Contrarian views

The markets have been taken unawares after the surprise poll outcome. In our opinion, it is more of a NDA defeat than a congress victory as the congress has failed to muster up a majority. The resultant compulsions of government formation will need a drastic change in your strategy. It is imperative that a new government will form new policies and change previous norms. This will result in new sectors / stocks coming into investor focus, new triggers for the markets and a changed plan of action. We examine the implications and courses of action available to our investors.

The markets are likely to continue reeling under the left parties' statements. We do not expect the leftists to water down their belligerent approach towards capitalism and private enterprise. Since the stock markets are the ultimate symbol of capitalism, we don't expect the leftists to give any priority to capital market growth. Their thrust will be towards labour issues, HRD, partial protection of local industry and some what of a closed door approach towards industry and commerce. The only saving grace will be the majority of the congress in the ruling coalition. Dr. Manmohan's assurances in the electronic media that reforms will be pursued and a liberal trade policy will be a logical extension of the common minimum programme will soothe some nerves. However, the left parties are expected to make their presence felt at periodic intervals by their statements. The markets are likely to take these developments in their stride, but the upsides are likely to be capped. Our investors will recollect that we have been advocating from the beginning of the year that this year is unlikely to be as bullish as a larger section of the market players anticipate. We had put forth the example of a person climbing the stairs of a 20 storey building, wherein the first 7-10 floors are an easy climb. Thereafter, the climb is laboured. Since the Sensex had climbed from 2900 to 6000, we forecast a cautious view. Click here to view that article. Our contrarian view on market directions of Jan 2004 also advocated similar strategies. Click here to view that article. The next question is - is there scope for profits in the coming period ? The answer is an emphatic yes !!

While it doesn't require hard guessing that the disinvestment candidates are the first to be on the chopping block, the million bucks question is - what will be on the buyers radar screens. So far the lower interest rate regime in the USA facilitated cheaper borrowings there, deploying these funds into emerging markets ( including India ) and taking multifold profits. Firstly, the US $ was falling so investing in the emerging economies resulted in local currency appreciation and investment appreciation as the stocks bought were jumping higher by the week. With the fall in the asian markets, possibility of rising interest rates in the USA and steep oil prices, hedge funds are expected to withdraw hot money from our markets and park it back in the USA. The dedicated funds, pension funds and emerging market funds are likely to churn their portfolio's with a view to limit / slightly lower their India exposure. This will mean that upsides will be capped and the 7000 sensex is nothing but wishful kite flying.

The domestic funds will also reduce exposure to PSU's and churn into lesser volatile stocks. Defensive counters will be in the arclights again. Our positive view is in the utilities, services sector, pharmaceuticals ( domestic - not much of MNC ), software and shipping.

The markets are likely to bounce back immediately due to soothing of frayed nerves after assurances and damage control by the congress. However, the upsides are likely to be met by selling pressure by unnerved bulls. The indices are firmly entrenched in downward sloping channels and our reading is, the 1700 - 1735 levels on the Nifty and 5600 - 5650 on the Sensex will see a flight of tired bulls who have received a battering. New hands will enter the markets and it is logical that they concentrate on new stocks. Among industrial houses, Reliance and Tatas will continue to do well, so will some of the Birlas. For company specific reports, please refer to the paid version of this newsletter.

The markets are still ruled by a roost of optimistic bulls who are latching on to long positions due to hope and no choice but to wait. These players will continue to roll over their long positions till their stretched capital permits them and then bail out. The savvy traders will either sell calls at out of money strikes or buy puts at out of money strikes on counters that are being held by such tired bulls. Our derivatives newsletter will specify such scrips which are likely to be the fall guys in the nervous scenario ahead. Concentrate on scrips which have a low volatility quotient for writing options. The returns from this activity is likely to extremely high as the bulls are likely to be squeezed into a corner by the options writers. Shorting select counters in the futures segment is also a good idea as the buildup in certain counters is excessive. Ahead of the expiry in May series, a fatigued unwinding is likely at higher levels. Opportunities in the May contracts therefore will be handsome for the savvy traders. Aggressive players can also buy oversold counters where bears are likely to come out and square up short sales. The details follow in the regular newsletter.

Options will / should be a good component of your capital deployment in the coming future and exposure to futures maybe restricted temporarily. No more than 35 - 50 % of your capital ( depending on your risk appetite ) should be kept in futures. Greater weightage should be given to the Nifty rather than individual stocks due to volatility considerations.

The author is a Mumbai based trader and invites feedback at Vijay@BSPLindia.com.

SEBI disclosure - The author has no positions in the stocks mentioned above.