well, which I think they will, India will sell off a lot more than that. I am looking at about 20% fall in global equities from hereon. India being typically at the high beta end of the market will probably fall a tad more than that and so will the other high beta emerging markets like Russia or Latin America.
Q: You are saying a 25% correction in the index in India is likely which would take it back to again that 12,500 kind of zone?
A: That wouldn’t surprise me in the least, absolutely not. I would definitely hold that view over the next six months that you could go all the way back to 12,000–12,500 and who knows as we always know overshoots happen on either side of the market. So on a bad day you could slide down 500 points even from there. Definitely, I do not think the upsides are there incrementally. You get a blast last rally, which could take you 200 points higher, that’s fine, that’s for a quick trader but not for any serious investor, definitely not.
Q: You would be very surprised if the year end saw a big move up for the markets because the counter argument is that liquidity is still comfortable and there may almost be a scramble to get something done by the end of the year by way of a performance?
A: These theories are very bad except that usually when they work, we say the theory works but there are enough number of times when they don’t work. Statistically, I am not a big believer in these easy, cozy theories because markets are all about destroying, precisely, those kind of theories.
If you think about the correction that happened in the last fifteen-twenty days globally, there was no apparent reason why it should have happened. That is the interesting bid that it was accompanied by pretty much good news globally. If you would look at the US gross domestic product (GDP) numbers, they were quite strong.
South Korea did blowout numbers on their GDP end. By and large, there was nothing that merited a sudden sharp fall of the kind that we saw. That makes you begin to think that is the market reading something which the headlines are not highlighting just yet? Go back to March when the rally started, there was still bad news. It continued for a good month to a month and a half, it was only around late May or June that you started to see real sequential growth coming in. However, I do remember the headlines in late March or mid-April and I was saying that the fundamentals have still not turned. The fact is that they did turn sequentially but it took a good two and a half months.
So sometimes market moves without reasons, you need to probably think a lot deeper that what is the market’s inner mind telling you. So my sense is it could well be that the market is beginning to read that in the next three–six months’ time, this whole easy liquidity and low interest rate and low inflation theory, which has made this move happen could go out the window because now you are going to see the ill-effect of a low inflation base this year begin to creep up from Q1 of 2010 and then again sequentially earnings may not be as strong as there has been because we were coming out of an absolute trough. So maybe the market’s mind is beginning to read those things that sequentially issues––be it on inflation or on rates or on earnings––may not be as robust as is necessary to propel this market higher.
Q: There has been a lot of talk about the dollar carry trade and how that’s fuelled asset prices and whether it will reverse in the next few months. What are your thoughts on the dollar and whether that might pan out?
A: When the dollar falls then you have a big rally in global equities, and particularly, in emerging markets. But I was looking at history and I was not able to find that this is a perfectly correlated situation and I am a big believer in that theory and I belong to the camp that the dollar has to strengthen for markets to fall and it could well do so.
However, there have been reasonable periods and even in the last three years in which it was counter to the conventional theory that the dollar actually strengthen while markets went up as well. So it is not always that this theory holds. My broad view is that the dollar might strengthen a tad but I do not see huge strengthening move. It may well be that the relationship may not hold in that. If the dollar actually does not strengthen what that does is, and let us say on the other hand it weakens, what that will probably do is it might push inflation argument back to the fore. Therefore, rates will follow in the whole reversal of the cycle. That is not going to be good news for the market. So the global economy is still very fragile and the last thing any country can afford is a resurgence of inflation.
Therefore, no economy in the world, that I can think of, can afford a move to tighten rates just now. Therefore, if the dollar actually weakens and rates begin to harden then you may see equity prices begin to tumble because the dollar is weakening rather than the relationship that the dollar weakens and because of that you end up having rallies in equity markets. So maybe this relationship is due for a break because all of us have become too cozy even in assuming that this is a way the trade actually works out.
Q: What do you think about this whole Reliance settlement issue, do you think it is likely? What is your own position in First Global on the Reliance stock?
A: We have been negative on Reliance Industries for quite a while now. I see no reason to change that view. These occasional spikes keep happening as there is hopeful talk that the settlement might be reached and I am not an insider on that trade for me to know whether there will be or not.
What I am more interested is knowing how the Supreme Court (SC) will interpret all the complexities around this and how will a court of law get into very detailed analysis of a business problem because typically courts are into issues of law rather than get into what is the cost of producing gas and stuff like that which even we analysts cannot figure out. So let us see how the SC takes this but I am no insider in this.
Q: What has gone a bit back of mind now is Q2’s performance by way of earnings, there were a lot of chinks over there. The only redeemed feature seemed to be the margin performance which as well maybe up for question in the next couple of quarters, what would your own earnings outlook be?
A: In light of what we have seen, it has been basically one big pack and that has been the auto pack that has truly been good. It has been outstanding in terms of numbers on an aggregate basis. Other than that, you are searching hard to justify a lot of their valuations, you are searching hard to see how incremental earnings growth will come through, if you look at the whole fund raising pie chart from the lows of March, it has gone to companies––infrastructure and realty pack––which have been at the poorest end of the market as far as business fundamental are concerned.
They have to my mind whatever little good news was there by way of their earning sequentially or whichever way you want to cut it, they just want to say that this is the only chance, let us put some numbers together, show the market that we are in good shape, let us get some capital and then we will figure out how to rework the numbers once you got money. It has been a little bit of a logic and reverse. However, companies that have not needed capital within that pack have been only the auto pack. So that has really gladdened the hearts but other than that the earnings picture was pretty relative to where the market is.
At 8,000 same earnings picture would have looked very different but at 17,000 where the markets were, this earnings number or these aggregate numbers are not going to take you to the highs. That has been my general view that the highs while tantalizingly close are unlikely to get reached or breached anytime soon even though for a brief moments, there have been moments that I doubt that is it really going to get there in November or December, etc. but on an aggregate basis, my view by and large has been that we would get a huge bear market rally which we got but it wouldn’t take us pass the highs simply because of the internals of the market by way of their marketcap weightages, hard to see which ones will take the markets higher because autos still don’t constitute much and that is the only area I feel comfortable about.
Q: What do you do with high beta now? Do you short that, do you stay away from it? How would you position yourself in that trade?
A: I never short anything at all, not in India anyway.
Q: Would you stay away from high beta names now?
A: Yes absolutely. If you see a lot of them have been struggling to take out their ranges. They have promised to take them out, threatened to take them out but they have somehow fallen short. The only stocks that have well on that front again have been in the auto pack or a few isolated stocks like Tech Mahindra here or Ranbaxy elsewhere.
By and large, stocks in the last 2–2.5 months actually have done what analyst keep talking about perennially, which is a trading range and the move from 15,500 to 17,500 was largely driven by some of the auto numbers and the auto names. I don’t know why Tata Steel rallied all the way from Rs 420 to Rs 570 maybe there was a short squeeze or maybe there was something else. However, clearly the numbers don’t bear out any such optimism what the stock display for a brief while when the markets went to 17,500 or 17,200–17,300
Q: The one you have recommended a short on is telecom. Is that trade done or is it still open?
A: It’s a utility short in the sense if you run short of ideas then you go and say, do this trade. I don’t think they are going to halve as of next weekend. But this sector is pretty much done with and I don’t know why it enjoyed its time in the sun in the last two years.
I can understand from the early 2002, 2006 or 2007, when the big move upwards there by way of subscriber ads and not much competition––remember that was the key that people hoard its spectrum, the raw material was scarce in supply and the incumbents, therefore, made out like band-aids. But once the cap on operators was removed, once spectrum became reasonably available then why these stocks survive for this period of time? I don’t know.
So my sense is markets will not go down to their March lows. My sense is worst case 11,500–12,000 is where I see the markets going down to. However, a lot of stocks will break their March lows. Conversely, markets are not going to go to their highs but a lot of stocks have made all time as we discussed Maruti or Punjab National Bank (PNB), etc.
So that’s going to be the nature of this beast that markets will sell off but not sell off enough to take them to the March lows but a lot of stocks will break their March lows. There are quite a few big names might break their March lows.
Q: A few weeks back I read a few buy reports from First Global on stocks like Educomp then a subscribe note on Indiabulls Power. Were you just flagging along or playing along with momentum at that point, and therefore, you recommended a subscribe and has that changed?
A: I don’t have a view on a lot of the research reports that go especially on initial public offering (IPO) subscriptions. The fact of the matter is that Educomp is a very strange company and I don’t like the financials of that company although there was some news a week back or something that they are going to fix the free cash flow problem which is what my concern on the stock has been for many months.
I just think that education space in the next two years will have more positive surprises than negative. So there is going to be a good tailwind of positive information flow, feedback loop from that space.
Other than that, don’t start taking an Indiabulls Power subscription note too seriously because we can only say that it is relative to Adani Power a better one not that I am saying that it is a great buy because now after Reliance Power a whole new method of investing has opened up in which 2014–2015–2016 numbers are banded around as if it is the next quarter’s numbers.
But like I said that in the IPO market, somebody wants to put in money at that valuation, it is not the company’s problem or not the merchant banker’s problem, their job is to get the highest possible price. It is a pure zero-sum game unlike the secondary markets. So I hold nothing against Indiabulls Power or Adani Power or even Reliance Power.
Q: What has seen as the other unique positive for India is the divestment plans and the talk of so much policy change, paper hitting the market, would you see that as reason to keep the market buoyant or do you think so much supply might actually choke the secondary market?
A: Governments have typically never been able to time markets well by way of their divestment plans and almost 70–80% of the time we have gotten it wrong. Videsh Sanchar Nigam Ltd (VSNL) going for multiple road shows back in early 90s and coming back empty handed because the government used to say that look at this price we will not do it and we want Rs 20 higher or something like that.
So governments might get lucky, we might get a few away but it will still pressure markets rather than make markets buoyant because you are still going to divert money supply coming into the markets directly versus going into the primary market. So while it is good for the government of India, I don’t think that necessarily will be good for the secondary market. That is assuming that they do happen in the first place because markets can be very fickle and as we saw within two months of March, everything changed, we could easily change on the other side as well.
Q: A quick update on the proceedings of your case. Where does it stand right now with now the Securities Appellate Tribunal (SAT) ruling out of the way?
A: It is not out of the way, it’s still pretty much in the way and I can tell you nothing shocks me anymore. I have seen a lot, but this one did. This was an absolute bolt out of the blue because you go to the court of law expecting that you will get justice on counts of merit and counts of law but when you do not get it because if you didn’t think there was merit in your case, you wouldn’t have in fact appealed it in the first place. You would simply say, I will take it and I will just sit back at home and read a book or something. But you just go there thinking that these are the points of law on which the regulator is absolutely at fault and on 5,000 shares of Reliance and 10,000 shares of Infosys and 2,000 shares of Wipro, how on earth can somebody say that these trades have been manipulative when they have been done at market price and there is not even a rupee is changed after the trade has been done.
So you go there expecting justice and you don’t get it, it is not just disappointing, it’s shocking but be that as it may you have to respect the decision of the court and you have to move the battlefield elsewhere. So we are in the process of filing our appeal in the Supreme Court and hopefully in the next two weeks’ time or something we should be in there and then we will see what happens there of course in the Supreme Court matters of law gains precedence over matters of fact. So it’s a different approach that you take then what happened to the Tribunal. But the fact of the matter is that I am pretty fed up with this because to keep defending against rubbish charges like this for nine years is a bit much for even a man of my patience. So it only makes you think that instead of retiring at the age of 50 maybe 46 is a right age to retire.
Q: The one thing which the SAT ruling pointed out, your point about number of shares is taken, is that they kept harping on the fact that you took opposing trades and on that point they dismissed your plea, what is your response to that?
A: It is a straight forward thing. First and foremost there is no rule; there is no law in Sebi that you cannot be on both sides of the trade. Any number of trades be it a block deal, intrapromoter transfer, transfer from one P-note provider to another P-note provider with the hedge fund being on both sides of the trade. Intrafund transfers by mutual funds, any number of trades I can tell you in which unofficial ownership doesn’t change, and no Sebi regulation prevents that. But more importantly what we told SAT was very straight forward for that matter we told Sebi as well that what happens when you have a position at a certain broker, whose margin limits are getting full even today that happens. So the broker tells you, “please square up your positions here, take it elsewhere because my terminals are going to get shut off in the next few minutes or hours”, or he will simply do offsetting trade if you are 10,000 shares long in Reliance this here or 10,000 futures if that would be the case today. You would simply square it up here and you have an account with another broker, you simply offset that trade there by buying the same stock there. That is it. There is nothing more. It is simply a transfer of position from a broker to another on an isolated day when that particular broker’s margin limits are getting full and we have shown to the SAT as well as to SEBI, nine years back as well that these are the exact dates, these are isolated trades in a single stock. This is very clearly shown to have done at a market price, there is this insignificant volumes, all the stocks, each and every one of them trades in crore of shares and 5,000 and 2,000 shares don’t make or mar any price discovery in these stocks. More importantly, if you don’t agree with me then you tell me what I was attempting to do by doing this trade. You tell me, what is the benefit to me by doing this trade other than what I had simply told you that if margin limits are getting over here and you have to necessarily move the position or simply square it up but I want to hold on to my 10,000 Reliance long, what am I supposed to do?
I simply move it to another broker and these happened on very isolated instances, the volume here is insignificant. The price discovery is absolutely identical pre- and post-trend. What manipulation is this? If this is manipulation then everything I do today also is probably manipulation. It is absolutely absurd.
The beauty of this business is a regulator can spin out a charge out of thin air, it can simply say these are large transactions. Unfortunately, courts here look at law more than merits because of the fact that ultimately these are things that are decided by experts, people who are in the business or analyzing stock markets if you get a high court judge or supreme court judge, which is what I was thinking even in the Reliance matter, they are not equipped to get into the absolute the minutiae of a business transaction that is not there core competence. That is the competence of a regulator but when a regulator has the premeritated stance on this, there is very little you can do. So that is the simple fact that we told the court or we told the SEBI that what benefit is it accrue to us. We have done it transparently; it is in my personal name. Does anybody in the world do manipulation in his personal name? My account is open in the name of Shankar Sharma, it is not open in the name of some front entity sitting in Mauritius.
You telling me I am that stupid, I might be stupid but not that stupid that if I have to commit a crime I will do it in my personal name and with a fully disclosed member client agreement, which is known to the stock exchange and to the regulators.
So the fact of the matter is you can spin a fictitious charge out of nothing and I am supposed to defend it for the next twenty-five years. Fine, I will do it because I am supposed to do it and I will fight it but ultimately this is something that I don’t wake up all night thinking about. It doesn’t concern me in the least. All that matters to me is the next morning when you wake up, all your friends are still your friends.
Q: Where does it stand now? The last we heard the order was in abeyance till the end of November. By that time you would have filed an appeal in the Supreme Court?
A: Yes exactly.
article by moneycontrol.com