The markets rang out 2010 with solid gains in the last trading session of the year. Despite a slide early in the year on growing concerns about the Eurozone, most Asian equities came back strongly. The Indian market is poised for good gains in 2011 after rising 15% in 2010. With the government projecting the economy to grow at 9%, and record FII flows seen this year, India is set to outpace its peers and developing markets in 2011.
The Sensex closed the last session on a positive note closing above 20,500 while the Nifty settled at 6,134, about 220 points away from its all-time high that it hit in January 2008. Experts feel the Nifty is poised to take out 6350 in the first quarter of the new year and see a further upside of 8-10% from thereon for the next three to four months post scaling new highs.
According to Hemen Kapadia of chartpundit.com, 6185 is an important level for the market which will pave the way for it to scale new highs. "I have a feeling I think Monday is the time when the markets could just about peak for the time being, correct a bit and after that on the rebound when we take out 6185 I think then we are testing 6350 and if you take a view for the first quarter, I think if we take out 6350 which seems like a possibility at this point in time I wont be surprised if we would see a 8% to 10% upside in the next 3 to 4 months after that."
Amit Dalal, Executive Director of Tata Investment feels the markets are likely to remain in high expectation mood till the budget. He however sees large headwinds for the markets post the budget. "For the first two months we will have a better market than what we really think that it should based on concerns that we have on fundamentals. But the fundamentals will finally catch up with the market at some point and I am more concerned as the second and third quarter builds up into the system," Dalal said.
Below is a verbatim transcript of Hemen Kapadia and Amit Dalal's views on CNBC-TV18. Also watch the accompanying video.
Q: If the mood is upbeat till the budget, closing above which technical levels do you think it will pave the way for new highs?
Kapadia: We were in this range between 5700 on the downside around 6070 in terms of the Nifty spot. We are just getting out of that. Currently 6185 is important.
But I have a feeling, I think Monday is the time when the markets could just about peak for the time being, correct a bit and after that on the rebound when we take out 6185, I think then we are testing 6350 and if you take a view for the first quarter, I think if we take out 6350 which seems like a possibility at this point in time I wont be surprised if we would see a 8% to 10% upside in the next 3 to 4 months after that. Is that going to be sustainable? I don’t think so but that’s too far off as of now.
Q: What is the initial thought you have about the New Year ahead? Is it looking like or maybe a slightly shorter period or a more visible and predictable period of the first quarter. Will the first quarter be able to breakout of the headwinds that we see in terms of inflation, interest rates, political scams simply not seasoning and a certain lethargy in terms of reforms. Will all this keep the index pretty much ranged or do you think we have something else coming?
Dalal: I think the markets last year as you very rightly pointed out have given us a very good support and a great year for us to have built the base on. As far as the headwinds are concerned the concerns are quite large. I think those will perhaps become more to play out towards the end of the budget.
Till the budget I think the market will remain in high expectation mood. We are already closing this year or this week I should say with a far better market than what you would have thought two weeks ago. Technically I am told if you remain at these levels above 6060 you will see an upside in the market even further going forward.
So for the first two months we will have a better market than what we really think that it should, based on concerns that we have on fundamentals. But the fundamentals will finally catch up with the market at some point and I am more concerned as the second and third quarter builds up into the system.
Q: The fuel for this market came from the FIIs in the year that is just getting over – USD 29 billion or thereabouts an all time high. Chances are that there are going to be rival attractions in 2011. Already the last month showed some kind of tepidness and there are some who forecast that US equities itself would become very attractive and that would act as accountable. What are you expecting in terms of that getting replaced by domestic investors? We have had some mutual fund managers telling us that we could see practically a dramatically a different year in 2011 with respect to domestic investors because the core of SIP investors is growing as well those who invest in 2007 and got tired of waiting to reach even par levels have taken their profit or booked out of industry. Now there is a new core and more perhaps lasting set of investor who look at mutual funds as an essential part of their asset allocation? Whether domestic investors will be able to provide a shoulder to stock markets in the coming year?
Dalal: That particular argument in terms of whether we will be able to substitute FII interest in the market has been a case for concern for almost a decade for these markets. I do not think so. I think the FII flows still remain the backbone of the rallies and the backbone of making the market move either way up or minus.
Where the US market performance is concerned and allocation towards US market is concerned I think yes there will be more interest in the viewers market and perhaps in the western hemisphere than there was last year. But the kind of allocations we need are much smaller than what the huge allocations are made worldwide. I do not think that will disturb our flows.
Yes I believe that you will not be able to do IPOs of the magnitude that we did last year but with the same ease that we did last year, next year. But our flows will remain intact. It may not be USD 29 billion, it may be lower on an accumulative level but that will be sufficient for the marketplace.
Q: Do domestic investors come in at all? Are you getting a feeling that there is a certain maturity process that is underway and therefore you will not have these net outflow situation that is over and done with?
Dalal: I think those outflows are more of a systemic problem that has come into the mutual fund industry; it is more of a situation based on their own ability to market their schemes. It is not necessarily the investors view on market place. I think the investors view on market place and allocation to equity is becoming more and more professional in their thinking in a sense they do not want to take a stand on their own in the equity markets.
You see a large number of people saying I just want to give our money to good portfolio managers in mutual funds. So if you were to market it I think there are sufficient savings that can come into the system through these intermediaries be it mutual fund or portfolio managers.
Q: You were also quite positive on the entire IT space would you be preferring frontline heavy weights like Infosys and TCS or perhaps a midcap ones where there is more by way of a valuation headroom – your top picks?
Dalal: I can’t really disclose my top picks. But yes I think that largecaps have a great story to tell because they have this whole market in front of them which they are exploiting completely worldwide and they are doing a great job of growth so you really have the highest capacity utilisations now in these companies. You also have improving margins. When you come to the midcap if you are certain about a companies ability to retain people and not had attrition problem yes then there is a case to be made for evaluation and one should look at these companies.
Q: What kind of leads can you give within the banking space itself. Time was even we were used to giving much higher valuation to private sector banks and much lower to public sector banks – we saw that gap narrowing much in the year 2008 and for a better part of 2009 now will you start giving much more weightage to some of the public sector players especially those who have shown some inorganic moves like Axis, even ICICI. There is Bank of Rajasthan which went through a painful period of balance sheet consolidation and now on the path of growth so would it be a period of outperformance from the private sector banks?
Dalal: I completely agree with you. I think one should definitely look at that because the gap which has taken place on a price to book which has been reduced between the private sector and public sector has been substantial in the last 12 months and now the price to book ratios do not justify putting more money into the public sector.
One should go back to private sector. The NIMs are going to be under pressure for the banking sector on the whole and given that non fund base income is going to be very important. So that part of the business is best run by the private sector. So I would look at private sector banks.
Q: In the year gone by it is quite a sectoral divergence. You had banks, autos, IT, pharma doing well but on the flipside sector something like real estate, infrastructure stocks gave you negative returns- so now when we enter into the New Year and we have to make tactical changes to the portfolio which are the sectors you would think that the money would be flowing in and you would book out of?
Dalal: I am a little concerned on the auto sector mainly because the cost of money has gone up substantially. The EMIs have short up considerably if you were to buy a car now or even a CV so that is a major concern for demand on this particular sector. Where real estate and construction is concerned I remain concerned even now. I am not an economist but you can correct me or perhaps extrapolate on my thinking. M3 has come down and credit growth has gone up substantially.
To me that spells inventory levels having gone up in the system in some form or the other. The biggest inventory level going up is in real estate. Just tremendous unsold stock in the system so where that is concerned that particular sector itself spells considerable risk. Construction because the ability of the government to concentrate on development, to concentrate on what is needed in the country has gone down because of its own problems remains a concern. Therefore I would not put in money very easily or very quickly into this sector right now.
Q: In that case where would you want to put your money? Where do you think the alpha for growth is coming sectorally speaking?
Dalal: I would still remain with IT, pharma even NBFCs and certain private sector banks.
Q: It is confirmed news a proper announcement the came from ADAG group that they are changing their branding to drop the ADAG word but only keep the word Reliance. The markets are reading something into it. As a group would you get positive at all?
Dalal: If you take the businesses which are in the space for instance Reliance Infra, Reliance Power, Reliance Capital in terms of AMC business of its subsidiary. The Reliance communication all these three can do a lot more if they get the right kind of mix of capital and management from the Reliance Group. So if you were to make a scenario in front of your eyes that something like that could happen yes but of course we do not know if there is any confirmation to that.
Q: What would be your call on Reliance Industries? It has had a down year, the gas expectations in terms of volumes have not lived up and there were other issues in terms of margins as well. But would 2011 herald something different – would you be an early bird better on the stock because its telecom ambitions will also come into frusion before the year is out.
Dalal: I am positive on that particular company now. I think that they definitely went through their period of figuring out how they would like their capital to be utilised in the years to come. It is not something that you ignore for a very long period of time. Mr Ambani with due credit to him does have a history of very large and very successful execution. I think the next 2-3 years I am sure that he is going to spell out some strategy on how he wants to build up his base and it is time that one invest into that stock.
Q: What about midcaps? Will this be a space you will have the courage to bet on and will it be the relative outperformer at least in the first half?
Dalal: You have to be very careful when you invest in businesses and in companies because cost of money has gone up substantially and you can today put into a bank and FD – 9.5% for 12 months. Assuming that may not remain and it will come down.
You are still not going to have cost of money for borrowing less than 11-11.5% for the small guys. Therefore one has to be very careful when you select a company because you see marginal contraction, you will see earnings contraction in many-many companies in the next 12 months.
Source: http://www.moneycontrol.com/news/market-edge/mkts-to-remainfirm-ground-till-budget-2011-experts_509720.html
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