Post-March markets should correct and consolidate

Updated: Dec 30 2007, 06:34am hrs
The year 2008 is expected to be action packed for the derivatives market as the regulator will be opening up the sector for several new products that would help investors hedge better. Ashwani Gujral, ace technical analyst and author of several books on derivatives responded to queries posed by Rajesh Naidu of The Financial Express on what to expect in 2008. Some excerpts.

What are the key indicators or developments or triggers investors should watch out for in 2008

The significant triggers in 2008 would be liquidity, global markets, domestic political concerns and the India growth story. Sources of liquidity are going to be important in 2008, as more sovereign funds, endowment funds, etc are likely to replace some of the more traditional FIIs. Also domestic investors including retail and insurance companies expected to take a more active role in the markets.

Global cues would be key to the progress of the markets. It remains to be seen whether US economy enters recession or how fast the US fed cuts interest rates. If the fed cuts interest rates at regular intervals, which would keep enough liquidity to sustain the emerging markets rally. Also, there are inflation concerns because of high crude and metal prices, which may raise their head from time to time. It remains to be seen if the dollar decline gets arrested and pulls back after consistent declines in 2007.

RBI will have the tough job of managing the currency. As the employment generating export sector faces tremendous pressure from a rising currency. RBI would also need to fine tune reduction of interest rates to manage the ongoing soft landing and asset inflation. The Finance Ministry is expected to come out with more policies like the banning of P-notes to manage flows if currency appreciation gets out of hand.

Politics is likely to be the wild card which will raise its head from time to time, as parties get into an election mode. These temporary disturbance are only likely to provide opportunities to long term investors. Traders will have to be ready to trade both sides of the market.

From a markets perspective, we expect Nifty to have a final burst to about 7000 on the Nifty before the budget before it goes through a deep consolidation post the budget and corrects 20-25% and finally finishes the year with a 10-15% gain on the main indices.

What is your outlook on the markets for the year 2008

From a markets perspective, we expect Nifty to have a final burst to about 7,000 on the Nifty before the budget before it goes through a deep consolidation post the budget and corrects 20-25% and finally finishes the year with a 10-15% gain on the main indices. The bottom for year 2008 is not likely to be lower than 4800-5000.

What will be your strategy in this volatile market for the New Year

The market will give opportunities for entry in 2008, so a good strategy would be to book profits in the pre-budget rally. Post-March, the markets should be expected to correct and consolidate as there could be global and liquidity concerns. This would provide long term investors entry opportunities in leading market groups.

While the gains for the year may temper down to 10-15%, but a rally from the lows of the year would still give an upside of 35-40%. We expect the 200 Daily Moving Average (DMA), which is the long-term trend determining indicator to be tested post-March, that would be a key entry point.

Which are the sectors you are bullish and bearish on

We believe that interest rates in India are going to decline and hence it is possible that interest rate sensitive sectors could outperform. The sectors expected to be in favour would be realty, PSUs, banking, and auto.

We expect infrastructure, capital goods, power, oil & gas to perform in line with the market.

Export lead sectors are likely to see pressure, and they are not expected to achieve new highs. These sectors are textile, technology and pharmaceuticals. In the mid cap space we expect insurance, hospitality, shipping, fertilizer, power transmission and Education sectors could outperform.

What would you advice to the investors in 2008

Investors should be very cognizant of the fact that they will not make money by just by being in the market. They need to enter the market at levels where risk reward becomes favourable. People need to keep an eye on the internal and external risks to the market, which are likely to make the market volatile but also provide opportunities.