Rupee could go down to 80-81 against dollar: Steven Birch

The past couple of weeks have not been particularly happy for the Indian investor, with markets falling for several days straight and no real uptick visible around the corner. Moreover, negative sentiment has gripped Dalal Street, with contagion fears in the financial space after the IL&FS debacle, and concerns over a falling rupee and rising crude oil weighing on investors’ minds.

Although some have been calling the current correction a time to buy stocks cheap, global brokerage firm William O’Neil+Co’s CEO Steven Birch thinks the real uptick in the market is still some time away.

“Despite all the steps taken by the government, the market is still going down,” Birch says. And he’s right. There have been repeated assurances from the government that it will come to the aid of the NBFCs or non-banking financial companies (a liquidity infusion has also been announced), the NPA (non-performing asset or bad loans) menace is being dealt with strictly, and the government has time and again said that it has the capability to deal with the depreciating rupee. But the bulls don’t seem to be in the mood for a comeback charge yet.

“We were advised on September 22 that the Indian market was in a downtrend. So we went from 14 stocks from India on our model portfolio down to four and then one,” Birch says, adding that though there is still a lot of activity in the market, there have been no significant upsides like last year. “The character of the market changed,” he says.

So what does one do when the market goes into a correction phase like the current one? Birch’s advice is to cut one’s losses early. “When you go into capitulation like this, the first rule of thumb we teach investors is to cut their losses. If you’re sitting on losses from a week ago, and we’re telling you to get out, it doesn’t matter; you’re not going to make money in a general bear market. But the people that didn’t do that are underwater 30% or 50%. They’re in a different space, it is going to be difficult to get to breakeven from there,” he says.

Speaking about the two key factors that seem to be weighing down investors—crude and currency—Birch says he sees oil prices correcting and perhaps settling at $75/bbl levels eventually. “A strong dollar combined with high crude prices will also cause a situation where the Middle East [West Asia] starts to ramp up production,” Birch explains, adding that before we know it, oversupply issues might resurface.

On the weakening rupee, Birch sees more pain ahead. “From the patterns we’re seeing, rupee could go down another 10% to 80-81 against the dollar,” he says.

He then goes on to say that investors should look out for a sign he calls a “follow through”— simply, a day when the market is up on abnormally large volume—which is key, as it signifies a change in market psychology and sentiment. “All of a sudden you see a shift in the supply demand dynamics. The trigger can be government intervention, monetary policy or news inflow,” he says, however, advising that a “dead cat bounce” (when the markets bounce temporarily just because it has been falling for a while before falling again) is also real.

“We will wait for three days after the market hits a new low. On the fourth day, we will see how strong the market is. Large volume means that buying interest and institutional investors are coming back in. If that isn’t there, then the market can go lower,” he elaborates.

The silver lining however, Birch says, is the fact that valuations are now compressed and investors can look for stocks that have weathered the storm well. “Start looking at names which have corrected less than the index. That shows you that investors haven’t thrown out the stock like the rest. These companies are just like trees bending in the wind,” he suggests, adding that IT companies like Mindtree are a good example.

Pharma is another area of potential gain going forward says Anupam Singhi, CEO of the company’s India business. “As U.S. FDA issues are finally getting resolved, companies are getting more and more compliant,” he says, adding that the future seems bright for Indian pharma stocks.

However, like all major players, William O’Neil also remains bullish and optimistic about the long-term India growth story. “This is a vibrant economy with so many young professionals and investors,” Birch says, adding that it reminds him of the U.S. in the 1980s. “Now, in the U.S. we’re just happy to see 4% growth. We can’t even fathom that,” he says, reiterating that over the longer term, India’s scope for growth remains significant.