Sensex to give 15-20% returns in long-term

Ajit Dayal of Quantum Advisors says Sensex has given compounded returns of 35% peranum in the last 7 years and one must not expect similar returns but returns of 15-20% over the long-term is possible.

He further told CNBC-TV18 that valuations in India are not cheap but they are not near bubble phase either and so they are not uncomfortable with current valuations. At present at Quantum Advisors they have fairly low cash levels said Dayal.

Excerpts from CNBC-TV18's exclusive interview with Ajit Dayal:

Q: The expectation is that come January there is going to be big dollops of cash and that’s probably going to take the market a bit higher than where it is. Would you go with that theory?

A: We have to go back a bit and look at- if you had put Rs 100 in the BSE 30 Index in January 2001, today that Rs 100 standing in December 2007, seven years later effectively would have been Rs 874. So that’s a profit of Rs 774 over the last 7 years i.e a compounded rate of return of about 35% per annum or about 2.5% per month. I don’t think that people should expect January-February-March-April 2008 to sort of give you that sort of return.

Having said that we are very optimistic on India. We believe that Indian economy is totally in many ways dealing from what's happening in the US. It never has really been coupled to the global economy. India is very much a domestic driven economy. Unfortunately, some mishaps in policy where we have gotP-notes that has made us part of global capital flows in a far more accelerated fashion then probably what we can handle and so if something happens in the US- subprime crisis, if the big groups out there begin to withdraw capital from all their sort of territorial expansion plans and territorial investment plans which includes India and they take capital back home then yes, because of the P-note exposure and linkage that the Indian capital market has you could see a sell off.

So will January 2008 see a sell off because of what's happening in the US or will January 2008 see an increase-We don’t know but one should expect about a 15-20% rate of return in our view from Indian stocks in the long run not the 35% per annum that we have seen since 2001 in last seven years but certainly a 15-20% long-term sustainable number still looks very good us.

Q: How comfortable are you feeling about valuations at this point- the 20,000 plus? Are you feeling okay about the way we are stepping into earnings?

A:We are a value investor and we tend to be in cash when we don’t like the valuations. We actually are in fairly low cash right now. We had taken a bit of profits if you will in the month of October and we looked quite smart because the market fell off when the P-notes thing was announced. We looked very stupid when the market rebounded and we are still sitting in some cash but we have been in fairly low cash levels right now and that’s should indicate to you and to our viewers that we are very comfortable with valuations, we are not saying it is cheap but we don’t think it is anywhere close to bubble environments.

There is always stock selection that’s going on in our processes and within a basket of 20-25 stocks we have a portfolio now, which is in our view still a value portfolio. So yes, there is value; we are not uncomfortable with the valuation at this index level.

Q: How are you feeling about that midcap and smallcaps? Do you think its still a valuation catch up that’s playing out or is it just the money flows, which are being diverted to that part of the market?

A: It is more like money flows. There is always sector rotation in stock market. Many fund managers have got sort of favorite sectors. We are sort of cap insensitive and sector insensitive in many ways when we pick and choose our stocks. But if one looked at what happened in the indices from 2006 May, which sort of bottom in May-June 2006, it’s been really the largecaps, the BSE 30 led stocks and within the BSE 30, 5-6 stocks have accounted for a much of the rise in the Index till about the third quarter this year.

So there is some sort of a leadership change, as you all would talk about it. With regards to DSP Merrill Lynch forecast of estimated 10% GDP growth rate, our numbers and our valuation numbers are based upon a 6.5-7% the rate of growth of GDP, and if the GDP numbers do indeed end up at been 8-9 or 10% that would make the market in our view very cheap. So at 6.5% we are seeing the market to be not expensive, not cheap but if a 10% number did pan out which we don’t believe it will but if it did pan out and in the next few years if we get the infrastructure right then we believe it can, then the market is trading still in our view extremely cheap.

So we will be rushing into buy, if we got new cash and the 10% GDP numbers did sort of pan out.

Q: From the earnings lot though would you include IT in your list this time around or you will still stay away?

A: No we have been buyers of IT. We have been buying IT; we had some IT exposure at the start of the year. We have actually been adding to it over the last few quarters. We don’t believe that currencies, a weak currency is the only reason to buy IT stocks. We believe there are some fabulous companies out there and we hope that we own them in the portfolio and have made the right selection.

We have been buyers of IT. So it has been a nice last one or two weeks for us though not nice one-two quarters for us because we have been sort of buying up the IT as they have been coming down.

Q: Have you had reason to add any agro commodities to your list such as sugar?

A: No, we actually looked at sugar a couple of months ago and we know the share prices have rebounded a bit since then. But we haven’t really had the strength to go in and buy into sugar because that is sort of driven a lot by political influence and by near-term political events. Our job as analyst, as fund managers we believe in the long-haul is to try to sort of analyze things that we can understand and we have little understanding of what makes sugarcane and sugar prices move around given all the political stuff going on around it. So we are not able to guess that and we don’t have it.

We have been certainly watching it, studying it but don’t have the conviction or the strength to put money behind it as yet. One day we will probably but haven’t done so far.

Q: What is the top pick for 2008?

A: We do not disclose names but I recently spoke about IT and we like IT. We haven’t bought IT with a view of three-six months; we do not buy stocks with three-six months views. We invest in them after studying and trying analyze where things could end up on the three-five year view at the very minimum. So our view is that IT as a sector could recover.

We are not believers in a strong rupee. I think we kind of fool ourselves a bit by saying that when we strengthen against US dollar that we are a strong currency. There have been some issues in America and America has had an inherently weak currency. So a basic currency trade is a two way game; if one has a weak dollar it got to be something strong on the opposite side. So we have happened by accident to have a strong rupee against the US dollar.

And our view is that the Indian rupee given the fact that if one looks at the current account deficits or trade flows, you stripe out of the portfolio money that’s coming into India every year and we have had about USD 50 billion of portfolio money in India over the last four years and so if you strip at money out, India is actually running a current account deficit and is been funded by portfolio flows and no one has any control or any understanding of how sustainable these portfolios flows are on a month to month basis, on a quarterly basis or even on annual basis specially given the fact that P-Notes account for half of those flows.

We are not convinced that a weak dollar in that sense a strong Indian rupee is a given and the IT companies that we own in the portfolios we believe can manage the environment around them.

Source: Moneycontrol.com

Sensex may not cross or hold 20K levels

The markets kicked off the week on a strong note. Boosted by positive global cues, the indices surged ahead and closed with handy gains. Nifty closed at 5,732 up 123 points, while Sensex shut shop at 19,248 up 395 points.

Markets closed the day with handsome gains on heavy buying seen in scrips across sectors. It was a good of trade for most of the equity markets across globe. Asia had a strong session today, barring Shanghai Comp most of the Asia closed in green. Europe was also trading in positive terrain.

HDFC Bank, Tata Steel, SAIL, Bharti Airtel, Unitech, HDFC, TCS, ONGC, Reliance Energy are among the top gainers. Deccan Aviation, Voltas, IndusInd Bank were among the strong midcap stocks.

Technolgy stocks have bounced back today and were among the top gainers.

Dipan Mehta, Member, BSE & NSE feels that some FII money may have been coming into the Indian markets. He said, “Markets are always right and although there is skepticism, the screen clearly shows the 400-point rally. Today I think some of the FII money may have been coming into the market. We have been seeing consistent negative flows over the past almost three weeks or so. But today, maybe slightly different, given the fact that a lot of largecap stocks have rallied on the back of decent volumes. So that is one part of the reason. Some amount of short covering as well as build up on the futures side and fresh long positions also could be responsible for this kind of a rally that we have seen.”

He further added that there may be some flows coming in from retail investors and domestic investors. “At the same time I think the retail investors who are pegged down by some other worries in the global markets and with some of the concerns easing, there maybe a surge of flows coming in from retail investors and domestic investors as well because we are seeing a lot of the action in some of the side counters and the cash group, the B group shares as well. Question is whether the market is scaled to go beyond 20,000 and holds those gains. I do not think that is a possibility,” he said.

Deepak Mohoni Of Trendwatch (India) says that he would hold on to positions because there is global rally building up, apparently on the word that the pre-Christmas sales in the US have been very good. “So if there is a global rally that you certainly don’t want to argue against, and as far as 20,000 is concerned, that is only 3.5%-4% from here. So that is not really formidable target in percentage terms. So I think its okay to be optimistic, at least in the short-term.”

Source: Moneycontrol.com

Will market go below 18K levels?

It was a blood bath on Dalal Street. Deep cuts in markets across the globe weighed down investor sentiment, and the markets went into a free fall. The Nifty closed at 5,561, down 220 points, while Sensex shut shop at 18,603, down 678 points - the 3rd biggest single-day fall ever.

Even the midcaps and smallcaps took it on their chin today. It was large scale equity sell off across markets and sectors.

The worst hit index is bankex which has seen a sharp run up in the past few sessions followed by metal, capital goods and power. The sector that is least hit is the IT index on hopes that rupee may not appreciate further against the dollar. The rupee was trading weak at 39.385 against the dollar.

Sajiv Dhawan of JV Capital Services said that he has maintained his call for the past few days. “The call has been the same for the last few days. The midcaps were rising without the leadership from the frontline. I am not a believer that midcaps will continue to outperform frontline for a long period of time. I know it is easy to say after the event has happened. But if you had your stop losses in and you have got no problem, you are probably out at higher levels, you are probably still on a large amount of profit. But what I am finding a bit disturbing is that a lot of investors are holding on and they are now hoping that the markets will bounce back without any real conviction because they have seen this time and again and they say if they sell out now, they may not be able to buy those stocks back, if the upmove starts again.”

He opined that the investor should trade with clarity. He said, “I think you have got to be very clear which stocks you have, why you bought them, were they a tip, were they rumour, some market buzz or was that actually some fundamental in those stocks. If there is nothing fundamental then probably you are wiser off taking a small loss, exiting at the current juncture and reentering when the market stabilises and started to bounce back. If you are in stocks where you believe there is a growth story, there is something fundamental then you can use any sharp correction, 10-20% in whatever the stock is, to average out your position or add a few more.”

Dhawan adds, “I think if you are an Index trader- fine, you got a nice short position, plenty of cushion, good profit for the short after a long time. But the next 2-3 days, will be very important because I do feel a lot of people are still stuck in the futures and with the leveraged positions elsewhere and they might panic over the next 2-3 days if the market don’t stabilise or bounce back.”

Anil Manghnani of Modern Shares & Stock Brokers said that he is not very surprised by what happened in the markets today. “I think in the last two-three weeks action was only in the midcaps. For a while we had been seeing lot of the largecaps falling 3-5%. Even those that are in the midcap index itself, were up 2-3% which was clearly suggesting that some sort of delivery base selling by FIIs was taking place. In addition, continuously over the last few days on the stock futures side, we are seeing hedge sale position being buildup mainly by FIIs. This was clearly suggesting that at least on the largecap front, a fall is definitely round the corner," he said.

He added, "It was probably the euphoria in the midcaps that was not reflecting so much what is happening in the largecaps and now that is all taking place today and I think its pretty much playing catch-up in the sense that while the rest of the world corrected, we didn’t and now that everything else abroad has slowed down, that is the correction; it was likely that eventually we will have to catch-up on the down side. I think most of the markets had fallen about 10%; we were down maybe 3% yesterday. So we are pretty much catching up to that. We have broken through some serious levels and even major trend lines, I don’t think that 18,330, which was a recent bottom will hold now. I think chances are heading closer to 17,770 on the Sensex."

Should this, as a short-term trend be called down?

Manghnani says, “I will call it down and probably sell any bounce if we get like we have seen intra-day falls and pullbacks. I think immediately if suppose one might have a good day overseas also overnight, I think one is going to have a scenario where it’s going to open up and then start correcting. We have seen that already happened two-three times in the last week but like I said it didn’t get accentuated or reflected that closely because the midcaps were flying all around the place and the focus was so much on midcaps. But that phenomena of the Sensex opening up and coming down has been taking place last week and I think in the next few days if there is again a gap up opening then eventually the selling pressure would start again at higher levels and I think we will probably head it lower at least on the Sensex and Nifty in the immediate short-term.”

Source: Moneycontrol.com