India continues to grapple with macro economic problems like high interest rate, inflation, wide current account deficit and barring monsoons, there is no other positive cue for the market as of now, says Nirmal Jain, chairman, IIFL.
Though Jain is not too pessimistic on the market from current levels, but he cautions that given the way macros are shaping up, the market continues to face near-term headwinds and there is a threat of the Nifty falling below the key support of level of 5,500. In the best case scenario, Nifty can go back to 6000 level, he added.
Further, he added that overseas investors have holdings concentrated in FMCG, IT and pharma space and they have now started offloading positions in private banks. But, he does not see large ticket selling from FIIs yet.
Like most experts, he expects India’s FY14 GDP growth to be below 5%.
Below is the verbatim transcript of Nirmal Jain's interview on CNBC-TV18
Q: This morning we have traded quite a bit below 5500. Is the long standing range in real threat of breaking down?
A: It is quite under the threat of being broken down and whatever cues we are getting from macro or all the factors that can impact the market, they aren’t positive. We have been talking about it, high interest rate inflation that is shocking, the private sector investment and on top of that we have current account deficit for which now government as well as central banks seem to have run out of options, unless they increase customs duty or they come up with sovereign bond.
Now customs duty will have an impact on the economy which is negative. So at this point in time we are looking at a situation where gross domestic product (GDP) for the year can go below 5 percent. So other than monsoon most other macro variables aren’t looking positive. So at least in the foreseeable future if something dramatic happens this sentiment is subdued.
I am not very pessimistic in the sense that not that the market will crash or we are into a market which can go much further down or rupee can further crash because there are certain things which can go and there are certain things on which government will have to take some action now. In fact they have been discussing, so most of these proposals are on their table and it is just a matter of time that some corrective action is taken. For the time being there are very few positive cues and lot more negative ones.
Q: What if FIIs begin to take a dim view on India because everybody seems to be hoping that for some reason they will not sell and therefore the market will not tank. Do you think the way the market is these days in terms of how shallow it has become, it can even absorb USD 4-5 billion of FII outflows which can happen because of them taking a negative view on Indian macro even for the next one-two years?
A: I don't think at this point in time market has capacity to absorb USD 4-5 billion of FII outflows. And even FII knows that, most of the fund managers are Indian or they know India very well. So they know how hollow the Indian market is. If they press the sell button then they know that prices crash and there won't be any buyers.
FII investment is mostly concentrated in FMCG, pharma, IT and a little bit in private sector banks and NBFCs. And in the last few weeks they have exited at a least part of their holdings in private banks and NBFCs and may be now they are looking at the FMCG sector to lighten their portfolio. So if you even look at indices they have been held up by just these three-four sectors and may be 5-10 companies.
So FIIs at least the ones that are more they trade on the fringe or the hedge fund ones those who can be very quick traders they are as of now invested mostly in sectors that are doing well. So they already hedge themselves against the negative economic growth and therefore I don’t see that there will be a trigger for any significant outflow. At the same time what is happening is that they aren’t buyers anymore, they are marginal sellers which itself is not a good news.
Q: Do you think they could be selling down some of their holdings like ITC at Rs 320, L&T at Rs 780, ICICI Bank those kind of long-term core holdings could that be coming under pressure? This morning Morgan Stanley has cut its weightage in HDFC and HDFC Bank after many years in their Asian portfolio. Do you think some of these old blue-chips could come under pressure?
A: One cannot rule out but heavy selling will happen only if there is a big negative event outside or something that triggers this. So if there is some crisis or some event that happens in the US or developed world which make emerging market funds to shrink or something that happens in India, may be a war kind of thing or that threat becomes more serious. So that kind of an event can trigger but in a steady state scenario more or less they know all the factors. So the investment has taken into account those things.
So unless there is another event which we cannot foresee today or which we haven't already factored in, the selling will be small and marginal. I don't think there will be large ticket selling as such.
Q: What is your take on how long it will take to fix this because people were getting a little hopeful that may be by second half of this year things will start picking up and then equities will start to look up again? Are you less hopeful on that front?
A: I think most of the hopes have been belied so now just like most of us I am also losing hope and thinking that it may take at least a year more when election outcome become clear or election comes closer and people get optimistic and they try and see that things may change after election so that is one hope.
Another positive development is that central bank we now have a young governor who probably will bring in fresh ideas, new thoughts. But that has to be complimented with some solid action at government front. Otherwise we saw that the rupee appreciate yesterday, but again gave up this morning because people realized that the governor himself cannot do everything.
So the more likely scenario is that we may have to wait for six months to a year when the elections get closer and people see that outcome has much better hope than what we had in the last few years.
Q: What is your approach to fixed income investing over the next few months?
A: We are still holding on because of course there have been some losses but the losses also depend on what kind of tenure and what is the time frame you have because if you invested for 10 years and you hold to mature and get redemption then you really earn interest income and you don't have capital losses.
So we think that interest rates will head down as we see macro numbers getting negative on GDP, industrial growth and with the new governor there will be new thinking and my thought always has been that while it is important to contain inflation, RBIs monetary policy cannot do anything when it is caused by supply-side constrains in food as well as fuel prices which are beyond the control of monetary policy, more driven by global commodity prices then you shouldn’t do something which has more negative side effect on growth.
So interest rates might have risen in the last few weeks but we are still advising our clients that hold on to it. I think the interest rate may peak out soon and it is just a matter of few weeks that we will start seeing correction again there.
Q: So what is the worst you can see for the Nifty in the course of the next three months?
A: The worst if you ask me it can go down to 5000-4900 also, that cannot be ruled out.
Q: And the best?
A: Best case scenario is that it will remain here. Let me paint the best case scenario, the monsoon is very good, crude oil prices go down, the new RBI governor takes a very strong view on the interest rates and tries to focus more on growth. And government gets its act together and clears all the stalled projects. At the same time they are able to do something about CAD, they come out with some sovereign bonds which helps the rupee. In that kind of scenario, Nifty can go back to 6000 level.