Realty industry stocks could witness sharp rises when bears book profits
About three weeks ago, several analysts (including this writer) suggested that an interesting pair of trades would be short Nifty and long dollar. While people came to it from different perspectives including various mathematical models, it doesn't require a great deal of thought to realise that trends in the Indian stock markets are tied to the dollar-rupee relationship.
One trade follows naturally from the other. Most of India's stock market gains over 2010 have come on the back of strong foreign institutional investors’(FIIs) buying.
That in turn has forced the rupee up due to strong portfolio inflows. Of course, the global perceptions about the
US economic weakness has also led to the dollar being sold down.
Hence, any correction in Indian equity was very likely to be linked to a change in FII attitude. If FIIs start selling, that inevitably leads to a reversal of the weak dollar- strong rupee trend. In a chicken and egg situation, if the dollar appreciates, it is also quite likely that FII asset allocation would change to the detriment of Indian equity prices.
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As it happens, both trades have worked spectacularly over the past 10 sessions. The stock market has fallen sharply losing over 9 per cent from its early
November peak of 6338. The dollar has risen 0.9 per cent (about 50 paise) or so. Given 50:1 leverage on the dollar-rupee futures contract that translates into a massive 40-45 per cent return for somebody with a dollar-rupee position.
Partly of course, the dollar strengthening is a function of Euro weakness and of Chinese threats of fiddling with Yuan rates but it also has a lot to do with dollar outflows. The FII contribution to equity weakness is also marked. In November, the FIIs are net equity buyers to the tune of Rs 4,472 crore boosted in particular by a massive Rs 5,475 crore splurge on November 4. But in the last 10 sessions since November 12, they have been net sellers to the tune of Rs 4,200 crore. Without that one big buying session, November would have been a negative month.
The domestic political situation remains in a flux and it's not clear what the fallout from the series of scandals that have hit the public space would be. But it's reasonable to assume that FIIs would be spooked by potential damage. Under these circumstances, it is prudent to expect that the two trades mentioned above remain alive.
The Nifty could fall further and the dollar could rise some more. This intuition is confirmed by technical analysis as well as current valuations. The Nifty is still at a PE of 23 at 5,750, which is in the danger zone. The technical perspective suggests that a drop till 5,450-5,500 Nifty by end-December is quite possible.
More than overall market weakness, one would like to focus on certain sectors. Telecom is an imponderable - it's unclear what, if anything, will change from the policy perspective. We could look at paired trades inside the sector such as long Airtel and short Rcom but normal relationships may not hold.
The perceptions about the financial sector are probably more interesting. The recent raids on various banks, non-banking finance companies and mortgage institutions have definitely had an impact in that the corporates concerned have seen their stocks shorted. The Bank Nifty has also seen a major correction, losing quite a lot more ground than the Nifty.
The realty and construction industry is also under the gun. There should be more shorts available here, and these stocks will remain underperformers with respect to the overall market. The technically aware trader will however, watch out for sudden snap-backs when the bears book profits and the stocks in question jump.
Relief for traders on the long side could come from two sectors. One is the old faithful-FMCG. Stocks like HUL, ITC, Dabur, Colgate, always see defensive investments when the overall market falls. The other is IT - the sector becomes more attractive whenever the rupee loses ground and we've seen some indications of that.
The situation for the long-term fundamental investor is reasonable. Barring a recurrence of a full-blown global crisis or a collapse of the UPA government, Indian GDP growth should accelerate through the next 12-18 months.
The current correction opens up the prospects of investing at lower acquisition prices. If the correction goes deeper and the Nifty loses another 10 per cent or so, equity would become genuinely attractive. This seems to be a situation where systematic diversified investment will be fruitful. It will make sense to invest in stages over the next four to six months.