Can we expect more pain in the market?

Friday's was yet another extremely volatile session, wherein the markets opened in green, but drifted down in red on the back of selling pressure witnessed across the sectors.

The markets witnessed heavy gyration and swung between red and green in the first half of Friday, but traded under deep pressure for most of the time in the second half on account of sustained selling. So can we expect more pain in the market? Pashupati Advani of Advani OTC Dealers and KR Bharat, Managing Director, Advent Advisors give their views.

Excerpts of CNBC-TV18's exclusive interview with KR Bharat and Pashupati Advani:

Q: What is your sense - have we seen most of the pain, are we close to our bottom or is there more to come you reckon?

KR Bharat: I am afraid to say that there is a lot more pain that we need to see. One cannot predict where the bottom will be, but even if it does come fairly soon, I do not think we are going to see a sharp rebounce from the bottom seen in May of last year.

I think whenever the bottom does come, it will be followed by a fairly lengthy period of consolidation before this market goes up and there are various factors that will determine, how much the market then does go up after that.

Pashupati Advani: The way we have been going down, it's like drawing blood, it's been going down very slowly and painfully. I actually feel that whatever movements are happening is that theyy are following a zigzag pattern, which provides trading opportunities. But net-net, I think we are still headed down before we are headed up.

Pashupati Advani: I actually think that we are still not in control of our markets - in the sense that global factors still have a lot to do with it. I don’t believe that the nervousness is over globally. So I actually feel that we will keep having bounces because there is a lot of demand for Indian paper. But again, America is not really settled down yet and there are still some big holes in that market.

KR Bharat: There are two factors; one is ofcourse the global factors that everybody has spoken about so often. I think this was coming, the G7 Central Bankers is very well orchestrated by them. There was a warning out in February on the Yen Carry Trade, which is not headed by anyone and I think rather than have markets crash, the Central Bankers have said earlier, "Okay, we will increase volatility but we will inject these doses where we will be able to get to do what we want." and like Pashupati Advani just said, I do not think that process is over. I think the worst is over as far as international factors are concerned, but it is not yet over, there is some more pain to come.

The second factor, ofcourse, is the India factor. I had earlier said that one of the biggest negative factors that could emerge for our market is slowing down or a reversal of reform, at which point of time it is pointed out that Bharat has been talking about lack of reforms for the past fifteen years and will continue to do so for the next ten years. It is all very well to say that when the Index is at 3,000, where at 14,500, if there is even the slightest blip, it can bite you very sharply. I still reiterate that this market has great potential but rather like the Indian cricket team, what we make of our future is very much in our hand.

KR Bharat: I would like to ask what positive reform measures have we actually taken in the last couple of years? We have been basking in the glory of our growth rates but like the article in The Economist pointed out, it is not our divine right to grow at 10% or 12% per annum, we have got to make it happen. We have got a fantastic base, and we had a great opportunity to build on that base and we can only do that; like I have been saying adnosium, if we aggressively reform. Everyone knows what areas we need to work on. Clearly, infrastructure, labour laws, land reforms, retail - it is all there to be done and we have not done it.

We need to take a lesson from what is happening in China. What I heard today is that in the very recent past, China has made two policy announcements. One, it has not equalized tax rates between local Chinese companies and foreign companies. Two, for the first time, it has recognized that private ownership of property needs to be protected and the law in China will now protect the private ownership of land. These to those who are leaving in India may not sound much but it is a huge step forward in the reform space for China. And I am told also that the documents that outline these policy changes keep mentioning the word socialism but the fact is that while they keep talking of socialism and they are actually moving the other way and here unfortunately we keep talking about reforms but we seem to be taking steps backward and that is the biggest concern that I have. It is not something that cannot be changed but do we have the will to change it is what I wonder.

Pashupati Advani: I actually felt that his Budget was going to give further impetus to the infrastructure, so that it would make it more lucrative for private money to come into that space. So I actually expected sort of sops for cement, sops for infrastructure companies as well as sops for anyone who is sort of helping that whole process because we are already seeing the benefit of our golden quadrilateral that things are begin to move faster and people are a lot happier. So in that sense for the cement industry to be attacked is kind of a little crazy and even the way this whole thing has been played out in the sense that they have been made offers that they cannot refuse I guess is the right way to put it. They have had to tow the line and okay they have agreed to do it for a year and hope that they can then go crying and try to get something else next year but the fact of the matter remains is that they have increased prices as a result of the Budget, they have said that they are going to keep prices where they are and they are hoping for some kind of an excise cut so they get some benefit out of it and the question is whether demand is going to be able to continue that pace.

KR Bharat: It is difficult to say, I wish I knew but then its remarkable how little time it takes for sentiment to change, here we were just few weeks ago talking about the India story and the liquidity factors and so on. I think on the global liquidity front, things maybe looking a little bleak now, I don’t think its all that bad, I think liquidity will come back into emerging markets because at the end of the day while global growth forecasts are about 2%, emerging markets are going to grow at a much higher rate and therefore there will be inflows into our markets but the point is that Index levels are dependent on two factors, liquidity as well as valuations and I think people are now going to start taking a hard re-look at where valuation should be given reduced forecast for rates. So I think it will take a bit of time for people to draw their own conclusions and while I think results of this quarters will be fine people will be waiting with bated breadth to see what first quarter of next financial year is like and that will determine when and where the pain end. So at least another three-four months of drifts if you will before a clear direction emerges.

Pashupati Advani: No, I don’t think so. I think everyone you talked to say that the medium-term story in India is still very good. Most of them still slightly under allocated to India I would say and that sort of looking at ways to get in, in interesting fashion. What they are saying is, India has now probably come back in line with the rest. It is interesting but it doesn’t jump out and for it to jump out, we need to have a little bit more. I don’t know what that more is but certainly I think lack of tinkering will definitely help.

KR Bharat: I think so. I think if there is no major policy pronouncement over the next three-four months then the effect of the inflation that we are feeling will lead to lower growth, there is no doubt about that. Just as you can’t hide growth rates without inflation, you can’t have severe inflation control minus policy pronouncements without a kind of slowing down. There will be a slow down but we can mitigate that if we are brave enough to counterbalance that with policy pronouncements. Whether that will happen or not is a different story altogether.

As you rightly said, the market is trying to figure out how much that slow down could be. I agree with Pashupati when he says that the medium-term story and the long-term story for India is still intact because the base from which we grew was so small that I think there is ahead of long way to go and I agree with him also when he says we could do without tinkering.

Pashupati Advani: I think India has gone back along with all the other markets. We were probably 5-10% overvalued compared to others, we are now inline. So, yes, the nibbling is happening and I feel that as a class, emerging markets are getting more money. So it is really a function of a nibbling thing. I think you have actually been net positive this month despite all the tumult. So FII money does continue to dribble in but we are not seeing huge numbers because we haven’t had sort of big hit. We have been there alongside all the others that we have been hit when all the other markets have been hit as well.

KR Bharat: I would say for cement today, what I used to say earlier for oil sector, where there is so much interference potentially; discretion is very much better part of value.

Pashupati Advani: I feel that apart from towing the line, they must be having some concession. I think that’s probably going to give you a bounce. So as a trade, it’s probably worth looking at cement and maybe coming in.