Moneycontrol
Apr 18, 2017 12:18 PM IST | Source: CNBC-TV18

JM Financial sees 'monster rally' in PSU banks, sticks to 11,000 target for Nifty

Gautam Shah of JM Financial believes that the current bull market cannot be derailed by smaller developments. He expects the Nifty to bottom out soon and touch 9500 by May.

Even when the stock market was going through phases of correction in the recent past, JM Financial has maintained an upbeat outlook all along.

The financial services firm has said that the Indian bull market cannot be derailed by small developments, and believes that the ongoing consolidation will also get over soon.

“This is one of those sideways correction which happens from time to time. We have seen four such sideways movements since January,” Gautam Shah, Associate Director & Technical Analyst at JM Financial told CNBC-TV18 in an interview.

He added that the market handled recent geopolitical news flow well and volatility index did not see much uptick during the period. Going forward, he expects the Nifty to find bottom very soon.

Shah sticks to the target of 11,000 for the index though he expects it to touch 9500 by May.

Shah expects some underperformers to be able to do well and said that it was a good movement for the market as it makes the bull run stronger. "Power sector could be the dark horse and is currently placed at the start of a major rally, and metals too were witnessing a comeback," he said.

Shah added that he expected a 'monster rally' in PSU banks for the weeks and months to come. “Many smaller names can move up 2 or 3 times from current levels and investors should look out for sizeable returns,” Shah told the channel.

Metals sector were the best performers in the past six months and that it will continue to go forward in higher direction. The slight correction in the past 7-10 trading sessions is healthy and a recovery is seen going forward, he added.

Below is the verbatim transcript of the interview.

Anuj: Before discussing about the market, I want to discuss metals with you because last time you were talking about it that this could be just a beginning of a rally and don't be surprise by the quantum of gains. Do you expect this rally to continue in this space?

A: In the last six months metal has been one of the best performer in the market place but at the same time if you look at the last seven-ten trading sessions, metal as index has taken this market down by about 150 points from the recent high. Therefore, we are of the view that metal rally is likely to continue the whole of 2017. The setup is still as good as one can get and the small corrections of 3-4 percent, which keep happening from time to time, they just make the setup very healthy. However, now with BSE Metal Index getting back close to 11,000 marks, we see a strong recovery and today's rebound that we are seeing, is durable and is likely to continue in the next few days as well. So from risk reward perspective this looks like a good opportunity to get into metals, keeping in mind that the last ten days have been corrective for them.

Sonia: What about the market. It has gotten into a bit of a funk now, consolidating around these levels. You think it is just bracing itself for the next move upwards?

A: It looks like. I think this is one of those sideways corrections that you keep seeing from time to time, in fact since the time you started rallying from level of 7,900 in early January, we have seen four such sideways correction wherein the market has paused for about a week. Therefore, something similar is happening right now but globally what is happening at the current juncture is little unnerving because what you see on the charts and what you hear is completely different, in fact there is a sort of disconnect. When you look at the chart, you have enough evidence to say that this is indeed the mother of all bull markets and it is going to take the market to greater heights in the weeks and months to come but on the other hand you have news flow and you hear things like mother of all bombs, obviously as a global citizen you are forced to lose commonsense and go by the news flow and not by the evidence that you see.

However, I would like to believe the way the Indian markets have handled this news flow in the last five-six trading sessions is quite commendable because India volatility index (VIX) has not seen any uptick even though global VIX has seen substantial surge, the US market VIX is up about 30-40 percent but Indian markets, the way it has handled it is quite positive and we are of the view that this pullback that started off from close to 9,300 levels, is likely to end somewhere in 9,000-9,100 area. Therefore, as I explained last time, this crossover above 9,000 is a huge development that has taken place last month and I do not think this Indian bull market can be derailed by small developments. It is only if geopolitical accident were to happen that the Indian bull market can get derailed which is not our view. I think our working view is that the Nifty sees a rebound from 9,000-9,100 zones and goes to levels of 9,500 and beyond and our bigger picture target of 11,000 also remains intact. So we do expect the Nifty to find a bottom to this pullback very soon.

Latha: Everybody is looking at the result season. The earlier results have not shown us too much hope. Is 9,500 round the corner or could it take some doing?

A: One cannot complain if the market is taking time to go up because we are already up quite a bit in a short span of time and these consolidation phases of two-three weeks from time-to-time only make setup healthy but the global news flow of the last five days has just got the market slightly more cautious. The sentiment was very different till a couple of weeks back and I would like to believe that we should be seeing 9,500 by the month of May itself. I think that is the kind of timeline that we have. Let us not forget that the Nifty has gone beyond 9,000 and sustained well above it for almost a month now and if it were to do the same for the next one-one-and-a-half-weeks and then start the next leg up - that would be very positive because once you are in unchartered territory, levels are meaningless. So 9,500 can quickly become 9,700-9,800 as well but the point I am trying to make is that at levels of 9,100-9,200 your risk reward is extremely lucrative to go long unless something happens globally. So your downside is about 100-200 points and upside could be 500-1,000 points on the Nifty.

Anuj: You won't talk stock specifics but some of the high beta pockets have started to do well. We spoke about metals. Real estate, a couple of capital goods stocks are seeing big rally. Do you see big trend here?

A: I think so and what we have also seen is that a lot of underperformance is making a comeback. Late last year metals started to do well after underperforming for two-and-a-half years, oil and gas as an index made a strong comeback after underperforming for five years, power has made a comeback and I spoke about it in our last interaction where we said that it could potentially be a dark horse for 2017. This index is coming back after seven years of underperformance and in the last one month itself a lot of these power stocks are up anywhere between 15 percent and 20 percent and this is just a start of a major rally, so the whole of '17 we expect a lot of these power stocks to move up 40-50 percent in value. So it is good to see that a lot of these underperforming stocks come back and it actually makes the bull market a little stronger because you do not want the same set of stocks leading the market higher, which is the banks; they have done that in the last six-eight months but time-to-time you need more participants to make this bull market stronger.

Sonia: So in this list of underperformers what about public sector undertaking (PSU) banks. You have been a bit more bullish than the others on this space. Do you think that is going to start to perform as well?

A: I think so. I think that you are looking at a monster rally in some of the PSU banks in the weeks and months to come. The kind of setups that we have in some of the smaller names, I would like to believe that many of these names can actually move up two or three times from current levels and a lot of the midsized names can give 40-50 percent upside over the next six-nine months. Here in a normal scenario -- globally if something were to happen and if the Nifty goes back below levels of 9,000 then all bets are off the table but in a normal scenario we would like to believe that PSU banks will be the star performer. However, you referred to some of the Futures and Options (F&O) names which are moving up 15-20-30 percent on a regular basis, I am sure time will come where you will see some of these PSU banks doing the same. So we are extremely bullish there and investors should look out for sizeable returns there.

Latha: The star of the last 12-14 months have been the non banking financial companies (NBFC) space, the Bajaj Finance and such like. Would you take off money from those NBFCs and go over to PSU banks?

A: It's a difficult call. I think PSU banks give slightly better risk reward because after the kind of correction that the Nifty has seen in the last one week, some of these banks have come off a little or they have been sideways. So maybe a risk reward is better but in bull market it is all about opportunity cost and you have to stay with the winner, so NBFCs as a play is likely to do well for months to come. Yes, they might be slightly overbought now and the risk reward might not be justified, so from that perspective I am not very sure whether you should be buying fresh here but PSU banks are slightly more lucrative at this point of time.

Anuj: Reliance Industries, ITC, Larsen & Toubro (L&T) - these three heavyweights have woken up and counted for much of this rally. What are your thoughts on that?

A: I cannot speak about specific stocks but it is good to see these stocks move in tandem and take the Nifty higher. Reliance is an interesting case. It falls in the oil and gas space which was underperforming for almost five years and typically when such underperformance gets covered, it happens in a very short span of time which is what has happened in the last few months. It is very interesting in the oil and gas space because when Reliance underperforms, the oil marketing companies (OMCs) take the oil and gas index higher and when the OMCs underperforms, Reliance does well and that is the reason you have oil and gas index coming back to those levels of 14,300 which, if I am not wrong, is 2007 high. I think this is going to continue, a lot of people are asking us whether we should be entering these stocks even at current levels. I think the answer is yes, and every small decline in some of these names that you mentioned is a buying opportunity because this is a kind of underperformance that is going to be covered and it is going to take a lot more upside for it to come back to equilibrium sort of levels. So we would be very positive there and every small decline is a buying opportunity.

Latha: Real estate is the new flavour over the last few weeks, in fact months. Is it still good to climb?

A: I am not sure whether it is the new flavour because a few days back not many stocks in the space were doing well and its only yesterday that a lot of these names have seen major breakouts. As I said this is a season of underperformers making a comeback, so this real estate rally looks genuine. It is not one of those rallies that we saw in the last six months that ran for a few days and then just cooled off but the setup there is quite good for more upside.

One final point on the Bank Nifty, it's an index that has lead this bull market very well and while we were doing our analysis in the last few weeks, we have come up with a target as high as 25,000 for the bank Nifty and we feel that PSUs and the private names are going to take it to those levels. So that is a big upside for a largecap index and if were to play out, you can expect Nifty to do well.

Disclosure: Network 18, which publishes moneycontrol.com, is a part of the Reliance Group.

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