Speaking on the current rally, S Naganath, President and CIO, DSP BlackRock Investment Managers, said the road ahead will be a little more bumpy and in that regard, therefore, this rally probably will be peaking out right now. He, however, added that maybe a mild correction will be back up.

Agreeing with Naganath, Vetri Subramaniam, Head of Equity Funds at Religare Mutual Fund, said looking at the markets already rallying about 35%, “one is somewhere in that territory where one should be looking for it to top out rather than to keep extending.” He said, “I would tend to fall in the camp which says we are pretty close to some sort of a peaking pattern over here,” he said.

Here is a verbatim transcript of the exclusive interview with S Naganath and Vetri Subramaniam on CNBC-TV18. Also watch the accompanying video.

Q: Where do you stand on that debate, do you think we are almost getting cooked with this rally or it still has legs?

Naganath: It is a difficult question to answer. Given the repetitive rally and return of risk appetite certainly it is heartening to see the market having done what it has in the last few weeks. I would tend to think the road ahead will be a little more bumpy and in that regard, therefore, this rally probably will be peaking out right now, maybe a mild correction will be back up is my guess.

Q: Globally too the same prognosis you think?

Naganath: Yes, same thing globally as well.

Q: What about you, are you in the camp that believes another 15–20% is possible in this move or we are about getting to the ceiling of this one?

Subramaniam: There are two ways to look at it. One is to just look at past history and what kind of movement we have seen in these sort of sharp and sudden rallies, or call it a bear market rally or whatever you will. In 2001–2002 we got something like about a 45% rally on the Sensex. If you look back then most of the rallies were much smaller than 25–27%. If you go all the way back to the late 90s, you will find that the rallies were anywhere between 35% and 70%.

My guess looking at that we have already gone about 35%, you are somewhere in that territory where you should be looking for it to top out rather than to keep extending. So, I would tend to fall in the camp which says we are pretty close to some sort of a peaking pattern over here.

Q: And then what when you say volatility––are you suggesting that the market could go back to where it came from or not quite retest of the old lows just yet?

Naganath: It is very hard to tell but given the pace of the move that we have seen recently and the belief that some of the efforts that government and central banks are taking to kick start growth in economies, it is quite conceivable that we may not retest the lows. We may slide somewhere between the lows and where we are today and then maybe move ahead in the second half of this year.

Q: You don’t see the rally extending into the elections and maybe just topping out before the result comes out is that a possibility?

Naganath: I am more convinced that we will see a nice rally in the second half of the year––in other words, continuation of this albeit with some corrections. It is much more difficult to predict where markets will go in the next 4–6 weeks.

Q: What is your view on that there has been one school of thought which feels that maybe like it has done a few times in the past, the market rallies into elections and takes us to some place higher before it tops-off for the moment? The other is, of course, this is it and the next rally can happen after the market digest the election results?

Subramaniam: I wouldn’t like to base that view entirely just on the election. I think the election will certainly heighten the volatility in India as compared to what we might see elsewhere in the world. However, the more important events that we should be tracking will be more in terms of the data points for the local economy as well as the data points for the global economies. So, we can’t fight that global co-relation and that will be the more dominant factor rather than the election itself.

Having said that, I would tend to believe that most of the good news or the so called green shoots which have become very popular in stock market lingo in the recent weeks will create excitement more in the early half of the year than in the later half of the year. The later half of the year is when you are going to start running into reality, perhaps that the upturn is not very strong. So, my sense is that the strength in the market is perhaps more likely to be in the first half of the year rather than in the second half of the year.

Q: Where do you stand on that question on whether a retest of the bottom is likely from wherever we top-off in this run?

Subramaniam: I think it is a big trading range, I don’t think even when I was on your channel few weeks after the interim Budget that we saw in February, I was saying that most of the macro risk are priced in and it is a big trading range. I am not certain we need to break those lows that we saw in October last year. I still hold that view both from valuation standpoint as well as whether you look at past history of bear market, these lows have typically been created in the first 15–16 months of the fall. Thereafter, what one should be looking for is a trading range market.

Also, very interestingly, if you look at most of our past history what you will typically find is that the price low comes very early into the bear market. But the valuation low has typically come fairly after significant amount of time has passed. So, in valuation terms one might see a lower than what we saw in October last year, maybe a year down the road but in absolute price terms it might be higher

Q: You have got a different view you are actually betting on good performance in the second half, what are you predicating that on?

Naganath: There are two reasons for that. I think the first reason is that there is a lot of quantitative easing and stimulus packages that have been announced in the first quarter. We have to give it about three–four months to work its way through the system. So, my sense is come July-August-September is when I think the effects or the lag of it we will know for sure whether all this quantitative easing is working or not.

So, the belief is that given the efforts that have been put in, it is quite possible that some of it will find traction and one will see some economic recovery on the back of it. Whether that is enough to get us out of this entire financial crisis is an open question and we will figure that out later in the year. However, it is quite possible that three–four months is what it takes to get there.

Secondly, I believe that inflation will be here faster than the markets are currently anticipating. There is a lot of debate about whether deflation is here, not here, disinflation, etc. My sense is that one should not wait for milk and bread prices to fall to say deflation is here. The fact is in the last 20–25 years lot of the growth has come from the growth in financial services. A lot of the wealth has been invested in financial markets. Therefore, when you have seen stock prices fall this much, property prices fall this much lot of income has been deflated. Therefore, it has deflated consumption. So, in a sense it could be argued that deflation is already here.

What next? There are people who say deflation will continue because velocity of money is not increasing because lending and credit demand is limited. Banks are not lending. They also say there is excess capacity in the global system, and my view is that the velocity of money will start increasing once central banks and governments begin to push the banking system to lend more. In some cases, if there is a greater push one will find that credit will start to flow again.

On the other hand, if there is so much of capacity a lot of that capacity––some of it at least––being shut down because of lack of access in capital. I think people are not considering that supply chains in many areas are getting disrupted. There are all manners of credit issues, lack of capital, etc.
So three–four months down the road, or even earlier, if you have a gush of credit in the system and at the same time that you have seen capacity coming-off, I think the net result will be inflation. If that causes consumption to start moving up because people see prices steadily increasing. I think you could see economic recovery exhilarating. The markets will then respond positively to that. So that is the broad premise in which I am basing that the second half is going to be better for equity markets.

source: moneycontrol

Similar Posts:

• Will markets rally till New Year?
• Stock Markets (SENSEX) Could Go To 10000-12000 Levels Back – Marc Faber Opines
• ‘Current market rally’s not a sustained recovery’
• Rally doesn’t indicate return of bulls: Shankar Sharma
• Current market rally raises optimism