It may be for a moment but Nifty did touch a new all-time high at market opening today as the index opened above the 9000 mark.
Led by BJP's win in four out of five state elections, the market across sectors is euphoric in today's trading session but Nilesh Jasani, head of research (Asia Pacific), Jefferies cautions that the party may be over soon and advises investors to 'dance very close to the door'.
Speaking to CNBC-TV18 he said that policies going ahead can be negative for the market. "What can be good socially, ethically, morally, may not be good for the market," he said.
Contrary to popular opinion, Jasani is bearish on the market and feels that all the ingredients for a bubble are available right now.
He sees the market hitting a top at current levels and is asking people to book profits.
Below is the verbatim transcript of Nilesh Jasani’s interview to Latha Venkatesh, Sonia Shenoy, and Anuj Singhal on CNBC-TV18.
Anuj: I am reading your note and you are saying three things could happen -- there may not be more than a pop for the market near term, we could argue that we are seeing that right now, and policies ahead could be market negative. If you could explain that.
Latha: I think he is against it, he is against all the three, right?
A: Yes, I think definitely the point is that policies ahead could be market negative. From my point of view, what we explain in the note is a simple concept that what could be good socially, ethically, morally, or even politically, may or may not be good for the market and that is the main difference that we highlight in the note. From our point of view, the government has got a mandate as per the election result to do more of what they did in October-November i.e. go after the black money, cleanup the system, and whether you call it response, whether you call it whatever you call it, the reality is that that drive to increase government tax revenue as a percentage of gross domestic product (GDP) is going to be negative for the segment that is very important to the market.
Again, whether we like it or not, the market spends on a particular segments wealth, health and growth, and that segment will have to give out a bit more to the government in the form of taxes, some of that willingly, some of that unwillingly and that will impact private sector capex, that will impact consumer discretionary spend. From that viewpoint, in an expensive market, it could be negative sort of driver in the months ahead.
Sonia: Such a strong ruling party mandate, generally does it reinforce foreign investor’s views on India or will they still look for earnings growth before taking that next call on the upside?
A: If we pass that particular statement, a good reinforcement to stay a popular government is a positive for the market because it would reduce political uncertainty, it would bring policy clarity, and somewhere in that you would make the assumption that it would lead to better growth. Now, I think the first two, again, somewhat questionable -- on the political uncertainty part, the fact of the matter is that Rajya Sabha majority is still at least two years away and before that there could be once again a bit of an relaxation cycle, political cycle.
In terms of policy clarity, as I said, that there is definitely going to be a policy clarity, but policy preference is not growth at all cost which was the case let us say in mid 2000s or early 10’s. It is preference of fairness in equity and third as I said is that if valuations had a room for rerating, obviously lower political uncertainty is a positive, but valuations are expensive.
Latha: There are economists who say on the contrary there is less need for the government to be populist now since its mandate is so widely accepted. 53 percent of the population lives in states ruled by BJP governments, that is an outstanding sense of confidence, why would they need to go for populism and these guys also point out that in any case Modi’s policies have not been anti-rich so to speak, Jan Dhan for instance, or direct benefit transfer (DBT), these have been pro-poor but not in an anti-rich sense.
A: I think if we remove just the tax that you mentioned, anti-rich populism, pro-poor then I think we will get a bit more clarity on the market implication. I think Modi’s policies are going to be fairly clear, they are going to be about ensuring that we all live clean and we all live ethically right. Government tax revenue to GDP has to go up, government spend has to go up, and government leads the growth charge to some degree.
In that if private sector capex remains low for a while, so be it. In that if rich people can’t consume as much as they used to, so be it. In that if taxmen has to be stricter than before, so be it, and that is exactly the point we make in the note that when Modi said on December 25 that at some point stock market investors will have to pay their due, it is unlikely that he has completely forgotten about that. Maybe the timing was not right and that is the point that it is about fairness in equity and that is the mandate.
Anuj: Last year we had a scenario in February when the market was at the bottom. Of course maybe at the peak of the fear with the Nifty below 7,000, you think right now we could be at euphoria phase in that case and we could be near a market top?
A: We have all the ingredients of a bubble and that is because of local liquidity. It is one of the reports we wrote couple of weeks back. For a change, the market driver is local investor, it is not something that happens a lot in the last 10-15 years and local liquidity is absolutely enormous. Now, you can link that to demonetisation, you can link that to euphoria and so on and so forth.
The point I am trying to make out here is that I can’t abandon fundamentals and news flow and based on that, I have a negative view but I equally have to pay respect to the fact that there is enormous amount of liquidity which is risk seeking, which used to be in sort of black market being lent and borrowed by various people but forced to be in deposits and now headed towards markets, and the impact of that frankly no one knows. Yes, if I have to take a call, I would say that market should peak somewhere around here, but as I said, there is a huge risk to my call in domestic liquidity.
Sonia: What about the global cues, how does that feature in because now we are seeing the dollar index once again back above 101, there is a Fed rate hike that is coming soon, would that be one of your ingredients of a bubble as well?
A: I think the standard dollar and interest rate correlation have been broken with equity market while equity markets themselves remain correlated. As you know that most of the Asian markets are up near double digit, so far this year, and so equities themselves are correlated. However, the usual correlations or relationships that you had with long bond yield or DXY, is sort of moving in both directions these days. At times when interest rates go up, market starts up, at times they go down, markets are up and vice-versa. So, I would say that, yes, without a doubt if there is a major global reversal in equity prices, we will be impacted but at the moment we are not expecting that.
Latha: What would you therefore have investors do, you have any over weights at all or are you asking people to take profits?
A: We are asking people to take profits. Having said that for many professional investors this is exactly the time they can’t they stay absent from the market or raise cash weights enormously. So, your usual defensives likes staples, IT and utilities will help here but outside that what we are telling people is that dance very close to the door. When you have markets which are absolutely at a level that you can’t justify based on your traditional framework, you want to be as liquid as possible in case you have to change your view overnight.
Latha: Where do finances figure in all this? That is a large sector – public sector, private sector, NBFCs, within NBFCs pure play housing finance, where do all these fit?
A: Negative. One sector where when you look at the overall developments, starting from newsflow, you have a sector where deposit growth is high but they don’t have much lending to do, a sector where the central banks has clearly stated that they are really not interested in cutting rates aggressively. It’s a sector where long bond yield is also not going to fall much given where valuations are. Whatever impact of demonetisation or some other bills tomorrow, a lot of that is going to be borne by financials. So, we still are dealing with potential minor NPL spike because of demonetisation. So, negative on financials from our view point.
Anuj: Anything that is a screaming buy for you right now or do you think we are well past that mark now?
A: Roughly well past that mark. This morning our team came out with a screaming buy on BSE. So, there are definitely stock level opportunities and there could be quite a few in healthcare. However from the market view point itself, if the market were to really correct by 8-10 percent at some point, very few stocks will be in green during that time.
Latha: What about metals? They have had a good run, they were the best performers last year, any view on them?
A: That is the call that you in a way link to your global call. As long as you are reasonably positive on global markets, metals generally will be alright. Whether you buy Indian metals as a result of somewhere else, that depends on people’s mandate. However your commodity price cycle to a degree depends on your global market cycle and global newsflow. We are as I said not too negative on that.
Sonia: If you do believe that this part is going to end very soon and one should dance close to the door, when do you see this party restart? What is that one trigger that could sort of get this bull market to resurface?
A: Party to restart totally depends on the phase in between how we correct and where we correct. By my standards I am not as negative as I generally would be. I think that overall growth is quite intact and political uncertainty in India is the medium term trend here which is a great thing. So, at some point once we have sort of a better handle on realistic earnings growth and valuations, I think party will restart more on just value coming back into the market and a bit of less euphoria, I don’t think we need any major fundamental correction. I think from that view point the economy is very stable, in a great shape.
Latha: So, in that case, what are you working with in terms of an earnings growth for FY18? I would assume, I am asking you Sensex, Nifty, but whatever the universe you track.
A: My view is that FY18, forget about FY17 at the moment, which is obviously completely, it is going to be confused because of demonetisation and impact that we see in the fourth quarter, but at the moment, market is expecting FY18 to be about 30-35 percent above FY16. So, two year nominal GDP growth of roughly about 22-23 percent that market is expecting, earnings growth higher than nominal GDP growth.
Point to point, two year earnings growth will again be lower than nominal GDP growth at somewhere around 10-15 percent. So, we have quite a bit of downgrades coming. They are happening slowly and will persist in my view.
Sonia: One thing that this Uttar Pradesh election result has taught us is that the market or maybe not the market but the middle class, lower middle class has taken demonetisation very well. If there is another step like this that the government does take, in the near future, do you think this time around, the market will digest it differently?
A: Again, totally depends on the stage. At the end of the day, I am going to make certain statements which are not going to sound ethically right, but the fact of the matter is that the market, to a large degree depends a bit more on the health, wealth and growth of the top 5 percent of the population than bottom 85 or bottom 95 percent of the population. Anything that the government tries to do to reverse that again could be very good for the economy also in the medium and long-term, could be very good socially, could be very good politically.
But it is unlikely to be a positive for the earnings growth of FY18. And that is the whole point we are making that what could be good from one view point may not be good for the market.
Latha: But, my sense is that Mr Modi is demonstrating that it is not so much a zero sum game. Bank nationalisation eventually turned out to be negative in the late 1960s and early 1970s. But, Modi\'s policies have been more Jan Dhan, more direct benefit transfer, more digitisation, that is pro-poor but that is not necessarily anti-rich. I am just coming back to that same point again. You do not think that he is capable of an out of the box treatment of macros?
A: I think that it is perfectly true that it is not zero sum game at the economic level, particularly long-term economic level or even short-term economic level. And I am not saying that it is the simple fact is this that what we call the market or the listed sector, for example, they will not benefit if tomorrow everything in India moves online retailing.
Even if it benefits in the long run, today you do not have the plays in the stock market, rather you have plays that will hurt very badly. So there are trends and this is just another such trend that Jan Dhan, etc. are very good. They just do not benefit listed companies profits for FY18.
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