The mood of the market is to sell more on rallies rather than buy on dips, says Vikas Khemani, Edelweiss Financial Services. “Market would be a lot more volatile, a lot more uncertain due to the situation on the political front,” he says in an interview to CNBC-TV18.
Also Read: Nifty rebound unlikely; may even test 5320: PhillipCapital
With regards to exchange traded funds (ETFs), Khemani feels they have taken long-term view on the market. “Macro interest rates have peaked out, capital expenditure cycle has bottomed out, earning cycles have bottomed out, but ETFs still remain from a long-term perspective,” he says. Khemani also mentions that the next 6-12 months would be very uncertain, volatile and we will see intermittent rallies, corrections depending on how the news flow pans out.
Meanwhile, Khemani feels banking sector will remain under stress for next 6-12 months. Investors are seeing exposure moving out from banking to IT, pharma, consumer and that is a preparation for next 6-12 months, says Khemani.
Below is the verbatim transcript of Vikas Khemani’s interview on CNBC-TV18
Q: What is the sense you are getting from the performance of the market? Is this a brief short covering or could we see a bit of a rebound before the bears finally succeed?
A: The mood of the market is set more on sell on rallies rather than buying on dips and especially after last two days of selling. But markets would be a lot more volatile, a lot more uncertain due to the situation on the political front. In January, we thought that the new Finance Minister will set the growth back before they get into the election mode but that hypothesis is now being questioned.
The political uncertainty expected to pan out in October-November has been preponed. Most investors would now be worried about whether the growth will come back or there will be uptick in the growth back in next two quarters before they get into election. Or can the situation further deteriorate on the currency front before you get into election. What are the choices government would have given the political compulsions? This worry has become a lot more in the minds of investors and that will keep incremental money in the market under check.
Now, can we see more outflow of funds from the foreign institutional investors (FIIs)? We will have to wait and watch as there are a lot of global factors into it. You are not going to see very big mass exodus as things being made out by various sections. Few percent down from here, market will look interesting from valuation stand point. Secondly, all the funds that came in the last 12 months, specially the ETFs, they came in knowing very well that these kind of problems do exist in the market, elections are ahead of it. They had taken long-term view on the markets and from long-term perspective, nothing changes.
Macro interest rates have peaked out, capital expenditure cycle has bottomed out, earning cycles have bottomed out. So those things still remain from a long-term perspective. The short-term period is an uncertain period and we will have to live with this uncertainty. We will have to live with this volatility and that in next 6-12 months period would be very uncertain, volatile and you will see intermittent rallies, you will see corrections depending on how the news flow pans out.
Q: Do you have any anecdotal evidence of some ETF selling in the Indian equities?
A: ETF selling has come in last few days and there is no doubt about it. When such a large amount of money comes in, there is always some amount of money that sees short-term money and takes short-term bets in terms of improving the situation. That kind of money would have gone out in the recent past. But I don't think we are going to see a reversal of the flows from Indian markets. Some sections are making stories that Indian market story is over for some time and you will see mass exodus. I don't think that is the situation. So, the margin, you will always see some selling flow might come in. Mood has shifted from sell on rallies and that might continue for some more time.
Q: Where do you stand on banking? That index has taken quite a beating. Since your hope is that you are not going to see a tidal wave of FII money out of the system, are you a buyer at this level and what is your view in the banking space?
A: Banking per se as a sector is going through a challenging time. In January- February investors loaded up on banking expecting that interest rates are going to peak out and there is going to be recovery in the economy. That very fact has come under doubts so banking sector will remain under stress in next 6-12 months and that is one sector which is a swing sector, a) being large weight, b) very much linked to the economic variables.
Unless things start changing at ground which is not visible, asset quality issue can still be of lot more prominent. It is one sector that will remain under stress. As the indices correct or as market remains volatile, whenever you see very sharp cut in this, you will find opportunities to buy at significant lower levels.
You should keep a watch on banking sector and investors are also reallocating exposure out of banking to some of the defensives. So you are seeing exposure moving out from banking to IT, pharma, consumer and that is preparation for next 6-12 months. If that happens, banking sector is likely to remain under stress. A lot will depend on how the numbers come out, what kind of news flow come out, but currently the risk reward does not seems to be in favour.
Q: After the 10 percent gain on sugar how would you look at it?
A: While I have not studied sugar as a sector, but the move has been very positive. It has been a long awaited move. This will encourage fresh investment in this sector and that is a fairly positive event. So, it is a very positive move.