In an interview to CNBC-TV18, Dipan Mehta, Member of NSE and BSE shared his outlook on the market.
Below is a verbatim transcript of the interview:
Q: The theme last week clearly was a relief rally that we saw in the markets because of the macro situation improving. How much of it do you think is already priced into the markets or do you see some more of an upside because of the macro positive news?
A: We saw the dramatic fall in gold and oil, both commodities we are in a short supply in India and therefore we import them in large quantities. The market is trying to assess whether this correction is for real and whether the actual trading range for both these commodities have shifted to the present levels. The longer oil and gold continue to trade at these levels, with a slightly declining trend line, the more market analysts will get convinced that this is the new level. They will then start factoring those levels for the various macro estimates that they are factoring in for the current year and early next year as well.
Therefore, right now we have been blessed with this fantastic correction, but the importantly this correction should last. The correction in crude oil to below USD 100 should remain for several more months and if it is followed up with minor price increases in diesel then at least for some time we would overcome one of the major problems which has been facing the country for the past several years. So, it is a wait and watch situation.
What we saw on Thursday was a follow-up buying taking place on account of the fact that these commodity prices remain stable. I think this trend will continue into next week as well, as and when it gets confirmed that the problem from these two commodities has been contained.
Q: Would you put any incremental money in the banking space right now? If yes, what are the one or two stocks that you would advice?
A: Considering that inflation has come off and there is widespread optimism and hope that the RBI will cut interest rates more aggressively than what we thought maybe a fortnight ago or so. Given that kind of an assumption banks are the major beneficiaries of interest rate cuts, at the same time the banking results, at lease the first few which have come have been very impressive as far as the private sector banks are concerned. Both these factors in conjunction are acting as a good trigger for the banking sector, especially private sector banks.
My sense is that if you look at the entire universe of stocks it is the private sector banks where we are seeing secular growth and very decent track record and the benefits of compounding coming through. Valuations too at these levels are not out of whack, they are pretty reasonable. So, if the private sector banks continue to perform the way they have been, especially the way they have managed their non-performing assets (NPAs), then more and more money will chase these stocks and we could see the private sector banks taking leadership position.
PSU banks could be a good trading bet if the interest rates actually flow through. This earnings season is important from the PSU banks’ point of view to assess exactly how their NPAs are shaping up and what provisions are being made. These PSU banks will become more attractive if one is convinced that the NPA problem is well behind them.
In conclusion one would have to say that given the developments that have taken place between last week and early this week, one should get overweight on the banking sector.
With the usual disclosure, we are very positive on private sector banks. Development Credit Bank (DCB) also came up with a decent set of numbers and that is a very interesting midcap private sector bank. Then there is Yes Bank which also is one of our favourites. Third would be ICICI Bank. Investors could watch out for that bank and results could be better than the Street expectations.
Considering the kind of performance, track record and the valuation these three banks offer the best returns for investors within that particular sector.
Q: In the last week of the April series, how do you see the market move itself? Do you see this series close up well above the 5,800 level or do you think it could get sticky around this zone?
A: 6,000 level certainly is going to be psychologically difficult to scale pass considering that we still have this major political uncertainty to deal with. We have seen quiet past two-three weeks on that front but once the Budget session starts then again we will see the political rhetoric pick up. That is going to act as an impediment to the market scaling higher.
Let us see what Reserve Bank of India (RBI) has to say on May 3. This is the first policy after the dramatic reduction that we have seen in gold and crude oil. So, if they put out more positive kind of a communication or even their policy for that matter then it will attract more flows into the country and after briefly having the negative flows, we are seeing the foreign institutional investors (FIIs) flow turn positive. That is an important development.
Even if markets remain at these levels, some amount of retail money also could be attracted because now at least one avenue of investment that being gold will certainly be questioned by the retail investors and the high networth individuals (HNIs). So, some amount of diversion into equity markets could be expected.
However, markets have to remain stable and a bit of the volatility has to come off. At the same time, earning season will pick up next week and the weeks thereafter. We are entering into a bit of a heavy dosage of newsflow coming through. How the newsflow plays out could determine the levels of the market. However, per se, just because of the fact that some macro level changes have taken place, investors should look forward to better times.
As I said, the more these oil prices and gold prices remain at these lower levels, the more confidence will come through into our market.