Tuesday was a big day for the Indian market and looks like India could be back on the radar after being out in the cold for the last three months for global investors.
The collapse in gold price, big correction in crude price has got India back in the reckoning and that was seen in the flows and a big rally on Tuesday.
The US markets also recovered expectedly; Asia is not in a bad place today and Nifty could be in for some more gains over the next few days, says Udayan Mukherjee, managing editor, CNBC-TV18.
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Below is the verbatim transcript of his interview on CNBC-TV18
Q: Is there anything spectacular for the market today than a short covering rally like yesterday?
A: This time there is some fundamental logic to the rally. We had short covering rallies in the last three months and they looked good, but they were always merely technical in nature because the market got oversold. There was no reason for the market to go up, save the fact that it had exhausted itself on the way down.
For the first time you can build a relative case for India right now and that is why the foreign institutional investors (FIIs) have covered up some of their positions, not to say that India is off to the races and all our problems are fixed.
India had two major problems, one was the rupee and the other was the growth related issues with the stock market. One part of the story, though not completely fixed, is on its way to get fixed. The way gold has fallen off, the way crude is threatening to breakdown, could address our current account deficit (CAD) problems to a large extent. There is some movement up in the rupee which has got back to 54 and that is why global investors are taking note of India once again. This is because that was one big macro problem, all those macro issues which were pinning back the rupee, seemed to be getting addressed now.
The other problem which is not yet addressed is India’s growth and earnings problem which is very pertinent to the stock market. I do not think the steep fall in gold or even crude will lead to automatically India’s growth picking up or earnings bottoming out and that needs to be fixed. I do not think the stock market will take a lot of joy. So, that will remain a bit of a headwind for the market. But in the near-term, there is a tailwind on the CAD issues because of gold, crude and also with inflation and expectations of Reserve Bank of India (RBI) cutting rates that might propel the market a little bit ahead.
Q: Was there a bit of buying as well, in the market on Tuesday?
A: There was a bit of buying but there was quite a bit of short covering. For the last few weeks, FIIs had no reason to look at India because it looked very poor compared to many other markets and that is why people were heavily short on India and were selling in the cash market.
In the last 48 hours India is beginning to outperform some of its peers and that is because of the issues we just discussed. Therefore, FIIs feel that may be in the near term it is not wise to remain short in this market because it will unwind some of its near term underperformance. This is because of the way commodities have moved and therefore, some of the shorts have come off.
Some new money has come in and that may well be in play for a few more days. But as the market moves higher, this morning there is tailwind behind the market and momentum will carry us higher. More so if the correction in commodities continues for a few more days, but eventually we will have to run into those headwinds of growth and earnings which are still not fixed. If those headwinds get compounded by global growth worries which are beginning to surface once again, then that will lead the markets to correct once again. For now, this looks like a rebound that FIIs are playing as well so rebounds can be powerful, we don't know how much more by way of legs it has, but could continue for a bit longer and for good fundamental reason this time.
Q: Fund managers’ survey indicates that the investors are most underweight in the last one and a half years on emerging markets and within that the biggest swing is India. Will that take a little more time to sort out because these trends and switches are not portending well?
A: It is not portending well and do not want to be a party pooper because the commodity collapses are good for consumers like India and that is why some of this underweight might reverse in the medium-term. A note by GMO mentions how gold had collapsed during the Asian crisis by a huge amount and sometimes the collapse in commodities also synchronizes or is a reflection of the kind of pain emerging markets could be going through. Therefore, those commodities are reflecting it first.
The cause and the effect is not easy to determine. For now, we celebrate the fact that something that was hurting our CAD is going down and in the medium-term, lower commodities prices are good for India per se. Why these commodities are falling and whether in the near-term there will be a growth scare globally and even in emerging markets, which markets will wake up to in a few months or a few weeks time is a question and the answer to that is unclear at this point. Participate in this upmove because of the good cheer that has some legs to it, but all is not resolved on the growth front globally or locally.
Q: It was a huge leap for the Nifty in one trading session. Does that raise the prospects or at least the bar on the top in the near term?
A: There will be some momentum in the market now because shorts are covering up. The market was doing the right thing on Tuesday, the kind of stocks that were leading the upmove. Interest rate sensitives leading up to some expectations from the RBI, the oil sensitives like ONGC, because of the fall in crude and pretty much autos, banks, real estate, all the rate sensitives did quite well. Infosys did not go up. Some of the other companies that will not report great earnings did not go up. This leads you to believe that there is some rationality in this upmove. Could another 100-150 points happen on the way up? Quite easily, because it’s a shallow market, there is more short covering which is quite likely.
Generally, the mood on India lifts for a few days that okay, we had deserted this market but it needs to be looked at - that is a powerful momentum generated in the near term. In the next couple of days, we could easily get to 5750-5800. If this mood lasts and crude were to come down to USD 94-95 per barrel, gold continues to stumble after a dead cat bounce and could easily pave the way for even 5900. If we do get to those levels, then one needs to take stock of the situation once again. This is because some of the bank stocks, even infrastructure stocks would have moved up quite a bit by then and you would then start to look at growth and earnings once again which have not been fixed yet. For now it looks like a rebound, could be a powerful rebound but after that, maybe some of the global and local growth issues will peg the market back again.
Q: Any ripples that could be caused by Reliance as well?
A: I doubt it, because it is pretty much in line with expectations, helped on by extra other income or interest income as well. Quarter on quarter, the needle has not moved too much. Sure, gross refining margins (GRMs) were better but then oil and gas and petrochemicals reported fairly insipid performance. So, I don’t think Reliance is in for a major reaction. At best, it will be a market performer from here on. I don’t think the mantle of leadership is on Reliance, not on account of this quarterly at any rate.