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Surjit Bhalla of Principal O(x)us Investments said, the markets may see more downsides from here and a consolidation was likely with a downward bias. He said the market was concerned about negative fundamental as well as technical cues. He noted that “try to take quote here”

He said he was not super bullish on the global situation. He added that global growth had slowed and was likely to remain so. According to him, it was difficult to predict the outcome of the US Fed meeting on December 11. He felt that US interest rates were still on the higher side, and the odds were favour of a 50-75 bps easing over the next six months.

When asked about sectors, he said the depreciation of the rupee was making technology worthwhile at current levels. He was also bullish on power and infrastructure sectors, adding that the long-term growth story in the sectors remained intact.

Excerpts from CNBC-TV18's exclusive interview Surjit Bhalla:

Q: What is making you circumspect, patience or is it the global cues that you are seeing? Why do you think the risks are more on the downside?

Bhalla: I think both fundamentals and technicals. On the fundamentals, it is much of what you said that the global cues are certainly not very comforting. One can argue however that all the bad news is out. But if it was a case that valuations were lower, then the argument that all the bad news is out is a very good argument and makes one extremely bullish.

Now, we are sitting close to 6,000 or 10% below that. In that context with PE ratio somewhere in the 22-25 range, the bad news may be all out. But that doesn’t make one go ahead and aggressively buy. The other side of the story, the technicals is the other side - that is suggesting that perhaps at these levels, the reasonable way for the market is to move downwards.

Most markets in the emerging markets space have corrected much beyond 10%. We are at somewhere around 8% or so. That is the third factor. I think Brazil and we are the only two countries that haven’t really depreciated or corrected by double-digit figures.

We add all of that up together - how much can you then say that - listen one should go ahead and buy, I just don’t find that a very comforting view.

Q: What about the global situation most emerging markets, as you said, have corrected more than us and there seems to be a debate on, on whether the Fed will cut in December again or not? What do you think is the likely outcome from the December meeting?

Surjit Bhalla: It is a close call. If you go by the minutes of the last Fed meeting, they clearly stated that they would on hold for the time being unless something exceptional happens. Weighed against that is the news about the economy which is not shockingly weaker but certainly weaker than what the Fed had led us to believe. Add to that the fact that the real interest rates in the US are still quite high- I am talking about the Fed funds rate though the two-year note and the 10-year have corrected or have come to very reasonable yields. So the odds are if I were to put a bet that the Fed would ease and would continue to ease - maybe there is another 50-75 basis point over the next six-months until we get imbalance with- the real Fed funds rate should be somewhere close to 2% and we are not quite there yet and that’s 2% on when the economy is doing well.

When the economy is doing badly as clearly the US economy is doing though I don’t belong to the camp that says that it will go into recession that maybe you want to get the Fed fund’s rate, the real Fed funds rate down to about 1.5% or so, which is about 3.5%. That’s again on a long-term basis; I am not saying that’s going to happen or should happen over the next six months. The international situation for the first time in a long while, actually since 2001, is not in a super bullish state and even though global growth will be there, it will clearly be slower. As far as India is concerned, we are one of the few emerging markets amongst our competitors whose growth rate already is lower than last year and that has to do with both the high interest rate policy that we are followed as well as the high rupee value that we followed.

But that is an interesting statistic that amongst all our comparators, there growth rate this year GDP growth rate is higher than what was last year. Ours is lower. So you add that to the mixture, which says that, our valuations are somewhat on the higher side. Growth in prices has been rather exceptional. We have not corrected so much and the global situation n- I am just saying it’s very long bet; all puns intended, to think that the market will make a significant move to the upside from these levels.

Q: You are sounding more circumspect than I have heard you over the last many months. Even if there is not too much downside you would feel that 20,000 is an intermediate top in place which would be difficult to take out given the factors you mentioned?

Surjit Bhalla: I really think so. Here at O(x)us, we emphasize technicals a lot as well as fundamentals and what you have is a double whammy on the 20,000 side. You have got 20,000 and 6,000 on the Nifty. This is a relatively rare occurrence. So just add up all of the elements and it just seems- and the story was very different 10-days ago where it really looked like we on our ways to make an new high and the fact that we failed that adds additional evidence. The reason we failed exposed that if you will, we haven’t corrected as much as the Asian markets. So there is definitely a bit of catch up involved. You can’t have this kind of a gap all in the space of 3-months to persist for very long. So either other Asian markets really rally and I don’t see the elements in place for that happening or we fall a bit more than the rest of our neighbours.

Q: Would you agree or would you buy them after the fall?

Bhalla: Let me answer this is a slightly belated fashion. I have been sounding circumspect or not as bullish as I have been. There is a silver lining, there is something that can be bullish and likely will be bullish and therefore that signifies a particular sector to be in. That is the dollar or the rupee. Our view is that the dollar is very close to historical lows against the Deutsche Mark, against the euro, against the yen and if you will, against the rupee as well.

So, we see a significant correction in the dollar against these currencies, not against China, not against East Asia, but certainly against the euro, the pound and the rupee. If the rupee depreciates by 2-4%, which we think is quite likely, then I think the software sector, forget the power sector - just look at the software sector as to how much has been beaten down. I think that will provide a fillip to the software sector. Also, the software sector provides a safe haven in times of when the momentum play is being unraveled.

The infrastructure story in India started, if you will, about a year-year and half ago and will persist for the next 5-10 years. This is not a fly by night, internet boom where there is no valuation and no real profits and real activity. I think you have to correct perhaps even more and then it becomes rather attractive. So I like the software sector a lot at these levels. Power and infrastructure sector, if they correct, seems at least probable, if not likely.

Then they will become attractive. But one point I do want to make, this is an unfortunate recurrence for value players like myself. That is, I just see a lot more operator activity in leading stocks than I have ever seen before. I don’t think that is a healthy development.

Basically the momentum plays that you talk about is a code word for operator activity. I think that is confusing - the value play in the market place. If that is the case and if market corrects, then the market will go much more to the downside than befits it or the fundamentals suggest. That is the other danger lurking in the Indian equity space. You would probably have a better reading on how much operator activity there is. But I certainly feel it and we measure it by indicators in several stocks that it has really zoomed up in the last six months.

Source: Moneycontrol.com