The Nifty has been capped in a very narrow band of about 5,160 to 5,320, says Gaurav Doshi, VP-PMS of Morgan Stanley PWM. According to him, the Nifty needs to break-up this band. “While the Nifty continues to trade in a small band, we think a move above 5,320 will potentially take the Nifty higher to 5,550 or a break below 5,180 will take us down to the 5,050 levels,” he warns.
He further says, near 5,000-5,050 there is still strong valuation support in this market. Therefore, he says, from those levels, the downside would be limited.
Below is an edited transcript of his interview with CNBC-TV's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: How are you positioning for the May series?
A: The Nifty has been capped in a very narrow band of about 5,160 to 5,320. I guess the Nifty needs to break-up this band. A break below with a follow-on move would potentially take us to lower end of the bigger range of maybe 5,050 to 5,550. So, while the Nifty continues to trade in a small band, we think a move above 5,320 will potentially take the Nifty higher to 5,550 or a break below 5,180 will take us down to the 5,050 levels.
It’s hard to preempt purely because we have got expiry tomorrow. Secondly, we have been seeing these erratic moves the Nifty has been making on Friday, taking the last two Fridays as an example. So, it’s going to be hard to preempt which way the break will be.
Earnings are going to be a mixed bag. You will probably get to see some weaker earnings numbers towards the latter half of earning season. There are a lot of global cues involved. So, short-term traders should wait for the trend to make itself clear and come to them.
I think investors should look to add at the lower end of the range at near 5,000-5,050 because we believe that all said and done at those levels there is still strong valuation support in this market. Therefore, from those levels, we think the downside would be limited.
Q: What do you pick up from your sales test though? How are people approaching the next month which is usually quite volatile for global equities? Are they expecting to see a much bigger cut or more of this range-bound movement?
A: The last two to two-and-an-half weeks have been pretty dry. We have not been able to get a sense from traders in terms of what the mindset is with regards to institutions and the possible flows.
There is whole talk about sell in May and go away. A lot of global guys are talking about that. It is one aspect to keep in mind. But, on the other hand, we monitor weekly emerging market inflows into global emerging market dedicated funds. After 12 consecutive weeks of inflows, I think an excess of about USD 12 billion, we have seen about a billion dollars move out in the last two weeks, it’s been two consecutive weeks.
All in all, given the inflows that we saw and the rally that took place, it’s not an unreasonable thing to see some amount of money moving out. So, the liquidity still eludes us. I think it’s not just India, it’s happening across emerging markets. One could relate to the fact that the markets are waiting for little more clarity on what the Fed will say this evening, on how things will play out in Spain and France on the political side and probably revisit emerging market allocation. But, as of now, we continue to think emerging markets will be an asset class that money will get allocated to.
Q: The one sector we have more or less wound up with in earning season is IT, what is the view there?
A: As a house, we have been overweight IT. There is no doubt that it’s been a mixed bag. But as an investor into this country, who is probably benchmarked against the index, this is a sector you cannot afford not to own.
There is no doubt traditionally thinking has always been that you don’t look beyond or you don’t need to look beyond an Infosys and TCS. We have seen smaller companies have individual issues, management transitions, forex issues and etc. But I think what I would think has change is the fact that investors are now willing to broaden their portfolios in terms of look beyond the obvious two. They are also acknowledging the fact that we are seeing individual companies deliver, go through smooth transitions in terms of new management capability.
There is no doubt management has guided that there are uncertain times, growth may not be as great as what market is expecting. I do believe that the underlying valuations like for Infosys maybe at about 15-16 times earnings make them compelling opportunities to look at with one-two year view. So, while IT may not be a trader’s delight, I think as an investor one has to have exposure there. We believe that as and when these dips come due to nervousness and due to guidance, which can be revised on a quarterly basis, we think one should take advantage opportunity and keep nibbling into these dips because as a sector you want to own.
We think that if tomorrow rupee goes to 53, if oil starts to spike up, if you continue to have political policy paralysis in India, it is going to be a place where money will hide. So, from that basis as a portfolio exposure we would definitely recommend it.
Q: What exactly is the problem with infrastructure? Are people getting circumspect again about this sector and its earnings potential or has money begun to pull itself out of this space?
A: I think money had got a bit hopeful about what the positives potentially that could lie ahead for infrastructure, government action on power, the hope that we get into an interest rate cut cycle which would eventually review capex and reinvigorate corporate India, a lot of stalled clearances we thought would come through. I think a lot of money bought into the hope that these scenarios would play out. Unfortunately, for us lot that was expected hasn’t played out. So, on one hand, you are seeing a lot of money move out thinking that nothing has changed and we will revisit this sector when we believe that there is going to be some sort of incremental change from policy or capex.
But having said that, on the other hand, we are also seeing a lot of money is selective about what they are willing to bailout on. Within, infrastructure there are segments capital goods and certain other sub-sectors where we are seeing at least from an earnings point of view that a lot of these companies have got strong and extremely strong valuation support.
Second, incrementally the gloomy cloud, which exists for the sector, we are seeing one-two raise of hope in the form of the fact that a lot of the old low margin orders are getting executed and pushed out of the system incrementally. We could have seen an earning trough for a lot of these companies. We have seen a lot of them manage to get their way out of the debt traps that they were in.
I guess the big trigger now going ahead for a lot of them is going to be incremental order flows. But that is subject to when things improve, when capex improves, but on a lot of these companies there has emerged a very strong valuation support. Consensus is of the view now that atleast there is an earnings bottom in place. Therefore, money is selectively staying on, but in broad based as of now you may see some more money pull out of infrastructure.