Experts see retest of Jan lows
2008Experts see retest of Jan lows
2008-05-24 11:21:28 Source : News Bulletins/CNBC-TV18

http://www.moneycontrol.com/india/news/market-outlook/experts-see-retestjan-lows/06/20/339504


Ramesh Damani, Member, BSE, said the markets are likely to re-test January lows again. "We don't see any great value bargains in the market currently. The Sensex is likely to challenge the bottom of January again. There are macroeconomic concerns on inflation and rupee front. Q2 results are likely to be worse than expectations."

He advises investors to look at sectors that will benefit from the shift from road to rail transport. "Railroads may come back into market favour after 60-70 years."

R Sukumar of Franklin Templeton said the markets are likely to see more negative news than positive for the rest of 2008. "We may have seen the worst but the markets can re-test lows. We will see more stocks falling than rising and flight to quality stocks. Economic growth momentum is likely to slowdown to around 7.5%. Corporate earnings momentum can also slowdown to below 15-16%."

Excerpts from CNBC-TV18’s exclusive interview with Ramesh Damani and R Sukumar:

 

Q: What’s your sense, more downside from here given the kind of news flow that you have heard? Are we still going to grind in a range?

 

Damani: The perfect storm since the last four years has become the perfect nightmare. The global macro economic picture has deteriorated significantly since January. At best, we would test the lows of the market and probably break it sometime in 2008.

 

Q: You see that happening in a hurry because in the last few weeks we have actually seen a nice little upmove in global markets. Do you think you are going back to January-March lows?

 

Damani: The global economic picture has deteriorated badly, particularly in India. There is a lot of opinion among analysts that the government has taken its eye off the economy and is focusing on the election instead. Generally, good politics doesn’t make for good economics and we are bearing the brunt of that. Decisions to be made with the economy in mind are being held up because of an election that is due perhaps in the next 6-8 months. It’s hard to be optimistic at this point. The Federal budget deficit is completely out of whack and so is the inflation and rupee. Therefore, the test case for the markets would be the Q1 results, which are due in July sometimes, and the markets will be disappointed with the results.

 

Q: Are you quite as skeptical after looking at the kind of macro newsflow which is coming in, or you are more confident than that?

 

Sukumar: The news flow through 2008 will have more negatives than positives. The market bottoms out much before the news flow and probably we have seen the worst in the first quarter. There is some possibility that we might test the lows. In general, we would be trading above that level on a whole. There will be more stocks going down this year compared to stocks that are going up and there will be a flight towards quality.

 

Q: You don’t see the possibility of things worsening more. You are saying that things will be bad for a while but the bad news is pretty much in the price?

 

Sukumar: Both earnings and economic momentum will be negative. The GDP growth will flow down to its sustainable level. It’s been a growing above trend. At the current state of savings and infrastructure, the economy should be growing anywhere around 7.5-8%. So, it will go to that level. When it goes to that level, it might also undershoot for some time. Similarly, the corporate earnings sustainable level is 15-20%, and it has been growing above that. It will go to that band and there is a possibility of undershooting for some time. So, both the corporate earnings and the economic growth momentum are going to be negative.

 

Q: What convinces you that the best case scenario is the re-test of January and March and probably the base case scenario is worse than that? You don’t agree that we have put a bottom in place and what we are now seeing is just a timewise correction as some analysts seem to think?

 

Damani: It is unlikely. We have had four years of a great bull run. Most analysts and investors are looking and driving by the rear view mirror and not looking ahead. While bull markets know no top, bear markets know no bottoms. There are a lot of access valuations still. Even if you knock the index down to 16,000, and 4800 on the Nifty, which is the often talked about figures, and if some calculation is done for time sales of the companies going forward or the PE ratio’s of some of the A group companies, we can see that they are great value bargains for investors around.

 

There is always a price to be paid for the excess that has been created in the corporate market whether by ECCB loans, diluting equity, or by building in rosy forecast. The bulls are going to come back in the next few months. The market will stage a struggle at this point, but the odds are good perhaps. We will be probably more confident after the Q1 results are out. It they reflect a sustained slowdown that we have seen, then we will be more confident. The index will aggressively challenge the bottom which we have in place right now.

 

Q: Do you expect Q1 to be a bad quarter than Q4? What we have seen so far has been okay and there hasn’t been a mark disaster or anything like that, but do you see or expect more scars in the first quarter?

 

Sukumar: From the operating front, profitability has worsened and it’s the question of when the companies recognize that. Its very difficult to say whether its going to be Q1, Q2, or Q3. Clearly, we have to see a slowdown in earnings growth as well as contraction in margin reduction and return on capital on a cyclical basis. So, it will happen in the next few quarters. It is very difficult to say which one.

 

Q: Crude is trading between USD 130-135 per barrel. Is that the most important reason which is making you bearish or just one of the reasons?

 

Damani: That’s certainly is a very important reason as there is a trillion dollar difference at USD 125 per barrel oil. The wealth is leaving the wealthy and is coming into the West Asia. To put into perspective, the market capitalisation of NYSE is about USD 14 trillion. So, it is basically about 8-9% shift in the market cap in one year. In three years, its 25%. This is a tectonic shift. How do you deal with these numbers, how does a popular elected president in America deal with this kind of a cash flow going out of the pockets of Americans to the pockets of West Asians. It creates geo-political tensions which is never good for financial markets and the economy itself. It goes through a huge after shock with this kind of oil. In India, we are still driving carelessly because the Government of India is philanthropic and subsidizing oil for us, while it should be at market prices.

 

The actual pain of gas at USD 4 per gallon can be seen pain in America and some other parts of the world. We are not going to escape it too long. We might escape it till the elections. If you see the co-efficient of how dependent India is on oil, on a scale of 0-100 we are at 95, whereas a country like Japan is at 60 and France at 65. This means that we need an agenda to push for nuclear energy at breakneck speed and here we are looking at a gift in the mouth. We are actually turning down a great deal from the US Congress, rather than making tough decisions that the economy needs. Because of the elections, all eyes are now diverted to New Delhi and elections don’t make for great time in financial markets.

 

Q: How worried are you about oil and do you think the equity markets can take this kind of an oil spike in its stride this year?

 

Sukumar: The oil spike is going to be negative this year for equity markets, apart from affecting the economy. There is a lot of money going into the commodity markets, which would have come to emerging markets otherwise. So, there are two types of issues because of the oil price increase. I don't think there is a structural issue, it might be viewed as a cyclical issue. It will pass off probably in a year or year-and-a-half because once the demand for oil stops then prices will soften and people will probably forget about this. But it won’t become a non-issue. It will also not be one of the important issues in about 18 months time. So, it’s mostly a short-term worry.

 

Q: How do you play it from a market point of view, because while it has been a big worry for the market overall, a lot of these upstream exploration stocks like Cairn have gone up quite a bit, though they have corrected towards the end of the week? Is that a good or a risky place to be?

 

Damani: It probably is going to be the biggest worry in equity markets in the next few decades. According to Herbert’s theory, global oil is at the point of peaking either this year or in the next two years. About 20 years from now, oil will be significantly lower than it is today. All sorts of important conclusions have to be derived at, including talking of an end of an era which we saw as progress as the central part of it. It’s very important and it is not going to go away. There might be an intermediate top for oil. Certainly, if you look at the longer-range supply and demand aspects, oil is headed much higher. Therefore, oil exploration companies are a great place to be in. Some of them might be expensive, so buying them right now is not advocated. Anyone who can get oil faster or any technology that can move to green energy sources would probably be places where investors might be looking for. So, the trendline for oil prices is significantly higher.

 

Q: How are you playing the inflation theme right now because interest rate sensitives for fear of further spikes or tightening of monetary supply like banks, real estate, even autos have been consistently underperforming? Are you worried about even more interest rate tightening from here and the inflation situation?

 

Sukumar: Both inflation and interest rates have a scope of moving up from current levels. It’s definitely going to be an issue in the immediate future. The best way to play that is by being in companies which have a strong pricing power. So, they will be able to pass on the inflation and inputs to the customers. That’s one of the reasons why there will be a flight to quality because the pricing power is not uniform among companies. There are some companies who benefit when there is increased momentum in the economy and others who can survive in any type of economic conditions. This is the time when the mettle of the companies will be tested. Some companies, which have pricing power, will be able to sustain profitability and a few other companies will see a dip in profits. The best way to play is to analyze which companies have the pricing power and which can continue to grow under current circumstances and stay with them. We find enough of them in many sectors.

 

Q: What about FMCG, and consumer staples? Hindustan Unilever raised prices between 3% and 28% this week. Do you think FMCG has pricing power? Can it benefit from an inflationary environment?

 

Sukumar: On a relative basis, it can outperform. The absolute performance is not going to be very different this year compared to last year. But when other people are facing some much of uncertainty, this definitely looks better under current circumstances. The most preferred stock for us in the consumer sector is Nestle, where we have substantial holdings in many of our funds. In companies like that, margins are not seen affected because of input price increases.

 

Q: What’s the best place to hide, if your call is that we are in a bear market? Where do you hide in this kind of high inflation, interest rate, and crude oil price scenario?

 

Damani: It’s a tough market. What I have done primarily is raise cash, and I will wait and see how the market unfolds. As the great master Warren Buffet says, “As you see the price of oil is creeping up, so the trucking industry may not have that kind of benefit.” But he has bought railroad Burlington Northern because they have a transcontinental line which is irreplaceable plus goods will shift from roads to rail. So, perhaps you want to look at the kind of sectors that benefit.

 

We have great network of railways in India and there will be great places to find bargains in that sector because it’s gives a comparative advantage. So, we have to start looking at oddball theories to find companies that can have pricing power, be it inflation as Sukumar said or have a comparative advantage in the time of rising oil prices. That’s the way to be and Warren Buffet’s purchase of railroads is signifying that the price of oil would remain high and railroads will finally come back into favour after almost 60-70 years. So, that’s something to think about at least.

 

Q: The one sector, which has disappointed this quarter in terms of earnings, has been capital goods. There have been a lot of margin pressures there. Is the infrastructure and capital goods sector turning a bit more cautious?

 

Sukumar: There is going to be a lot of margin pressure and this is another case where the company with better execution skills is going to protect margins compared to others. There are two reasons why margins are going to be under pressure. One is of course the cost increases, some contracts might not allow full passing on if the cost increases. In order to increase the order book, a lot of companies bid for orders at pretty low margins and that’s also going to affect margins going forward. So, we are going to see some margin pressure.

 

Q: Where are you most overweight now, how have you reshuffled your portfolio to wade through 2008, which it’s going to be a difficult year for many companies and most stocks?

 

Sukumar: Whether the day is good or bad, one should really position oneself. So, some negative things don’t erode the value of the portfolio substantially. We have always been positioned fairly conservatively as compared to most of the peer group. Last quarter, our weightage on some IT stocks have gone up, within banking we have become more conservative on stocks with higher volatility and profits. We have cut our weightage and put it in more solid counters. Those are some of the changes that we have made in the last few months.

 

Q: The whole reasoning behind the recent rally or the pullback that we saw in our market was that global markets might have bottomed out. The bad news was all in the price and we have put a global bottom in place, do you agree with this hypothesis?

 

Damani: A lot of analysts have not come to the market. They had come to the market in 1998-2000. So, their experience goes back to five-seven years. Fortunately or unfortunately, I am much older and have seen the markets in the 70s. I know what inflation can do to corporate balance sheets and to the market. There is only so much that the Fed can do. Everyone assumes that Fed or governments will come and bailout the economy will come and bailout the economy, but economies have to go through their own pain or cycle.

 

We have been avoiding serious pain in the economy for the last decade or so. We have had almost supercycles since 1980 with commodity prices falling, interest rates falling, and great growth in emerging markets. The market will now have to adjust with new realities. Food inflation might be there for the next three-four years, it may not go away for the next six months.

 

Oil is permanently going to get a higher plateau. There will be whole new generation of innovation coming on and in the meantime, the market will have to trade water. It’s hard to be too optimistic in the face of this. There are always bargains available in the market. A lot of the midcap stocks look fairly okay. But, there are no expectations of 25% earnings compounded in them for the next five years. The results should be lumpier than linear and as a patient investor, I will hold on to it.

 

Q: What is the market telling you? Is the technicals, or internals smacking of a bear market to you?

 

Damani: It does. The volumes have been fairly low. So, one day you are going to have high volume sell-off in the market. Typically, there will have to a bellwether event that will take place, either a completely bad set of numbers from a bellwether company or some sort of economic policy going to be completely stray like inflation number or federal deficit number, budget deficit number that will absolutely spook the market or just be the case of excessive valuations bringing down the market.

 

There are a lot of excessive valuations with A group stocks. Markets has been telling that something has changed between January and now, it’s not a time to go out and be a hero. It is time to protect the capital that you made in the last four-five years. After every bull market there is a bear market but its also true that after a bear market there will a bull market. One just has to position oneself for that and sometimes one just has to ride out a bear market. It’s just that one has to lower ones expectation towards returns and realize that what has happened in the last five years is unlikely to happen in the next one-two years perhaps.-05-24 11:21:28 Source : News Bulletins/CNBC-TV18

In my humble opinion this market has only students and no experts. People are entitled to their own opinion and have a right to independent thinking. Markets react to unknowns and not the obvious.

Originally posted by pramodjain Patience and strategy lead to good investments If you dig in the same spot long enough, you'll eventually find water, goes an old saying. But many people dig in one place for a while, and then get impatient or distracted and start digging in another place, and then another... When they don't find water in any of those, they blame their luck. It's surprising that more people haven't figured out the simple trick. Of course, there's no denying the importance of choosing the best place to dig in the first place. Fact is, it's very difficult to predict equity markets, because there are simply too many variables involved. Drifting from one investment to another without any strategy will not help anyone reach their long-term goals. It amounts to digging in too many places for water. If there's no strategy for achieving goals, it may never happen. Remember, if something seems too good to be true, it probably is.  Schemes which promise stratospheric returns deserve your skepticism

Nice article.

There's one more Don't let market moods swing your focus, invest with a clear goal in mind


And more importnantly as per Richard Pzena: "I believe the biggest way you add value as a value investor is how you behave in those down-25% situations. Making the right decisions at those moments adds more value, in my opinion, than the initial buy decision."

Last week's market fall were attributed to high crude prices and global selloff pressure. But we see lot of strength has build up in the market, I personally think Indian stock markets will bounce back during May’08 or in the coming months, Why?

1. Stock Markets are driven by human beings & every movement of the market is decided by what most of the people thinks or does, so we can assume stock market as a “human being with feelings and emotions, with their own minds”. Now, tell me if I keep telling you same story every day from last 4-5 months, like there will be slowdown in US due to subprime or credit crisis or inflation is high it will impact our GDP growth or Crude is hitting higher and higher so on……after sometime you will not listen to me or at least not react with same intensity as you did first time. Mostly you will try to ignore my statements until you find something new or something unheard about it. So, what does it means, it means stock markets are looking for “something new” and until it get something new it will not react.

2. During last 5 years we never use to have 5 months of down turn in equity, everybody has money (Arab countries guys with lots of profit from rising crude are looking to deploy their cash) but all are waiting for the right time, and remember they will not be able to spot the bottom or top, so all those people holding cash will jump into the market when they will see market recovering, which will further push the market upward. So, it is just a matter of confidence building by the investor community in the market.

3. It is well knows fact that commodity prices are high, and that too because of China. After the Olympic in Aug’08 we can see demand coming down, this is general thinking, speculation by commodity traders are also contributing to higher commodity prices, so we can see these speculators winding their position before Aug’08 itself which will lead to cooling down of commodity like Crude, food and metals etc. Hence equity will rise due to lower commodity prices.

4. It is very clear now, that only two types of people are making money now days, 1st are commodity traders and 2nd are Oil producing countries. These people very well knows that prices of commodity has hit the roof and anytime it can breakdown, once such thing happens, these speculators will look for cheap asset which is equity now, Arab country investors will pump money into equity of emerging countries like China/India or BRIC which will help in resuming bull run again.

5. Soon, Anil Ambani is coming out with his tower business IPO, he is well known for investor friendly (remember the bonus of reliance power), so this will help in building investors confidence in the stock market again.

No doubt that by year’08 end we can see our stock markets crossing their earlier peak and things will back to normal.