Ramesh Damani - expect corrections

Q: Very divergent performances this year from various sectors. A lot of them have not performed in this festivity at all, and a lot of them like capital goods, banks, metals have been tear away performers. Do you see that kind of divergence this year as well? What would be your favourite horses if you just look at themes going into the next one year?

A: Why has it been divergent is because, this market for the last 4,000-5,000 points has been led by the FIIs. The romance with Indian equities was in full bloom for the first half of this year. And then tend to prefer the bigger names, because they can invest serious amount of money in one shot. So, whether it is a Reliance, Reliance Capital, ICICI Bank or Bharti, that was the favoured stock.

As we are well aware, the retail investors have been selling; they have not been convinced of this bull run. But there is evidence that they are now being convinced that this bull run is for real. My sense is that at falls they would be buying the cash shares and B group shares. So, the breadth has started to improve at least anecdotally in the market. So, I would wager that if the market regains its health, if it crosses 20,000, it would be on a burst on stream with good breadth and by good participation in cash shares and by the public investors.

In terms of the themes, my sense is what I have been saying for the last few years is that we want to focus on domestic consumption stories. Companies insulated from dollar depreciation problems. So, I continue to look at cement, logistics, banking, these are great shares. One basket of stocks that we are recommending to our investors in our brokerage firm, is a lot of these MNC companies is my understanding are going to be privatized over the next year or so. If one looks at a basket of these MNC companies, over a year, they have quite a lot of safety in terms of lack of depreciation. And when the buy would happen, there would be a significant premium to current market prices. So, domestic consumption themes and MNC privatisation stories are two themes we are zeroing in on.

Q: Has anything surprised you as a sectoral performance, as a story and do you think that is going to be the big star to watch out for over the next few months?

A: I think there have been some great calls in this bull market starting 2003, the real estate story, Reliance Group. How it has absolutely dazzled in terms of its performance, the telecom story, it has been a great story. As you have also said it has been a great bull market and these kinds of bull markets produce these kinds of spectacular returns. So, yes a lot of these old hands including me were caught surprised at the vengeance of the real estate move, the vengeance of the Reliance group has moved. And congratulations at the end of the day these managements have delivered for their shareholders. So, yes it has surprised me.

In terms of headline in the future, the trick in the stock market is to buy cheap, buy value, things worth Rs 100 for Rs 25. So, these stocks may not be particularly cheap at this point. But in a mature phase of the bull market momentum begets momentum. So, the big gets bigger. So, it is typical behaviour what happens in the bull market. The leadership breaks away from the pack and dazzles the market with superior returns. I think we are seeing something like that happen.

Q: The way some of the stocks have moved 20-25%, have they rung any alarm bells or not quite? They are just part of any big bull run?

A: It has raised alarms. When the midcap or smallcap stocks went up, we were worried, but they didn’t have an impact on the markets because they were relatively puny at may be 2% of India’s market cap. After these kind of blow-off runs, investors should pause for thought.

Bull markets do not end with retail investors selling their shares. Many bull markets in India has ended when the IPO pipeline faded or when huge sums of money were raised on prices that were not justifiable. I have not seen that kind of frenzy take place in the Indian IPO market. I am sure given time, a lot of corporates will raise upwards of USD 50-100 billion over the next one or two years in India. The Mundra IPO and many such IPOs suggest that there is latent demand for IPOs in this country.

There would be huge IPO offerings and some of them might time the markets. But for now, look at the positives. Liquidity should remain okay. We are seeing direct tax collection shooting ahead of indirect tax collections. The breath of the market and GDP growth are okay. Markets will see a repeat of the violent corrections that we had in 2007. Broadly, the markets will hold. At present, the bull market seems intact.