Experts differ on Indian mkt outlook

Sanju Verma, Executive Director of HDFC Bank said the volatility levels in the market were very high. She sees Nifty in a broad range between 2500-3400. She said that the market was trading at around 10 time earnings and added that the market traditionally bottoms out at around 9 time earnings. "It clearly shows that while we may not be at the bottom, we may perhaps be close to it." She expects the markets to recover soon as it is very close to its bottom. 

However, Ashwani Gujral, Technical Analyst does not share a similar view and feels that if 2860 on the Nifty is breached then market is likely to retest the October lows and added that he does not expect 2860 to hold.

Verma has lowered her India GDP growth estimate to 6-7% versus her earlier expectation of 9% but does not however, think those are bad numbers.

“India still trading at a premium to most of its emerging market peers.”

Gujral is bearish on Reliance and Bharti Airtel and Sanju Verma is bullish on L&T and Punj Lloyd.

Q: A lot of levels have been talked about in these past few days, what are you working with for the market, not just for today or tomorrow, but what do you think we might do by the end of the year?

Verma: In the immediate-term, derivative indicators give some sense of what we can expect going forward. Given the unreasonably high smart money ratio, which has indeed come down all the way from 81 levels, but is still at about 51 odd, both the put and call imply that the volatility is again at a very steep 60% or thereabouts.

If you take all this into context, then clearly there is reason to believe that the Nifty should gyrate between 2,500 and 3,400. That is a wide range, but that is what it looks like taking the F&O indicators into account.

However, from a long-term perspective, two or three things that need to be put in context are:

The index P/E multiple, which for the last 15 years on an average has never been below 15 times is currently at about 10.5-11 times. Given that the Indian markets in the past have bottomed out at a P/E multiple of between 9-10 times, it clearly shows that while we may not be at the bottom, we may perhaps be close to it.

If past is any precedence to go by, then we are more or less at trough valuations. For those who believe that we are very much coupled to the US, then there is good news on that front as well. Since 1923, the US has had 14 recessions and the trough valuations for the US in each of these 14 recessions has bottomed out at 11 times. Today, the Dow is again trading at 10.5 times, which means that the Dow is also trading very close to its bottom.

So, taking all these factors into account, for those us who believe that we are coupled to the US, the US should recover, if is not for any other reason, simply for the reason that if you strip out the banking sector, then actually the earnings for S&P 500 have registered a 15% increase. If you include the banking space, then there has been an earnings decline of 6% in the last quarter in the US. So, barring the banking space, things are not rosy but they are not as bleak as some of us would have others believe.

Coming to our markets, the only thing that could be a bit of a dampener is that we are still trading at a premium to some of the other emerging market peers like Brazil or Russia, which are trading at 8.5 and 4.5 times. Compared to them; at 10.5-11 times India looks marginally expensive.

The IMF says that the world GDP growth will only be 2.2% in 2009, out of which the US will actually show a de-growth of 0.7%, emerging markets will grow by 5.1% and the leader in the space is going to be India, which despite all the brouhaha about a high fiscal deficit and current account deficit is expected to notch a growth of 6.3%.

So, my point is that the days of 9% GDP growth may be over. But 6% or 7% of too high bases of 9%+ that we saw in 2007 and 2006 is not bad by any stretch of imagination. The only thing that has played spoilsport and could continue to be the wildcard going forward is the rupee-dollar rate, given that we have something like USD 51 billion worth of ECB, FCCB and other short-term loans that will come up for refinancing over the next 18 months.

Q: Does this qualify as a complete reversal or a breakdown or you would still watch to see if last week’s lows are holding or not?

Gujral: The negative for me is that the market was unable to go beyond 3240 and the pullback that we were expecting which would go out 3400-3500 has terminated midway. The trend-line, which started from 2,250, went through 2860 and today got broken at 3050-3060. This is a sort of descending triangle where the base is at 2860 and the tops are getting lower. So chances are that sooner or later the demand at 2860 will get exhausted and the market will go through those levels and then the market will approach 2500 to 2550. So in case 2860 breaks down, then it is pretty much going back and retesting those lows.

Q: Is it clear for traders right now as to which direction they should be moving? Would you play for a short on this market or are you still waiting and watching all those levels you are talked about?

Gujral: Today was good day to go short once 3,050 broke down and there was no reason to cover shorts once the market ended at its lows. Probably once 2860 is broken, fresh shorts may come in but certainly people should have gotten out of their longs due to the way things have collapsed today – 8-9-10% - this doesn’t sound like some consolidation or some correction of the previous upmove. We have basically given up all of yesterday’s gains and some more, which is called bearish engulfing. So when that happens, the chances are very low that this would hold 2860 now.