Here are 3 reasons why the markets are falling: Deepak Jasani, HDFC Sec

In a chat with ET Now, Deepak Jasani, HDFC Securities, explains the three reasons why the markets are falling at this point of time and says for Nifty, a good level of support will come only between 9,600 and 9,700 over the next few weeks.

Edited excerpts:

Do you see the relentless selling pressure abating any time soon or do you think that the markets are going to test new lows?

The fact that we have broken below the 200 DMA and also below the recent low of 10,141 does not bode very well for the near term. Of course, 10,000 as a round figure could give some support on the downside but a good level of support will come only between 9,600 and 9,700 over the next few weeks.

What is the sense that you get in the midcap space, do you think selling over there was expected? Will it be underperforming the large cap space?

Currently there are three which are impacting the market. One is the fiscal year and considerations. A lot of people who have borrowed money and invested in markets are doing the reverse; they are selling stocks and repaying their loans.

The second is the selling before the onset of LTCG regime. Long-term capital gains, as you know will start from 1st of April. So even though there are very few stocks which are higher than the 31st January prices, mentally a lot of people would want to exit the stocks before the LTCG regime comes into picture.

The third factor impacting the markets is a whole lot of IPOs coming together to raise about Rs 14,000 crore till 31st of March. This will also suck out some liquidity from the secondary market, especially from the institutional side which will lead to some selling pressure in the markets.

Globally also, we are staring at a potential trade war and then there is the Fed meeting. We are expecting a rate hike which could come by day after tomorrow and in general, the economic outlook in Europe and US has been quite strong. Do you think it is something that will affect foreign flows from coming into India and hence put further pressure on the markets?

Yes that is true. The possibility of making money abroad whether in debt or in equity could be relatively higher than that in India till the political uncertainty is out of the way and till inflation and growth is back into play. So, the foreign factors also will influence. FIIs though have not been very large sellers on an overall basis. Till March 15, they have been sellers of some Rs 200 odd crores in the cash market versus Rs 12,500 crores which they sold in February. Going by pure numbers, they have not been large sellers. They have been sellers but yes, what you are saying also makes sense. Global factors combined with the local factors including the political factor are weighing on the Indian market valuations at this point of time.

Any top picks at this moment?

Yes, basically it is a very tough period for coming out with stock picks. We have come out with a note today on Strides Shasun, a pharma company. Now Strides has a diversified vertically integrated B2C focussed business across generics, branded generics and OTC in the regulated markets of Australia, US and UK and even in the emerging markets. So basically, the company has undergone a lot of restructuring the past, has sold off some India businesses. It has formed some JVs for manufacturing plants with local companies. Its Australian business is doing very well or could do well going forward. So in such uncertain times probably Strides could be a good stock to accumulate. We are not saying that you should go out and buy the whole hog right now, but maybe you can accumulate between yesterday’s CMP which was 692. So buy between RS 630 and Rs 692 with a target of about Rs 920 in a year’s time.

We spoke to the management at Strides Shasun this morning and they were quite upbeat. But, of course, you gave us levels to watch out for. The stock has created wealth earlier. Do you think it can do that again?

Yes, however, it might not go to the earlier highs; that is not what we are trying to say. It has fallen so much so sharply over the last one-one and a half years due to a combination of factors. Now that the negatives are probably out of the way, there is a good possibility that the stock retraces upwards to a healthy level and you could make some money over there.

I want to talk to you about metals, a lot of them have come off from their recent highs, be it a Hindalco or Tata Steel - which is significantly off its recent highs. Even in the Chinese markets, we have seen iron ore and steel prices fall as well as underlying base metal prices.. Do you believe that the up move that we have seen in metal stocks would now come to a halt?

The recent reversal in the metal prices has to do with the possibility of trade wars across the globe. In case, it materialises in a big way with all countries trying to put in barriers in terms of import duties or otherwise, then yes, the entire metal pack could go down. It will also result in a global recession kind of a scenario and I do not know whether the developed countries can afford to have a recession at this point of time. But till this fear is out of the way, metals could underperform for some more time and then probably take it forward from there. But given the fact that the economies globally have made some sort of a bottom last year and have started to see faster growth, metals could come back in favour after one or two quarters, once this uncertainty is out of the way.

Do you think that this also extends to the oil marketing companies? Oil marketing companies have also been great outperformers in the last few years, do you think that is the reason why even they are correcting, now they are commodity based stocks?

Oil marketing companies basically depend on a few things; first is their refining margins and marketing margins. Refining margins over Q4 initially had dipped quite a bit. They have recovered a little bit over the last two or three weeks. If we look at Marketing margins, there is a fear that in view of the ensuing state elections, the prices of petrol or diesel may not be revised soon enough to cover their marketing margins. Secondly, today’s report that BPCL and IOC could take a 26% stake each in GAIL is negative for the entire sector because it means locking up their funds unnecessarily without any tangible immediate benefits.