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espite all the hoopla surrounding the positive newsflow from global markets, Mohammed Apabhai, Asia Pacific Trading Strategies Group of Citi advises maintaining a cautious stance on equities after the recent rally in the fourth quarter of 2012. He says all equity markets have hit targets in November, adding a Nifty fall to 5,400-5500 will not be "surprising".
In a recent report, Citi Asia said it expects a 10 percent tactical correction before second quarter starts (Q2FY14). Citi says early inflows could see markets topping out soon.
Interestingly, Apabhai says, there is not really much evidence to show that there has been any significant pullout of funds from India over the past few years. So, he says, what you could get in India is just a biased trade.
"Even across Asia, we have seen over USD 1 billion of net inflows coming into the market through out Citi desk and yet you do not really see the equity market responding as aggressively as you would. What this would indicate to me is that some of the more informed investors who have been buying since October are actually using the opportunity of these start-of-month inflows to actually exit their positions," he told CNBC-TV18 in an interview.
Apabhai, who expects a sizeable pull-back in risk assets soon, has been asking clients to book profits on all long positions.
Below is the edited transcript of his interview to CNBC-TV18
Q: Tactically you seem a bit cautious going into January and February. What is making you circumspect?
A: We are turning lot more cautious by being quite positive for the fourth quarter. This is really a play on global liquidity. We are concerned that the European Central Bank’s (ECB) Longer-Term Refinancing Operation (LTRO) is going to result in a sharply lower amount of liquidity. Probably it will be 20 percent of all the liquidity that they have injected since LTRO began in November of 2011. That is likely to come out of the markets by the end of the first quarter. We are also seeing signs that there is going to be a rally in the dollar. As that happens, it is going to be negative for risk, for Asia in particular and for the markets like India, Hong Kong and Korea as well.
Commodities and gold could also be vulnerable to a pullback. There is going to be a return of concerns in the US over the fiscal deficit and the deficit ceiling. In the first round of the fiscal cliff it was easier for the Republicans. They were effectively voting for tax cuts and this time around there is going to be a much bigger battle. It would be between welfare spending cuts and tax rises. So, all those issues are going to come back.
There is a question about whether funding stresses return for European banks? If they give back the money for the LTRO does that mean that they will remain as creditworthy as they are right now? It is not to say there is going to be a complete collapse. However, there is going to be a fairly sizable pullback once the start-of-year flows finish. So, for the time being we are still seeing start-of-year flows. After that things are going to become a lot more concerning.
Q: How much would you give the market in terms of current momentum? How much more could we run in this current leg without the market topping out you think?
A: We are limited to anywhere between 2 and 4 percent. So, we are not saying short right here right now. However, given that we have been long for sometime, we are giving our clients notice to lock profits on long positions into any strength. Interesting part is that we have sent out a range of liquidity targets for equity markets. That diverges India, Korea, Japan, Australia and the US on November the 8th. They have all hit the targets within the space of around 24-48 hours, all coincidentally. So, it basically it mean that if there is a risk off environment it is going to hit everybody. India will be impacted. As it is one of the markets which benefits from excess global market liquidity or global central bank liquidity.
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