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Markets are poised for a breakout
September, 09th 2009

The markets are poised for a breakout either way and liquidity is critical. The theory that ample liquidity is there and it will remain there forever, is going to be tested very severely in the coming months, Manish Chokhani , Director & CEO, ENAM Securities told ET Now.

The obvious point I need to ask you is about the current breakout in the market. How would you characterise the current market movement and specially the kind of activity markets have exhibited in last 15 days?

All markets across the world seem to be poised at a very interesting spot where you have a breakout now imminent either way. For the past two to three months, India as you have noticed, even post-election has not done anything and yet it has really been consolidating. So, it is really a function of this liquidity which has been the backbone of this whole market.

That is the technical side of the market, a short term breakout but fundamentally speaking, can we justify the technical breakout this market has exhibited on Monday?

Well, in India you always argue for the upside, dont you, you never predict the downside. So, fundamentally of course, India has no reason to be collapsing or anything of that sort happening. The worry of course, is the fact that the foundation is liquidity. If something happens to alter that thesis of ample liquidity what happens to us then?

So are you indicating that there is a perception of liquidity but actually it is really not there?

The way over the last 12 months the governments in the west have run their printing presses and therefore kept artificially low interest rates and fairly stable currency regimes. That is really due to end in November in the US and subsequently after that in the UK. Now what this does to liquidity globally is that it is going to tighten and therefore the underlying theory that we all have that ample liquidity is there and it will remain there forever, is going to be tested very severely in the coming weeks and months ahead.

Also having said that you have seen the leader of this phase has really been emerging markets led by China and commodities led by oil which have both corrected. Also in India of the $8 billion which has come in the current year, more than $4 billion has really gone towards fresh issuances of IPOs and QIPs and so on and the follow-on buying has not really been that strong despite a better than anticipated government coming to power. So it is not that one can rely on this liquidity continuously gushing into India.

Also if you are really looking to summarize fundamentally what are markets discounting? Have you already discounted FY11 and started looking at financial year 2012 already?

Well FY12 is really far away so the current year which ends in March of course are well and completely priced in. What most people have priced in is that next year there is a better recovery, probably slightly higher inflation numbers in India, slightly higher interest rates scenario and therefore the nominal numbers for GDP, the nominal numbers for top line and therefore profits look that much better and the range of earning estimates people have for the following year are in the region of Rs. 1000 to Rs 1100 depending on who you talk to at what point of the day. On that 1000-1100-rupee kind of number ballpark Rs. 15000-16000 a year from now is not really difficult. So the markets are bit ahead of themselves, I would not say it is overpriced terribly but if you ask me then if it is 15000-16000 index today why cannot we construct a portfolio, find us things to buy it, it is really tough.

If you have to assess price versus risk, how would you assess it?

They are moving parts everywhere, so one does not know what is the outlook for currencies and interest rates across the world over the next 6 months. Also while it is mathematically easy to say that one is going to have a recovery and therefore one will see 1000-1100-rupee earnings per share.

The fact is until you see it how do you get the confidence that you go up, so typically you should be climbing a wall of worry whereas this time because we have got the liquidity in advance, we have probably climbed too far ahead too quickly and the worrying sign for me and again I am not normally a person who gives so much caution and one likes to remain optimistic, is that the leaders of this phase have been China and commodities and one has seen corrections there and the underlying thesis which has been liquidity led is also said to get severely tested. So one could have a scenario where one has a very massive short term breakout by liquidity including local liquidity and you may see 1000 point rally in the market very quickly.

Let us turn our attention towards primary market. NHPC listing more like a flat one, Adani Power HNI has never made money, as a house ENAM is one of the top merchant bankers in India, you were active merchant banker both in NHPC and in Adani Power, will things change now for the IPO market going forward?

Yes, very much and again which is what I am saying the whole argument that there is ample liquidity or there is money just dying to get into India because in theory if you have to take a 3-year 5-year view of India and build the next bull market story, the biggest profit making opportunity in India lies actually in the power space because very similar to what happens to telecoms in the early 2000. We are power short and over the next 5-7 years you would not get the state electricity boards which today produce almost half of Indias power.

They have no ability to invest and therefore the whole slack is getting taken up by the private sector and already seeing merchant power rates the way they are spiking in, therefore the profit pool on the incremental 50,000-70,000 megawatts which is going to get created in India is very large and presumably if the world is living at a 2-3% interest rates scenario with the weakening currency outlook in the west it is very strange that you do not get much more longer terms, deeper pocketed buyers to come in and buy actually this whole space a lot more aggressively.

If we have to wrap this up, how would you maximize benefits for our viewers, particularly if you are looking at Sensex targets of 17000 to 18000 should one be now focusing on stocks which are really going to see liquidity be a key driver for them to move up?

The risk that one piled on when the market was recovering and in our eagerness to catch up on percentage points of performance which were lost, this is not the stage to be adding more risk, this is a stage actually to see because it is kind of a game change period for the markets where this ample liquidity period ends, we see whether recovery is happening, what is the impact of that on currencies and interest rates, reassess what happens by default to valuations over here and then take the next level of bet.


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