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Mkt to rebound slowly; buy stocks in small lots: Quantum

Volatility is the word to describe the trading week gone by. While both Indian equity indices, Sensex and Nifty shed 3.6 percent over the week, it staged a smart come-back with the Sensex closing in the green, up 161.19 points or 0.61 percent to 26392.38. The 50-share NSE Nifty climbed 53 points or 0.67 percent to 8001.95.

So while the markets may have ended well for traders, Sanjay Dutt of Quantum Securities says the bottoming out will be a slow and steady process. 

“We must realises that whenever such deep aggressive corrections occur, the bottoming out is basically a process, it is very rarely a sharp V-shaped recovery,” he explains adding that Indian market  continues to be a structurally strong bull market.

While he recommends investors to buy into stocks that were probably expensive earlier, he is quick to add: “Buy them but be careful and buy in smaller lots.”

Below is the transcript of Sanjay Dutt’s & Jai Bala’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Sonia: It is very interesting what happened last week, we had a big fall on Monday but then we saw a bit of recovery towards the end of the week. What is the sense you are getting, is this the time to be going out there and filling your shopping baskets or it would just make sense to sit out and wait for this volatility to settle?

Dutt: The fundamental point that we need to get clear here is that we are in a structural bull market and what we have seen is an extremely aggressive correction in that structural bull market. We must realises that whenever such deep aggressive corrections occur, the bottoming out is basically a process, it is very rarely a sharp V-shaped recovery.

Therefore, it is going to take a little bit of time for prices to consolidate, for prices to remain plus minus at the current levels. Maybe we have seen the price correction, we may not have seen the time correction, so we may spend a little time here, a few weeks or few months at round about these levels or a little higher than these levels. But fundamentally and structurally, I have no doubt about the fact that this is a good time to buy into select stocks which you missed out earlier and also look at new opportunities wherever you think valuations are turning compelling and investment horizon is two to three years ahead, you are definitely going to make money, I have no doubt about that.

Anuj: So can you say with conviction like you told us last time that 7900 give or take 100 or 200 points, of course you can’t time the exact bottom but that should be the bottom and in terms of price damage we should not go back to say levels like 7000 or so because that is a bit of a risk with the kind of global cues that we have seen. Is there a bit of a meltdown around the corner, you don’t think something like that could happen?

Dutt: I don’t think so and I want to look at it very clinically and not emotionally or because something is sacrosanct about a level. If we just break up the index and you look at the components in terms of banking, oil and gas, IT, pharmaceuticals and if you were to analyse the weightages, there is a very little chance that -if you are very bearish also on India, would you go to a level below 7700 if you looked at all the stocks whether you look at the banking sector which has seen the worst? If you factor in the worst levels of the banking stocks and similarly you factor in the worst levels for the oil and gas stocks given the fact that some of the oil refining company margins might be under challenge etc but then at the same time realise that rupee is down therefore technology stocks will give you support, so it basically comes to a level what you correctly said that plus minus 100 points, that should be a firm base for the market.

What we saw in this week probably, those lows, I don’t think those lows will be tested again in the near future unless obviously some new kind of new development comes in. I don’t see any other reason that the low will be tested or will sustain for a long period of time and we would be going to months of a sub-7500, sub-7600 kind of a trading range, I have my doubts. 

Anuj: Were you surprised by the meltdown before the expiry? Because, your view was that the market would see a short-covering bounce towards 8,500. Of course, not holding to that for that, but going forward, do you get a sense that because the market did not see that kind of bounce, there is a risk of this market actually now seeing a bit of a breakdown, maybe towards 7,500?

Bala: You need to hold me to it. That is what price action is all about. We have to accept at several points, that we are wrong on the markets. The markets are always right. So, if you recall I was saying in February, the markets are bound for a 10 percent correction and I had asked investors to raise cash. So, our view at that point was that this correction from 9,110 was a 10 percent correction and is a correction of a smaller degree. But, by going longer than two months that I had projected in March and breaking below the 7,940 mark, what the market is telling us at this point of time is that the correction is of one degree larger than what we had assumed.

So, what that means in terms of price at this point is that the low that we saw last week, that at least needs to be tested and if my interpretation is correct, the market needs to go slightly below that; 7,590 on the Nifty is a very important level for me.

I think if the market were to go back and test at least 7,767 that the low it made last week, or go slightly below that, that will make a lot of sense. That is what will make a durable base. I agree with Sanjay when he said that bottoming out is always a process. Yes, it is a process. But, I beg to differ slightly in the way that all lows need to be tested for it to become durable. Otherwise the market is standing on three legs. So, that is never stable.

So, we want the market to go back to the low and retest it. And even if we look at the global markets, the price structure is very similar to what it is in the rest of the world. But the damage in the European markets is much more severe. So, I think we need one more revisit of the low and then if that were to hold, or if the market were to go slightly below it, that will make the correction compete. We give more importance to form over price ratios. So, we want the form to get completed. I think that will get completed once the market goes slightly below, not too much below the low.

Sonia: Coming back to that point you were making about how this is a great opportunity to buy some of the stocks that you wanted to buy, but were at high levels. I am going to name three such stocks that have no fundamental problems but have been hit because of the crack in the market. There is I ndusInd Bank that fell about seven percent, there is Kotak Bank that fell about seven percent this week and there is Maruti Suzuki that fell about 10 odd percent. Do these three make for good buying opportunities for the longer term?

Dutt: Good question now. I have actually wanted to touch upon this point. therefore let me address this question of yours a little more broader perspective so people get an idea without really passing a verdict whether these stocks are going to fall more or whatever. Only negative that I see for India at this point of time, which actually is a big negative and we are seeing it playing out, is that out of the emerging markets, and in fact, while out of emerging markets, out of most markets in the world, foreign institutional investors (FII) and in fact international investors are kind of overweight or over-exposed to India in the sense everyone is optimistic about India. If you ask anyone amongst the emerging markets (EM) basket who is sitting outside India or is looking at India, he says India is different, he will look to buy India. Or he already owns India.

So, these kinds of stocks that you just mentioned actually are a victim of over-ownership. They are not victims of fundamental what we have seen them in the last week, 10 days; the huge sell-off that we saw in most of these stocks. So, therefore my problem with these stocks is that anywhere where there is over-ownership particularly at the FII level and the institutional level, I would be worried there because that is more vulnerable. Because, when a fund manager is sitting abroad has to pare EM exposure or he has to pare financials exposure across all markets, he does not look whether he has IndusInd Bank or he has ICICI Bank, he just goes across the board and sells, say USD 200-300 million or USD 500 million of financials.

So all these stocks are actually victims of that and not victims of merely fundamentals changing overnight or have changed over the last four or five months.

Sonia: So, your point being that we should get into these stocks or avoid them?

Dutt: I think whenever there is fall and you get a panicked bottom in them, you should add them. But do not be in a hurry to really stock up and complete your exposure, because once selling comes, then you do not know what rally, irrespective of fundamentals, they may fall 20 percent or 30 percent, but that does not mean that the fundamentals of those stocks have changed. So, I would say buy them, but be careful when you buying them and buy them in small lots.

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