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Pre-budget rally unlikely, macros not supportive: IL&FS
December, 12th 2011
Indian market is badly bruised, losing almost USD 500 billion in 2011 and there is a growing fear that the cut could be deeper still. Some investors are waiting on the sidelines to sell on further rallies. But there is a bit of bad news as Vibhav Kapoor of IL&FS feels that a pre-budget rally in 2012 is just unlikely.
In an interview to CNBC-TV18, Kapoor said that there is a high probability of the current range breaking on the downside and the macros are not supportive too.
Noting that the EU Summit positives have already been priced in the market, he added that the Nifty is likely to face significant resistance at 5,200 level. "The market is going to find it very difficult to cross that 5300-5350 levels and given the fact that the Indian situation has stood out to be much worse than what was expected," Kapoor stressed.
He strongly believes that economic growth is likely to gather pace only when interest rates falls 1-2%.
The total investor wealth in the Indian stock market has dropped from close to Rs 73 lakh crore (about USD 1.69 trillion) at the start of 2011 to close to Rs 56.9 lakh crore (about USD 1.1 trillion) currently.
From a 52-week high of 20,664.8 points on January 3, the first day of trading in 2011, the market benchmark Sensex has fallen to 16,213.46 points.
Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.
Q: There was a lot of hope earlier that we will have a big blast rally for the year-end post the EU summit. Does it look less likely now?
A: Globally yes. A lot of things are yet to be sorted as far as the European situation is concerned. Although with what they have done, probably some confidence can come back into the market. The global markets, particularly Europe and the US, had already gone up significantly over the past few weeks. Quite a few developments have already been discounted by the global markets. Even if this European pact were to come into force and the bond markets were to develop confidence with all the cutting in fiscal deficits, we might have a reasonable chance of a recession in Europe.
Q: Does it look likely that 5,200 levels is a firm top for the Nifty for the moment?
A: Absolutely. We have been talking about 5,200-5,300 levels for quite a few months. The market will find it very difficult to cross the 5,300-5,350 levels. Given the fact that the Indian situation has stand out to be much worse than what was expected, 5,300-5,350 levels is an absolute top for the time being.
Q: Would the bottom hold around 4,600-4,700 figure or is that increasingly looking at risk?
A: Thats quite difficult to say. We have got only two positives. One is the possibility of inflation coming down a bit and therefore interest rates getting lower over the next few months and going forward, the market may start discounting that soon. Second is that everybody is so bearish leading to a complete bearish sentiment and consensus in the market. Its difficult to say whether that 4,700-4,600 will hold, but there is always a chance of it going down below that.
Q: According to you, the market holding a 4,700-5,200 kind of trading range for the next few months is the best case scenario?

A: Yes, thats probably the best at least till February. Its a small range and has been holding on for quite sometime. At some point of time, there is a possibility that the range will break. There is good possibility that that could happen on the downside.
Q: What would you recommend high net worth investors (HNIs) to do right now? Should they still be looking at gilt funds and bond funds for the next many months and not look at equities immediately?
A: The gilt funds and bond funds are beginning to perform a little. We have been recommending that it is something one should look at as an investor at this point of time. Ten year yields have gone down by 40-50 basis points.
If inflation figures start to come in lower, we could see some dovish noises from the Reserve Bank if not an interest rate cut at least for the time being. So, this could help the bond market. This is probably the only place where one could hope to get some decent returns over the next two-three months.
Q: We have lot of heavy macro this week. Do you see those impacting markets in a big way?
A: Its an important week from the data point of view. We have the IIP, inflation numbers and then a policy on Friday. The market will look more at the inflation number than the IIP because the IIP is any way expected to be weak, probably negative.
The inflation number will be pretty important from the point of view of what stand the RBI would take on Friday going forward. If you have a reasonable fall in the inflation figures, it could be a little positive for the markets. If the inflation numbers are bad, then markets could take that pretty negatively.
This week will decide the trend of the market for the next month or so. December normally is a positive month for the markets. During the second half of December, we normally get a little bit of bounce. The best case scenario is that the market would continue in this range of 4,700-5,200 levels at least till the end of this month.
Q: A lot of experts seem to be feeling quite cautious about the early part of 2012, not predicting any great upsides. They are very cautious about the first January earnings and the union budget. Will it be difficult for equities to move higher at least in the Q1 of next year?
A: It seems so. Typically, we have this pre-budget rally, but given the macros and the fiscal deficit situation this time, it will be difficult for the finance minister to come out with something very different or aggressive as far as the budget is concerned.
The depreciation of the rupee has been causing a lot of problems for companies. The results in January will see a lot of companies cope with the 6-7% depreciation after September, which will spoil the corporate figures again. So, we dont have much to look forward to.
The depreciation of the rupee is also causing or will cause problems as far as inflation is concerned. Whatever gains we are getting on fall in commodity prices because of the global situation are getting wiped away because of the very sharp depreciation of the rupee.
Unless we start to get capital flows back in a big way, I dont see how the rupee will appreciate significantly from these levels. While the global situation may stabilise, we might not see great sort of growth moves in the global economy for quite some months to come.
Given all these factors, it will be very difficult for equities to go up beyond a certain level. Probably, the only positive would be if inflation and interest rates started to come down.
Q: What do you expect from New Delhi over the next few weeks? Would that have any kind of major bearing on the market?
A: We would not see any major steps in terms of reforms. The parliament session will end in a few days. After that, we will have the budget session in February. Given the overall political situation and what has happened to FDI in retail, we would not see any great steps as far as the economy is concerned. Therefore, this leaves us sort of hanging in a vacuum. The markets wouldnt know what to do as far as the reform situation or the steps from the government are concerned.
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