'The risk-reward ratio is adverse'

Q&A/ Vibhav Kapoor

his views on the future market trends.

What is your take on the stock markets?

The bull market seems illusory. Despite the hype, the market is at the same level for over two months. The Sensex first touched the 14,000 mark on December 5 and has been around the same level since then.

The index rose mainly because of a handful of heavyweight scrips. While Bharti has surged 21 per cent, Reliance and TCS have risen 12 per cent and 8 per cent, respectively, over the past three months. The Sensex would have fallen, but for these three. Of large-cap stocks, 80 per cent are down and 20 per cent are flat. The falling trend "� in these counters "� is across all sectors.

The euphoria over real estate stocks is also a thing of the past. The high leveraging in the form of higher open positions in derivatives is another risk for the markets. Take the case of FII (foreign institutional investor) investments. They were negative in December last year and saw marginal increases in January and February on account of IPOs (initial public offers). So where is the so-called bull market?

Is a big correction on the cards?

One can expect a big correction only if any of the following three happens: A sharp rise in global oil price, a free fall in global markets, or a further spike in domestic interest rates. According to my calculations, 12000 is a fair value for the Sensex on March 2007 earnings. The risk-reward ratio is adverse for the market. Some things are happening below the surface and these can change the trend.

What should investors do?

They should reallocate their portfolios in different asset classes. It will be sensible to invest 25-30 per cent of the current equity portfolio in fixed income securities. They should reallocate sectoral portfolios and can sell in sectors such as banking, automobiles and consumer durables, which can be affected by sharp changes in interest rates. Sectors that are immune to interest rate hikes should be a preferred option "� IT, for example.

What is the future of the IPO market? Should companies be less aggressive in pricing?

Companies should leave something on the table for investors while ensuring that the costs of funds do not go up unnecessarily. In the primary market, a true price discovery is difficult as QIBs (qualified institutional buyers) can bid by paying only 10 per cent of the amount. This percentage should be raised.

Many companies are announcing M&A (merger and acquisition) deals. How should investors look at these scrips?

M&As provide (growth) potential as well as risks. The debt component in the buyout price is very important. For standalone and mid-size companies, a high debt component could be a risky proposition. Companies with a strong backing of a large group can still weather the storm, if any.