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See 2-4% further downside for mkts: ODL Sec

Posted by Yogesh on Tuesday, 7 October, 2008

Sandy Jadeja, Chief Market Strategist and Head of Global Training, ODL Securities, sees more downside in October. “The Nifty and Sensex can bottom around 3,200-3,400 and 11,200 respectively. So, we are looking at around 2-4% further downside.”

Sanju Verma of HDFC Securities said the global banking crisis has manifested into a financial market crisis.

She expected the market to bottom last week but that has not happened. “Investors will start discerning the good from bad after the dust settles.”

Here is a verbatim transcript of the exclusive interview with Sandy Jadeja and Sanju Verma on CNBC-TV18. Also watch the accompanying video.

Q: What’s the sense you are getting after this relentless selling, is the market looking like its steadying at all?

Verma: We are more or less down with the time and price correction. We have lost about 8% since last Tuesday and I was wondering whether I had jumped the gun and is there a need for me to revisit my so called bullishness. If I were a trader, I would have cursed myself because every penny counts but from an investment perspective, I still stand by two things. The events in the last couple of days have pointed out to two clear things, which have not been discussed. The crisis in the US, Europe, Denmark, Netherlands is the banking crisis, which has got transformed into a money market crisis and is now manifesting itself in terms of a stock market crisis. I am not surprised because US for instance, the credit to GDP ratio is a whopping 250% ditto for the UK and a couple of other Euro-zone economies.

In India, the credit to GDP ratio stands at just about 60% while a high credit to GDP ratio is an indication of the fact that the economy is expanding, financial intermediation is happening and consumption and investments are getting their requisite boost. Too much of anything is bad, and a very abnormally high credit to GDP ratio is an indication that banks are overleveraged stretched to the hilt and the economy is overheating and that is precisely how the whole thing is held itself in the so called developed markets because of the 200% to 300% credit to GDP ratios. The banking system is overstretched for instance in the US, banks accounts for about 30% of S&P 500 profits before this crisis happened and about 25% to 30% of the GDP. So, I am not surprised that the very magnitude of the banking sector has had a huge repercussion on everything from the real economy to the stock markets.

The reason I continue to believe that once the dust settles down and logic finally prevail, people will start discerning the good from the bad and that is when we will get investor confidence back because today it’s all about a money market crisis and I don’t think we have a money market crisis here. Unfortunately the stock markets have tumbled but that’s for a different reason, that’s because of the currency depreciation about 17% year to date and 8% in one month alone. So, the problem is very different here from what it is in the developed markets and in the US which has been in the epicenter of this financial meltdown and surprisingly the best performing developed market year to date in terms of stock market performance. So, my point is that too much has happened in terms of things not really behaving in a logical fashion but sooner than later if fundamentals and logic were to prevail, my personal sense is if this is not the bottom, we are perhaps close to it.

The other interesting point which I want to highlight, which I have gathered from my discussion with a lot of fund managers that I speak to across geographies is that the mortgage to GDP ratio which is the basic mortgage debt outstanding the percentage of GDP, the mortgage to GDP ratio in UK is as high as 90%, in Ireland at about 70% to 80% and again about 80% in the US, the mortgage to GDP ratio in India is barely 3%.

Q: What do you do with midcaps now, the stocks have lost about 40% in the last couple of days and how would you approach that space in the carnage that’s going there?

Verma: I have always maintained that it is less to do with midcaps because in this carnage having lost 60% in dollar terms for some of the larger companies, a lot of them would become midcaps but the fact that there has been erosion from their market cap doesn’t take away their fundamentals. So, I would be buying into a given sector and buying into certain companies in that sector. Just to put a point across, for instance I still wouldn’t be buying into IT companies despite the fact that Infosys or TCS after a stupendous correction are looking mouthwatering. I would still resist them but for Instance look at Tanla Solutions which is a midcap company, somewhere in being a full fledged IT company and a telecom play. I would take a serious look at it or for that matter a Punj Lloyd as well.

It’s true that capital good stocks have corrected more than the broader indices and L&T and Punj have both fallen but despite that Punj still continues to trade with a steep discount to an L&T. So, would I go ahead and buy Punj Lloyd, perhaps yes because it is trading at a steep discount even in terms of market cap to order book. It’s very stock specific and sector specific and less to do with being classified in a particular genre be it a midcap or a large cap.

Q: We have had extremely rough couple of sessions. What are the Nifty and Sensex indicating to you right now?

Jadeja: It still appears to me as I said previously that the major patterns – the five wave patterns – haven’t been completed on either of the indices, and that is global indices and not just local indices.

So, we may see further downside at least until the end of October. What we really need to look at right now is that the average daily ranges are increasing. In other words, it is getting quite risky for short-term traders. Margin requirements are likely to increase in the coming months as well.

We expect further volatility. We may not see a firm low until the end of this month or the early part of next month.

Q: Do you have any levels in mind for the Sensex and for the Nifty, which could be possible bottoms in October?

Jadeja: On the Sensex, we are looking at 11,200 as a key level and on the Nifty we expect the level to be at around 3,400-3,200. These are broad figures. We have taken the previous move on the downside and then multiplied these by the Fibonacci factors and that is where you tend to get these support levels that really tend to work out quite nicely.

So we are looking at about another 2%, possibly even 4% on the downside. We do not see the capitulation that we are expecting in the market moves and that is not seen anywhere worldwide at the moment. So, until we see that, it is very difficult to give you very firm levels to say that this is the bottom. Along the way what tends to happen is if you look for support levels, traders come in, they buy at the support levels only to realise that they are getting stopped out. It is only because that these support levels are weak. So, percentage-wise we are still looking at between 2-4% downside on the indices.

Q: How much more pressure do you see in a market like the Dow for example, which crumbled below 10,000?

Jadeja: Dow at 10,000 we understand is just a psychological figure. We had marked out 9,870, as a key level. At the time it just didn’t seem as if the Dow would get there. The market tumbled 800 points, and we saw a clear rally towards the end of the session.

I would like to have see the Dow close above 9,870. In fact we are way above that figure right now. Today we see some volatility in the futures market. We were down some 115 points about an hour ago and we are now up 68 points on the futures.

So, what is happening is a lot of traders are looking for the momentum and are also looking for consolidation in these areas again before we start seeing an up thrust.

A lot of traders are unwilling to do business. Nobody wants to buy, or sell. They are unsure. So, there is just no confidence out there. Until we bring confidence back into the market, it looks like we are going to see uncertainty.

If the Dow starts falling from 9870, which sounds extreme, one will see capitulation at 8,700-8,900 levels.

None of the momentum indicators are pointing up, and all technical indicators are still pointing to a negative arena. So, it is still looking bearish to me. Even if we get a rally for 2-3 days, I think the short sellers are going to come back in.Source Moneycontrol

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