'Markets may bottom out around 11,000-11,500'

Ridham Desai, MD and Co-Head Equity, Morgan Stanley, said the markets have made lower tops and bottoms, which confirms that we are definitely in a bear market. “Price damage is the first indicator. Around 75% of the price correction is over in the current bear market. Fundamentals have also given way. A lot of stock market drivers are taking us further into the red. The bottom may lie around 10,500. So, the markets are likely to se more downside for the next six months.”

He feels that valuations have come off. “Markets are trading around 14 times forward earnings. They are still not cheap. Valuations will get attractive around 10 times earnings.”

According to Desai, the markets are seeing a bear market rally. “There can be an 20-40% upside in the markets, but investors should sell into it, as one will never know when bear market end. It can only be defined in hindsight.”

The markets may not go though a prolonged sideways move like the one in the 1990s, he said.

For the markets to rise, Desai said, crude prices need to top out. “Consensus estimate for FY09 growth has come in at 20%, which needs to be revised downward. We see more pressure on EBIDTA margins and downward adjustments. However, earnings bottom is dependent on policy response to economic woes like inflation.”

He feels that investors need to patient. “One will get good buying opportunities on corrections. Investors can buy in small amounts for in investment perspective of around 2-3 years. They need to look at price erosions and valuations, which is the most fundamental tool. Investors also need to put capital to work slowly. They will see better times to invest further.”

Desai does not see the markets hitting new highs very soon. “We can go back to the old highs by July 2010. However, equities will still remain the best asset class with CAGR returns of around 20%.”

On politics, he said that expectations on reforms increase around formation of new governments. “Elections are likely to happen in May 2009. By then, the bear market may be over.”

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