The emerging markets are unlikely to do well in the near-term owing to a stronger dollar and rise in US bond yields, says Vibhav Kapoor, Director of IL&FS. He sees huge amounts of money flowing back from the EMs to the US.
Vibhav says demonetisation or not, the Indian market is bound to suffer due to this in the near-term. Nifty, he says, is sure to break the Brexit day low point of 7,927 points.
He is not too worried about the cash crunch at this point, as he feels it may only last for another month. But the main issue he says is how long the impact of demoetisation will last.
The December quarter results of companies will show the real condition, he says. He is confident that bottomline may not actually be that bad. This fact will give a boost to trader sentiments.
He says the auto sector is a very good sector to buy into, as he feels the demonetisation effect won't last very long on this sector. But he waits for the share prices to get 5-10 percent cheaper.
He recommends oil and gas companies due to the surge in crude oil prices after the OPEC decided to cut output for the first time in eight years on Wednesday.
Below is the transcript of Vibhav Kapoor’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: This has played out as per the script six months back when we spoke to you. The reasons could have been different, but you expected these kind of levels, but are you buying now?
A: We are still very careful. There is a lot of uncertainty. That is the real issue and as I have said earlier, there is uncertainty on two counts, one of course is the domestic factor, which is the demonetisation, its impact, how much it will impact earnings this year, next year which is a major issue. Then of course, you have the global uncertainty about the dollar, about what happens when Trump executes his policies. The dollar is becoming stronger and yields are going up there, interest rates are going up and as I just heard it is going to have an impact on the rupee if we reduce rates very significantly. So, there is a limit to doing that. Everything is uncertain.
Then you have the European uncertainty, which is coming up. You have the Italian referendum, you have the Austrian presidential elections. So, in such uncertain times, markets never do well.
Latha: I guess, for the rupee the crude price also becomes a little significant. I do not think RBI can ignore the clear bullishness that has crept into the crude market. More importantly, I wanted to ask you how the demonetisation math looks now. There was an expectation that if some Rs 4-5 lakh crore, does not come back, we will get some kind of debt reduction in some way of fiscal munificence or at least a satisfaction that that kind of black money has been taken out and fresh black transactions will not happen. Now with our news break that it is Rs 11 lakh crore as of November 30, does that disturb the demonetisation math?
A: We do not even know whether that math is applicable. People have given different opinions. Even Reserve Bank of India (RBI) governors have given different opinions. So, this is very uncertain. But of course, the surprising part is that people have been able to convert everything and bring it back as white money, which is a negative in many respects.
Unfortunately, even the media has never been concentrating on telling how people have been converting this black into white. So it is unfortunate. We will have to see, but it is difficult to say right now on the math.
Latha: So what exactly is worrying you -- earnings cuts, how long will the cash crunch impact actual output? What will you look for to start buying?
A: I am not too much worried on the cash crunch because it has to end sooner or later, so, it maybe 10 days more or 15 days more or less.
Latha: What if it were two months more?
A: Even then. The issue is how much impact it will have after that. It could have an impact for another quarter, it could have an impact for another two quarters. That is something as to how much impact it will have. So, of course earnings will be impacted for December quarter. They will be impacted for March quarter. But will they be impacted for June quarter? That is something which we do not know today.
Sonia: What do you see as the floor for this market now because in a way, that Brexit day low of 7,930 has been sacrosanct? It has not been broken yet and we bounced back from there. Do you get a sense that this next wave of volatility, that low could be breached as well?
A: It could be of course, certainly. That is the way markets behave. So, you had one big fall then a rally to 300 points. Now maybe the next downtrend is starting because there is nothing that happened to change that perception of the uncertainty, etc. So, you could see lower levels here definitely.
Latha: But also, there is a strength in the global economy. Chinese numbers have looked good. Commodity countries have got a little more pricing power, both metals and crude and the US numbers have recently been looking good. So, if that is the case, there should not be too much of a downside to risk assets.
A: Emerging markets are not going to do too well for some time to come and this is irrespective of our demonetisation issue. The dollar is going to strengthen, the US bond yields are going to go up and I am very much more bullish on the US markets and the US dollar and US yields than maybe a lot of people are. You are going to see a huge amount of money flowing back into the US and into US equities probably. They looked the best at this point of time as an asset class. I would see maybe the dollar index (DXY) going as much as a 110 over year or a year and half time. So, that sort of atmosphere is never good for emerging markets.
Anuj: So are you saying, in that case, we could be looking at a bit of a bear market scenario for India, near-term?
A: It is too early to say. I hope not. But right now, it is already uncertain. And to say we are in a bull market, all analysts always, everybody keeps on always saying we are something different and all the time, we are going to outperform, all that is nonsense. If you go back to past records, not all the time, we outperform over a long period of time. But there are phases in between when you do not outperform. Even the emerging markets underperform. So, we are in one of those periods right now.
Sonia: How do you approach the consumption space, auto and paint companies? We have seen a bit of damage because of demonetisation, but do you see this extend some more and is this a time to buy or stay away?
A: Right now, I do not think it is time to buy anything, but yes, some of the consumer companies will look good if another 5 percent maybe below what they are or 10 percent.
Latha: When you say consumer, you mean the auto kind, fast-moving consumer goods (FMCG) kind?
A: Yes. When the December results come in January, that is the real time. Now a lot of these companies are going to cut costs also this quarter. So, the bottomline may not be as bad as you are thinking. For example, advertisement costs. For example, Hindustan Unilever (HUL) said they are cutting Rs 150 crore a month. So that is equivalent to a 15-16 percent margin. It can take care of a fall of about Rs 1,000 crore of sales. So, they will cut a lot of costs in this quarter and next quarter and therefore, the bottomline may not turn out to be as bad. So, my hope is when the third quarter results come, that is the time you may get some improvement in the market.
Anuj: So, how does one create portfolio in this market because obviously, you cannot be on cash. You have got to invest in the market. Which pockets would you invest in right now?
A: Selectively, start for example, some financials, consumer companies I have said, automobiles looks like a fairly good sector.
Anuj: Financials meaning non-banking finance companies (NBFC)?
A: Some NBFCs. The problem with NBFCs is not only what is happening. The problem was that they were just too expensive. They are trading at 15 times book value, something like that -- absolutely ridiculous. Demonetisation or no demonetisation, they had to fall some time. So this has just hastened that. So you have to look at valuations, you have to look at what type. You can start investing, but it has to be very gradual because this is going to take some time.
Latha: So, very gradual you would say consumer and financials as well.
A: And some financials as well, yes.
Latha: Not public sector banks yet?
A: Public sector banks, in any case, we are not very clear again outside the demonetisation. There are other some companies or sectors one could invest in, for example, some of the oil and gas companies, which are not directly impacted by demonetisation on a day to day basis because they are selling wholesale, etc. So the refiners or the upstream companies, they do not get impacted with this. And if oil prices are going up, they should benefit to some extent.
Anuj: Any auto name that you would buy right now?
A: Auto by itself looks good. In fact, probably the best right now. We have seen Maruti numbers yesterday of course. It is a lot of destocking and next month you might get some back. But it is showing that things are not that much impacted in the auto industry. If they are, for 2-3 months, they will recover pretty fast.
Latha: Pharmaceuticals would be a place for shelter?
A: Yes to some extent. Unfortunately the normal ones like IT for example, which would have been so good shelter at this point and pharmaceuticals have got their own problems. So IT, as we have discussed many time earlier, has its problems in terms of business model change. Now Trump coming, we do not know the uncertainties there and pharmaceuticals has got these Food and Drug Administration problem all the time after them. But yes, some of those stocks have fallen quite a lot. Maybe 20-30 or maybe 35 percent from top levels and therefore, there could be at least good shelters at this point of time.
Latha: Is fixed income or gilts still a better option than equities for the next six months to one year?
A: Most of the returns in fixed income are over now, they are played out. But yes, you might get a few more and as you were saying earlier, I completely agree with you that I do not think the RBI can go on cutting rates beyond a point because of US interest rates going up and the rupee will therefore suffer very much. So you will just have limited cuts and therefore returns will be limited.