Sensex @ 10K by Dec: Karl-Thomson

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HONG KONG: Patrick Shum, chief strategist, Karl Thomson Securities, said  the Sensex may drop to 10,000 by the end of the year.

At what levels, in terms of price correction, does India become good on a valuation basis to look at?

Shum: I guess at the end of this year, the Sensex may drop to 10,000 points. I think at that level, it is a good time for buying. Before that, I suggest investors should be more patient and wait for the correction.

What is your worst-case scenario for inflation and interest rates now?

Shum: Inflation is over 12% - so it is higher than the economic growth, and we can see in India that the economy is under stagflation. The central bank will have less flexibility to implement their policys...  so uncertainty will affect investment sentiment.

 What is the flow of money from the FII side into Asia? Are they looking at equities in emerging markets?

Shum: Most of the equity markets is still facing pressure because a strong US dollar means money is returning to the US. So, in the near term or the rest of this year, money flow to  Asian markets will be low, and the equities markets will face certain pressure.

You said India is probably heading towards stagflation? Is that correct?

Shum: I think investors, for the rest of this year, should hold more cash and increase their cash holding... I can see more downside in the coming months.

From an economic stand point, I didn't catch the word stagflation. What is that?

Shum: In economic terms, you can see the sub-prime crisis in the US, and in the European market, we can see negative GDP growth. So, in economic terms, I think the global economy will slow down.. so it's not a good time for investments.

What accounts for the rally that we saw in Indian equities all through July?  We were one of the outperformers ...

Shum: I think in the near-term, the Indian market will underperform but in the long- term, let's say 1-2 years, I think India will outperform because the fundamentals are still good... in the near-term, strong inflation will erode consumers' purchasing power.  I think the valuation of the Indian market is relatively higher than other markets...

I think the market will become weaker because inflation is still there, and I think because of strong oil prices and food prices, inflation pressure will increase and the central bank may raise interest rates again.