K R Bharat, MD of Advent Advisors, and global strategist Eoin Treacy of Fullermoney.com give their views on the markets.
Eoin Treacy of Fullermoney.com says that Monday's market fall was not surprising. However, Treacy does not anticipate a decline in the markets like it happened in May.
Treacy further states that a pullback to 11,000 would be surprising. Treacy advises to use pullbacks in India as a buying opportunity.
Commenting on the Fed, Treacy says that there could be a possibility of a Fed rate cut in early 2007.
KR Bharat of Advent Advisors views such corrections as good for the market on the long term. He further adds that the level of panic in the markets have gone high at this point of time.
Excerpts of CNBC-TV18's exclusive interview with KR Bharat and Eoin Treacy:
How would you view yesterday's fall? Would you view it as a beginning of a bit of a down turn or would you view it just as one off?
Bharat: What I have been yearning for, as a long-term investor, if I had no exposure in India, would be a healthy correction where I could sort of come in and buy aggressively.
So to that extent, I view any correction coming in at these levels as something, which is good for the markets in the long-term. I also think that the level of panic in our market has gone quite high, particularly because of the sharpness of the fall that we saw last time.
A lot of retail investors burnt their fingers and so at the first sign of something like this, they seem to want to exit in large numbers.
Are you saying that a fall like yesterday is attracting new money into India; is that happening?
Bharat: I don't think that a 350 point fall on a particular day will do that. Globally, again there seems to be concerns in the US, the consumer spending number that we will see will be much higher than expected, which means that once again, inflation and interest rates will go up; those issues will come up again.
My point is that if there is any increase in interest rates in the US, and if that triggers a correction in the equity markets in emerging economies, I think that will be a fantastic opportunity for long-term investors to come in and buy.
So to answer your question, I think if there is a reasonably sized correction, then I think it will be very healthy for the markets in the long-term because then the path towards a more aggressive Sensex target will be less sought with danger.
How do you map this market against those global cues that you talked about, are you getting the sense that flows have become perhaps more sensitive to risk at this point with a small shift in perception to risk, they are more likely to take their foot off the pedal?
Bharat: That is a very valid point. The other point, which is of slight concern; I don't know what kind of numbers one will get of net FII sells for yesterday, but I suspect the number will not be large, which means that just as the rally was liquidity driven, the correction also seems to be liquidity driven. This means that there is no support for this market.
It is very thinly traded and a relatively small amount of selling seems to have triggered a fairly aggressive fall in the market, that is probably a greater cause for concern. I think, overall even within the emerging markets spectrum, India is still viewed very positively and I see no reason for that to change in a hurry.
How did you read the sharp correction that came into our markets and in the short-term or even medium-term how would you chart out the next course for this market?
Treacy: I wasn't surprised by the fall in the Sensex yesterday. We have been looking at 12,000 as an area of potential resistance. Very simply put, it had rallied from 9,000-11,000 and fallen back to 10,000 and then rallied back to 12,000. So there was a rally of 2,000, then a fall back of 1,000, then again a rally of 2,000. And there is a reasonable assumption that we might have seen something coming up a little bit and we saw that yesterday.
The important factor is that we are in a little bit of risk. But it is nothing like the kind of risk that we would have been in last May. I don't anticipate anything like the declines that we saw then. On the other hand, the pullback to 11,000 would not be very surprising.
But the very important thing here is that, last week I was talking about a possibility of a rate hike in the US, but that seems very unlikely. I would not be surprised if we see some rate cut into the early part of 2007 and I anticipate that next year, we will see a very good year for the stock market. But every pullback in the Indian stock market should be used as a buying opportunity.
What makes you think there will be a rate cut next year?
Treacy: I think there is a strong possibility that there will be a rate cut purely because we are looking at a housing slowdown and the Fed will do whatever they can, with whatever tools available, to make sure that we will not hit a recession next year in the US.
As you chart out the course or even look out into the next few months, what is the biggest concern for this market? Is it the interest rates or is it the way commodities have been moving or is it what a lot of analysts have said this time around in Q1; that perhaps we have seen the best of earnings?
Bharat: I don't think we have seen the best of earnings,
They are talking about the future being better than the past. Personally, I think that as a nation we are not realising our full potential, we are not investing money in infrastructure, we are not laying the foundation for a consistent 8-12% compounded growth in the economy for the next 5-7 years.
I think we are too short-term in nature; not only the policy makers but even here, when one switches on to a financial markets-oriented channel, everybody is talking about tomorrow and day after, nobody is talking about 6 months or 2 years forward. We are just too short-term in nature, 350 points fall triggers panic, and it triggers debate.
But nobody is talking about what we need to do as an economy, to grow at 8-10% compounded for the next 5 years, what kind of investments are required across various sectors of India and where this money will come from. And therefore, as a corollary to that, what kind of policy changes we need to make.
As Eoin Treacy spoke about the US Fed doing everything to prevent the recession, some people today are saying that we are seeing the end of the five year commodity bull run because we could be seeing a slowdown again. Is that a concern at all or you don't buy that?
Bharat: It is a concern. I think at least in case of the base metals, the bull story seems to be getting over. And therefore there will be fallouts of that but coming closer home to India, I think that the Indian economy is extremely resilient to a lot of the external factors. The external factors tend to have a short-term effect on the overall direction of the Indian market.
Aren't you worried about the slippage in the fiscal?
Bharat: I am extremely worried about that. But then, if one does nothing about it, then the cause for concern grows. The fiscal is not a concern by itself but it is a concern, if no measures are taken to either combat it or to counteract it. I think the best counteraction to the deteriorating fiscal is to accelerate economic growth through long-term measures and that is what I am hoping to see.
Technically, what would you set out as a band for this market? When do you get concerned that the trend might have actually turned around and we might be sitting on a situation, which is like May?
Treacy: I don't think we are in a situation like May at all. I don't believe that's really on the cards. If we were to see something like May then dynamics that we saw yesterday would have been twice as big as it was. And even though it was psychologically important for people, I don't think we will see much more correction.
I don't think we are anywhere close to the high in the commodity bull market. We may be in a cyclical high but on a secular basis, over the long-term, I think commodities will go quite a bit higher than they are today.
And if there is any threat to how well the Indian stock market will do over the long term, it would be commodity prices. But I don't think that will be a very big threat. And I think that's probably the only threat.
What are the chances of this market taking out its old high. Can we actually see that within this year?
Bharat: It is quite possible to see that within this year, however, I think that the market will probably test lower levels first before taking out the high. And I think if that happens, then the possibility of the highs being taken out aggressively and conclusively is much greater.
I would rather see this market unsuccessfully test 10,000 first and then test the high rather than the other way round. Because if it tests the lows first, then the probability of the highs getting taken out conclusively is far greater.
You said that the market reacts very short-term to external factors; it is largely an inward looking market, so what kind of sector would you be looking at? Would you be betting on sectors like IT, which are using the domestic markets for the external world?
Bharat: I would be betting on anything connected with services, with infrastructure and with the building blocks of the economy going forward. So it would be services, IT, infrastructure and pharmaceuticals; where it is R&D oriented.
Because the direction that the Indian economy seems to be going in, I see huge growth in these areas. I think that any company that is entrenched and that has an orderbook for the next two-three years in any of these sectors, one will see unprecedented growth in them.
That takes me back to my old pet theme of midcaps because a lot of the better known companies are very well researched. At the second rung, there are companies that are doing so well. And they haven't even come to light, a lot of analysts aren't even aware of the existence of some of these companies. So I think the future is very bright for somebody, who is investing in the Indian market on a long-term basis.
But when we have a market at this level, one must be prepared for volatility, one cannot have a one-way growth and one cannot have a market at this level without volatility. So if one has a brave heart and if one is long-term oriented, then one should sit back, be patient, enjoy the ride and make a lot of money.
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