Sensex may hit 29,000 next June

Sensex may hit 29,000 next June
18 Feb, 2008, 0048 hrs IST, TNN

Like Mumbaikars caught unawares by the recent spell of cold wave, investors have been struggling to adapt to the recurring bouts of volatility on the bourses over the last one month. But the weathermen of Dalal Street are expecting sunny skies by the end of this calendar year. Five of the six participants at the ET Round Table see the bellwether BSE Sensex between 20-22,000 then.

The panelists included Narayan Ramachandran, MD & Country Head, Morgan Stanley; Pankaj Vaish, MD & Head equities and fixed income, Lehman Brothers; Ved Prakash Chaturvedi, MD & CEO, Tata Asset Management; Gaurang Shah, MD, Kotak Life; Rashesh Shah, CEO, Edelweiss Capital; and Motilal Oswal, Chairman, Motilal Oswal Securities. The session was moderated by Ramesh Damani, director, Ramesh S Damani Finance.

Only one participant, Ved Prakash Chaturvedi felt that the market was likely to be around 18,000 levels on December 31, 2008. “But that does not mean that mutual fund investors will not make money,” he added.

Mr Ramachandran expects a modest performance by the Sensex in the current calendar, but expects the benchmark to touch 29,000 by June next year. Slowing corporate earnings is one factor that most market watchers feel could hold back the market. However, the ET panelists are not too worried about it.

According to Mr Ramachandran and Mr Vaish, interest rates are showing signs of slackening and that could provide a support to corporate earnings over the next couple of years. “These (recent outflow of FII money) are not big things...they are just minor....India has attracted a lot of money and most of it came because of the fact that India is an attractive destination for money,” said Mr Ramachandran. “The real thing that will decide is where fundamentals are going. I feel that they (fundamentals) are solid,” he added.

Mr Shah felt that issue was not about whether earnings will grow 18% or 12%, but about the rate at which the Indian GDP would grow. ”If you expect corporate earnings growth of 11-12%, it means we are looking at a GDP growth of 4.5 to 5 to 6%. But if you expect GDP growth rate to be around 8%, give or take 200 basis points, then a 17-18% corporate earnings growth is not difficult. And I haven’t seen anybody—Indian or global—question India’s 8% GDP growth rate,” Mr Shah said.

While foreign funds have pulling out over the last few months, domestic liquidity has been a strong pillar of support and this trend is expected to continue, feels Mr Chaturvedi. “The kind of money we have seen that has flown in from the domestic investors in the last one year is certainly heartening,” said Mr Chaturvedi. “My guess is that if you combine insurance and mutual funds and other (domestic) sources of inflows into the market, close to $2 billion of fresh money is coming into the market every month,” he added.

Mr Gaurang Shah sees more investors tapping the stock market through Unit Linked Insurance Plans (ULIPs), mainly because of the handsome returns these products have delivered in the last four years of the Bull Run.

He excepts inflows of roughly $5 billion through various insurance schemes during the current quarter, a significant portion of which will be accounted for by ULIPs.

“I think relative disadvantage of insurance as a instrument vis-à-vis other fixed interest products has come down, which is also because real interest rates have reduced across the world over the last 10 years. So I see money continuing to come in,” he said.

Einstein too has a place here

India could be one of the best places to invest in for many years to come, affirm panelists

What happens when you put the India heads of two large Wall Street banks, two entrepreneurs who’ve founded and run popular brokerages and two fund managers who manage crores of investor money in one room? You get sharp insights, wry humour and an affirmation that India could be one of the best places to invest in for many years to come.

All this and more happened one Thursday morning, when ET brought these top capital market experts together, with Ramesh S Damani, a well-known face of the stock broking community in India, as moderator. The current state of the financial markets, enunciations of Budget wish lists and suggestions on how the stock market could be made more efficient, flew across the table over cups of tea.

Setting the agenda by an apt quote from Kahlil Gibran: “Progress lies not in enhancing what is, progress lies in enhancing what can be,” Damani steered a discussion that saw participants apparently unfazed by the recent turmoil in the market and foreign funds continuously pulling money out of India. “When you drive the boat very close to the coast, you see the zigs and zags in the coast,” said Narayan Ramachandran, MD & country head of Morgan Stanley, evocatively referring to the daily net sell by foreign funds. “But when you look at it from above, it is pretty much a straight line,” he reminded the gathering.

However, there was a consensus that corporate earnings have been slowing down. Pankaj Vaish, managing director at Lehman Brothers put a number to 18% deceleration over the next couple of years and a further deceleration from there. In spite of that, though, he felt the market was attractively valued.

The state of the derivatives segment also spurred many comments from the participants present. While Motilal Oswal said that the current payment system is only geared for normal days but not for extraordinary ones, Rashesh Shah of Edelweiss Capital said that the need of the hour is to make the market more “heterogeneous” as only this will erase the “one sightedness” among current investors.

On how the government can lay the road map through the Budget, Tata Mutual MD Ved Prakash Chaturvedi, was for disincentivising short-term trading, while Ramachandran wanted hig priority for the developing bond market and Gaurang Shah of Kotak Life Insurance bet that a change in tax on the physical infrastructure side was likely, while on social infrastructure side, he wanted investments in education.

With numbers and prognostications flying about, Damani parried a query on a one-year Sensex target with a light aside: after Albert Einstein died and reached the gates of heaven, St Peter asked him to temporarily share lodgings with three others till he was alloted space. St Peter introduced the room-matesby their IQ levels. As two of them had IQs of over 200, Einstein decided to discuss his theory of relativity and global warming. St Peter then pointed to the third person and apologetically said he had an IQ of just 60. “No problem,” said Einstein, “We can discuss where the stockmarket is headed.” QED!

It's a learning curve, we’re getting there...

What next? constant improvement in F&O system, heterogenous markets.

Ramesh Damani: Someone was holding the bag when the market fell 60%. Now, does this guy come back to the market? Isn't there a huge loss that has taken place in the F&O market last month and the previous three crashes.

Ved Prakash: Sure. I think several segments of the market may have been hurt and some of them may come back and some of them may not. I am obviously talking about the long-term investor who looks at equity as savings. In India, equity has never been looked at as savings. It is only in the last three years that like they allocate money to bank deposits, they are allocating money to equity as savings. On dips, you see them putting money for five, ten years, etc. is a good point.

That guy does not panic, he actually believes in the India story , in the earnings growth story. My sense is that tribe of those people is increasing thanks to that huge distribution workforce we have put in place. And that can’t vanish overnight, irrespective of what happens to sentiment short term.

Ramesh Damani: Rasheshji and Motilalji, I am going to get you both on the next point. Is the F&O system broke? There is no adverse corporate development, there is no profit warnings and yet stocks fell 80%. Is that acceptable? Is it an acceptable product to sell to long term investors and does it damage the long term credibility of the market when you have products that are not for retail investors sold to retail investors. The second part which we will get to later is that how do you fix this problem?

Rashesh Shah: Overall if you see, F&O products can be used either for speculation or for hedging in currencies or fixed income or equities. In India what has happened is that the system is not broken but needs constant improvement.

One of the key things required for investors in India is to access the F&O market for also portfolio hedging, for structuring of the portfolio for downside protection etc. which has not happened. The entire F&O market has become a proxy for going market long without having to pay all the money. But overall I think our F&O market has been one of the show pieces of the capital market. This inspite of the four or five blips we have had and really significant ones. A few people got hurt but people do get hurt when markets fall sharply.

Ramesh Damani: Isn't there something wrong in the market when you can go circuit down on the Sensex. 2000 points down and 50 crore traded. What does it tell you about the systems. About the quality of markets that you have in F&O. This when there is no adverse corporate development, no profit warning, no cyclone hitting India. Is it a technical problem and if that is so then clearly, the system is not robust enough.

Rashesh Shah: See the entire market is not heterogeneous enough. For instance, institutional investors have to come to the F&O market if they have to short sell, they cannot short sell in the cash market right now. These anomalies will disappear once institutions are allowed to short sell in the cash market, too.

Then the market will become very heterogeneous. You will have Indian retail, HNIs etc. -- investor base will become very broadbased. Than all this kind of one sightedness will go. On the whole, the system needs constant evolution. Still it must be said that it stood the test of time.

Ramesh Damani: Motilalji, what was your experience on the day of the crash?

Motilal Oswal: The F&O market has grown much faster in terms of institutional participation and volumes than we all expected. I guess the required robust support mechanism in not in place. Be it stock lending, short selling by institutional investors, margin funding or the banking system.

These things play an important role for the market to do well. In my mind, banking is the greatest challenge. Collecting payment on 'T+1' is impossible. Even if there is money available in the bank, it takes three days for a broker to collect the money.

Hence, I feel that our systems are not prepared for days when a tsunami hits our capital market. On a different note, the top 10 brokerages command a share of 25%. What about the rest of the brokerages that cater to 75% of the market? Such brokerages in this segment do not have access to capital. My sense is that we are geared for normal trading days, but not for such tsunamis.

Ramesh Damani : Narayan, I have got two criticisms. First, people who should not be investing in the F&O market are doing it here in India. Second, the ease of entry in the F&O segment. Should we restrict the players' and the stocks' entry in F&O?

Narayan Ramachandran: A free market, by definition, has to be free. The crisis is not of F&O or the mechanical designs, but of leverage and the inappropriateness and the lack of full understanding of the use of leverage. That can be modified either through heterogeneity that is a long term measure or in the short term by examining things like change in margining structure.

May be the degree of leverage is inappropriate in a somewhat immature Indian retail system. May be that needs to be looked at. I viscerally believe that you need speculator, investor and hedger apart from long and short for a market to be robust. And to that, you need to have the heterogeneity of HNIs.

I think the institutional growth for the mutual fund industry and ULIPs is not there. The pension fund industry is not moving fast enough and the access of general account insurance money in the equity market is going to be small. That we really need to accelerate for that brings value-oriented flow.

Ramesh Damani: Keynes famously said, 'in the long run we are all dead'. I want to ask something in the short term context. We have had periodic crashes--technical crashes in May '04, May '06 and Jan '07. Are these acceptable? Doesn't it damage the integrity of the financial market?

Narayan Ramachandran: I don't agree that all those falls were technical. Even the latest one is not necessarily technical. I would challenge the observation that you can't wipe out 70% of the market capitalisation in two days. We just did.

Source:E.T