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Tuesday, December 25, 2007

Markets are headed higher, atleast till Budget: Damani


Speaking to CNBC-TV18, Ramesh Damani, Member, NSE said that the markets are headed higher, at least till the budget and added that the breadth has opened up and retail participation is better. According to him, freezing of subprime mortgage rates is not the best solution to the subprime crisis.

Damani said that there is some amount of frontrunning ahead of fresh FII flows in January and that they are not worried about midcap valuations.He added that the rupee appreciation is likely to continue for the next few years and he is bullish on economic expansion, but warns investors to watch out for global factors.

 

Excerpts of CNBC-TV18's exclusive interview with Ramesh Damani:

 

Q: The market is looking up for itself, how are you feeling about how it might do for itself over the next few weeks?

 

A: For the next few weeks the answer is fairly straight forward, I think it is headed higher. I think the breadth in the cash has opened up dramatically and the retail public, which has been the missing jigsaw in the last few 1000 points, is now well entrenched with the market. Once they enter in the market they are bloodied, they make money, they stick onto the market. So my sense is, at least till around the budget, we have a clear sell going ahead.

 

But there are storm clouds gathering on the horizon that financial analysts have to look at. In the longer-term, I think the clouds in terms of the excesses we are seeing in the secondary market, the huge pipeline in the IPO market, may provide a dampener. But I think in the short run, the outlook is sunny, bright and straight north.

Q: What worries you most, any of the excesses in valuations and price movements that you are seeing right now or what kind of cues might come in next year which might dent the story at least temporarily?

 

A: Let us start with what is happening in America. If you noticed, yesterday they froze the subprime rate. As I heard a smarter American columnist paraphrased it, the point he made was that stupidity got them into the mess and they feel stupidity will get them out of this mess. The idea of freezing mortgage rates is typically something we would do in socialist India in the 1970s or what Nixon did in pricing wage controls. It does not make sense, ultimately the mortgage companies will have to bear the burden of this.

 

You start with the fact that the Fed has reduced interest rates 0.75 bps in two chunks and still the Dow came below the starting point of that region. So what is the Fed doing? It's reducing rates even further by 0.25 or 0.50. So it's keeping on artificially injecting financial markets. The answer to bad credit is not more bad credit, so you start with that kind of credit contraction that may take place over time.

 

There are a lot of excesses going on in the secondary market in India, which are fairly obvious to see. Many of bull markets has been stopped in India by a very robust primary market pipeline, which I think will happen in the next two-three months. Having said that, the short-term direction in the market is high. The screen clearly tells that the market is going higher, the breadth of the market has improved dramatically, the Indian public is back there, January tends to be a good month for Indian foreign inflows. So, there is some amount of front running ahead of the foreign inflows.

 

I think the short-term trend is good and I would remain bullish on the market. But we would not be cognizant or prudent we did't take into account the thunderclouds that are gathering in the horizon.

 

Q: Is it this big midcap burst that you are alluding to when you talk about the excesses in the secondary market that worry you?

 

A: That's good because these stocks are primarily undervalued, so I'm not necessarily worried about the midcaps. They are going from 6 P/E to 8 P/E to 10 P/E, it is not there.

But there are, for the first time in this bull market, excesses in the largecap area of the market. I do not want to mention any stock because sometimes understanding is not complete, but there are a lot of excesses in the largecap areas in the market where you can actually seriously lose money. In the smallcap stocks which are Rs 500 -1000 crore, it is hard for the public collectively, or as an aggregate, to lose money. But when, without rhyme or reason, the stocks go up or circuit up 10% up every day without any newsflow, just because of buying power, it suggests that the market could face a serious correction. Over time, I am not suggesting that anything is wrong in the market right now, in two-three months the markets might be bloodied a little bit.

Q: How are you feeling about where the currency might be heading as we step into the next year. That's been a much talked about topic this year, but for the next year how would you plot these currency sensitives and the way the rupee itself is going to move?

 

A: I am strongly in the bullish camp on the rupee, we have broken out of 50 in a bear market in the rupee and once that kind of seismic shift takes place, the bull market does not stop. So I think the rupee is going to appreciate over the next year, three years or probably even five years because India's strong economic fundamentals come into way.

 

It is not necessarily a bad thing. I think some of the exports might whine but I think most consumers gain when they travel abroad or when they import oil or cars from a stronger currency. Just like Toyota learnt to leave with a stronger yen in Japan, I think the software people have to learn to live with and deal with a stronger rupee.

 

My sense is the rupee is headed higher. It might be at a near-term high, but I think the progress is clearly northward against the dollar.

 

Q: How would you look at the leader sector now, infrastructure and power. Do you think delivery will come through next year and justify these kind of valuations or are they giving a bit of vertigo and you're apprehensive?

 

A: I do get a sense of vertigo. For example, a stock that I own, Honeywell, I can talk about it more freely, it went up Rs 500 in a single trading session a few days back. It had a base price of Rs 170 when we bought it four years ago so it tripled its valuation from that valuation in a single day. So there are a lot of excesses that we are seeing ahead of fundamentals running ahead.

 

But it's just like what we saw in technology stocks, people were counting eyeballs or people were counting projects to be done or projects to fantasy. So there is a lot of froth that we refer to in some of these sectors. The idea that one can buy a stock at any price and make money is fairly fool hardy in financial markets, but we are seeing at least a glimmer of that right now.   

 

Q: In the last three-four years we have broken our historical pattern. Earlier it happened often that we would hit the highs for the year around the Budget time and then not see those levels till the month of December or January next. Do you think there is a chance of that happening in 2008?

 

A: We've had four-five years of sensational gains, double-digit gains there. There's a counsel that's very powerful in financials market called regression to meet.

 

I think in budget the plate seems fairly clear and I am very encouraged by what Mr Chidambaram is saying that he want to actually reduce corporate rates in India, personal income tax in India. I think that's unbelievable if that actually happens because voluntary compliance has increased tax collection. Direct tax collections are greater than indirect tax collection for the first time in the India's economic history.

 

I think we are doing all the steps that are correct in terms of managing the economy so I am, impressed by that and I am not going to write-off this bull market that easily. I am just saying global factors, or the excesses in the market itself, might slowdown gains in the market. I continue to remain bullish on the economic expansion-taking place.

 

So to answer your question more directly, I think we will have better sense after the Budget. My sense is that, at some point after the Budget, global cues will start taking over because you just cannot keep reducing interest rates and creating artificial pools of liquidity to proper financial markets worldwide.

 

The US will have to do what India did in the 90s - do a very painful restructuring, privatize, sell assets, reduce its fiscal deficit. A lot of the hard decisions are already made in India. So we continue to benefit from a buoyant economic tide but can we cross global headwinds that are likely to take place; oil prices rising stratospherically, the US continuing not be a engine of locomotive growth in the world, I am not so sure about that. But Indian GDP growth continues to expand very pleasantly.                         

 

Q: What would you expect to see from that front, continued bursts of activity every time there is Fed cut and then, at some point, we will get weighed down by the economic news from the US?

 

A: Exactly! If you look at the last 75 bps, the Dow rallied 800 points or whatever and then it corrected well below that price from where it started. So huge amounts of liquidity were injected into the market but it did not help. Then a second round of thought began in America that we'll cut 25 bps another 50 bps leading to another rally including this messy bailout of subprime mortgages that is going on. So the market will rally based on that and then people will take a harder look that Federal deficits are not being cut, inflation is still going on, dollar is depreciating. When these hard knocks come in, the Dow will perhaps get knocked down again.

 

It is a very tough call, but my sense is that the US needs to takes some very hard economic decisions. They cannot keep fighting a war in Iraq, spend billions and trillions dollars there, keep mortgages under control, keep inflation under control. The era of that perfect storm which we had in 2003-2007 seems to be getting over and credit markets are going to contract and re-rate risks in this world. So in that situation, money flows to emerging markets may not be that benign.