Going bottom fishing

Falling flat on one’s face has never been a deterrent to those who have chosen markets as their calling or even for those who comment on the markets for a living. At the beginning of the year, there are a lot of avenues, too, for those wanting to take a shot in the dark. The India Investment Conference organised by the Indian Association of Investment Professionals, a member society of the CFA Institute, is one such platform where investment experts come and state their outlook, sometimes at the cost of looking moronic in hindsight!

2011 has not been a pleasant memory for those who invested or stayed invested in equities. It must have been the same for last year’s panelists who had felt that 2011 would be a year of two halves — with the good following the bad. The only problem was the markets failed to follow the script. Those assembled at the 2012 India Investment Conference surely must have hoped that the soothsaying panel was on the money this time.

While Sunil Singhania, head, equities, Reliance Mutual Fund,  chairs the CFA Society in India, he was more than content to let the expert panel do the talking, preferring to watch the action from up-close. The panel was eclectic,  considering that it ranged from an economist to an outspoken market mind whose moniker seems out of place in a rather sultry country like India.

That said, investors grieving the loss of India’s trillion-dollar market cap have had some cheer in the New Year as the market continues to bounce from the depths that it had plunged to. After a 25% drubbing for the benchmark in 2011, it is up 6% so far at 16,466. Is this then a dead cat bounce or was the selling overdone to begin with? Shankar Sharma, co-founder, First Global, says that he is far less bearish than the biggest bulls and would not short the market at this level. He contends that “not only has the negative data and despondency been blown out of proportion, any positive data from hereon will only further buttress my stance.”

While the devil is surely in the details and the next set of IIP and WPI numbers due, Abheek Barua, chief economist, HDFC Bank, feels watching erratic IIP data is a futile exercise. His disdain is apparent, “I would take IIP data with a truckload of salt. The entire collection-to-processing mechanism is flawed, how can one make an assessment on flawed modelling?” Economists are well regarded for their indecisiveness but, for a change, Barua refrained from taking a measured stance. “The news flow from Europe continues to worry me as the Euro is a funding currency for our trade flows and there is a danger of a liquidity squeeze.”

Now, if the most pessimistic voice in a market discussion is that of an economist, that is surely cause for celebration. Or is it? Turns out that Barua had company in the form of Ashutosh Bishnoi, acting chief executive officer, L&T Mutual Fund, who harboured doubts  about equities rapidly coming back to favour. “Retail investors are keeping away as they still see consumption as more rewarding than savings or investment at this point in time. That needs to be addressed by either raising rates or lower inflation.”

While rates have peaked out on its own admission, the Reserve Bank of India (RBI) has come in for a lot of stick for its handling of the interest rate situation and more so of the rupee. Barua says the concern on balance of payments as well as FII flows were priced in at ₹50 and the damage from that point onwards till 54 was more an outcome of loose talk by Mint Street mandarins. While the rupee has seen a rapid reversal to 51, the RBI’s intervention, however, is showing up in depleting foreign exchange reserves, which have fallen by $27 billion since October 2011 to $293 billion at present — the lowest in more than a year. This depletion of reserves might just play on the RBI’s mind and stifle an aggressive lowering stance if there is no visible resolution to the European debt problem. 

While the ECB rate cut has failed to buoy sentiment there, to Sharma, this thought is a no-brainer as are all the other worries that the market seems to be up against. He says, “The rupee has nothing to do with interest rates; on the contrary, it might get a boost as the market starts to bounce back and begins attracting inflows.”

Navneet Munot, chief investment officer, SBI Mutual Fund, who parrots the much-known line about India’s structural drivers being intact, says that he would be surprised if there is no CRR cut in the RBI’s next meeting. “Despite the tightening cycle behind us, there is no liquidity. Banks continue to borrow one-year money at over 9%. We can’t have this kind of high short-term rates.” Sharma has his grouse, too. His fear is that from hereon it would take a lot of stimulus and very deep rate cuts to bring growth back on track.

Okay, fair point, but what if the RBI calls the market’s bluff and opts for very measured easing? And what are the chances of that happening? Manish Chokhani, an India permabull and chief executive officer, Enam Securities, thinks that could well play out as the RBI does not have the luxury of running monetary policy for the stock market. His explanation, “All FY12 budget projections are going to be missed and there could be some more populist giveaways.

In that circumstance, a very strong central bank might just not cut rates.” But would not a rate cut be a trigger to bring back growth and hence tax collections to fix the deficit? Chokhani’s answer, “With the deficit at 10%, the central bank needs to weigh if the rate cut would create enough incremental demand to cover the further increased deficit.” Bishnoi, too, feels that it is not the right time to cut rates as real rates are negative and one could see a lot of malinvestments. He says, “Due to high CPI, real return is -2%. In such an event why would any global investor send capital to India?” 

While at the beginning of the year, the market was 40% cheaper for FIIs, taking into account rupee depreciation, much of the flows in 2012 have come into debt, not equity, and who is to say the trend will not continue. Sharma, for one, says this anomaly could change anytime soon. “FDI money is coming in despite logjams. A 20% fall for domestic investors may not be attractive but for an FII, a market like India down 40% is too attractive an option to ignore.” Barua disagrees and says that the problem runs much deeper. “It would be wise not to expect an immediate earnings bounce post any rate cut. Many corporates were not hedged and have been badly hit by the slide in the rupee. Also, there has been not much rollover of short term Indian loans by European banks.” 

The overhang notwithstanding, Munot expects equities to give a double-digit return in 2012 if the Middle East and, in turn, crude oil does not blow up. Chokhani, too, is banking on a 20-30% bear rally and maintains that the next bull market peak should be around 2015-16. 

Sharma’s take is that 2012 could end up giving a positive return in dollar terms. But do not be surprised if Sharma does an about-turn three months down the line if the trend changes, for he has always advocated that in the markets one should not have a fixed allegiance to a point of view.