Financial Daily from THE HINDU group of publications
Saturday, Feb 18, 2006
Markets may see some nervousness after Budget: DSP Merrill
MR Jyotivardhan Jaipuria of DSP Merrill Lynch believes that Post-Budget, markets may witness some nervousness.
Mr Jaipuria further says that global liquidity may tighten, and some amount of money may flow out of emerging markets. There have been a universal concern about valuations. He says that the valuations have reached a level, where the "margin of error is very limited."
Excerpts from CNBC-TV18's exclusive interview:
What is your broad call looking at liquidity valuations? How do you see this panning out?
We are calling 2006 as the year of consolidation. We had a great run in the markets. It will be great if the markets do nothing this year and absorb the gains we have had. This will enable us to be ready for the next upmove. At the moment liquidity is strong. But global liquidity has been strong for the last two years. And at some point, we could get a bit of nervousness coming through in global liquidity during the year.
How do you think liquidity will get soaked in this time around as most of the fund managers are expressing apprehensions about valuations? Do you think it will be the primary market, which will soak most of the new money?
The primary market will soak in the new money. But once the global liquidity starts to tighten, some of the surplus money coming to the emerging markets will get stopped. To that extent, one could see some amount of money starting to flow out from some of the funds.
You talked about consolidation versus a volatile phase. How does that set us ahead in 2006?
I think 1000-point swing will not be very much as it is 10 per cent of the Index. If you go by a typical calendar year, India will normally have the market doing well up to the Budget. After that markets tend to slow down and start picking up again in fourth quarter of the year. We could have a somewhat similar phase again this year. Post-Budget, there could be some nervousness. There could be some lull till the elections and the monsoon, before things start to pick up again.
What are the big concerns for this year? Is it the liquidity slowdown, earnings slowdown or interest rates hike? What is going to create pressure?
The valuations have reached a level, where the margin for error is very limited. On the negative side, we have interest rates moving up and liquidity starting to ease off. We have all these on one side and high levels of valuations on the other.
If it is a year of consolidation, how do you position yourself tactically? If the market does not go anywhere, what will you do?
One has to look at the stocks, which have very strong and visible earnings growth, with growth prospects over the next few years being interesting. Else, look at stocks, which are cheap, undervalued or probably ignored in this whole bull run. However, now things are starting to pickup.
What about the primary market action?
Every time as markets get more bullish, the quality of paper tends to deteriorate. It is not an India phenomenon, but a global phenomenon. In fact, at the peak of the bull run, poor quality tends to outperform good quality.
India is not different. It will also see the quality, which might not be great in the primary market.
Those tend to get oversubscribed. And, as they do well, people look less worried about quality.
What is expected of the domestic fund flow?
In the long-term, domestic retail has little in equities. This is a long-term story and will keep on improving. Yet true test will come, when the markets do not do well. For, whenever markets do well, retail tends to come in.
But whenever we see markets correcting then that same money starts to move away from mutual funds and goes back into fixed income.
So if we get a phase of fixed three-six months with markets not doing well, we start getting negative returns.
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