Jan 23, 2015 07:40 PM IST | Source: CNBC-TV18

See 36000 Sensex by Mar’16; China joker in the pack: Ambit

Mukherjea sees the slowdown in China could triggering a devaluation of its currency yuan and even leading to it getting ‘unhooked’ from the dollar peg

The global environment is likely to get choppy in the coming months, and investors should not get exuberant because of the stimulus package announced by the ECB, says Saurabh Mukherjea of Ambit Capital.

The Greek elections will be one of the closely watched events, and Mukherjea says there is a good chance of an anti-Euro party coming to power.

But more important to market sentiment will be the events unfolding in China in the coming months, he said in an interview to CNBC-TV18.

Mukherjea sees the slowdown in China could triggering a devaluation of its currency renminbi and even leading to it getting 'unpegged' to the dollar.

A devaluation in China could have spillover effects and lead to volatility in the currency markets, which in turn will have repercussions for the stock markets as well.

China’s Purchasing Manager Index (PMI) for manufacturing falling below 50 will be a sign of trouble not just for China, but also for the global economy, he says.

On India, Mukherjea says he expects the Sensex to touch 30,000 by March this year and 36,000 by March next year.

He is expecting a constructive session of Budget, and expects the Coal Bill and Insurance FDI Bill to be passed in the Budget session beginning February 23.

He sees the Good and Services Tax and Land Acquisition Bills facing opposition in the Parliament.

Mukherjea is bullish on auto, industrials and banks/financial services, and is bearish on metal stocks.

Mukherjea does not see many reforms being introduced for state-owned banks, and prefers private sector banks over public sector ones.

Below is the transcript of Saurabh Mukherjea’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: 29,500 is almost here and the Nifty at 8,850, what do you think, there is no looking back for the moment?

A: We go through these phases of global euphoria and global bearishness so often that I have tried to sort of immunise myself somewhat. However, focusing on practical matters this is major stimulus, this is almost comparable to what the Americans did in the first year, year and a half post Lehman. This is bound to have beneficial effect on emerging market equity flows for a while; I don’t think it just one or two day affair.

This will also arrest the decline in commodity prices and so far if that is the case it could lead to some of the euphoria around oil easing up, abating in our country. However, it is worth keeping couple of things in mind, the HSBC PMI for China is below 50, the news from China continues to get worse by the passing month and that will weigh down on global commodities sooner or later.

The second thing is the Greek elections on Sunday. I am not a political expert on Greek or European politics but the news from Greece seems to be that there is a good chance of an anti-European party coming to power and that will then lead to the usual resumption of Grexit next week. So, my hunch is the ECB knew that there is some bad news in the pipeline and they are trying to preempt that with powerful quantitative easing (QE). We are celebrating that today but perhaps it makes sense not to be too euphoric about it. There could be some global negatives coming up over the next two to three weeks.

Sonia: If there is an anti-European party that comes to power and we do see a Grexit how much do you think the markets could react on the downside and will every downside still be a good buying opportunity?

A: Let us break it into two parts, both matters at home and matters abroad because the Indian market will be driven by a confluence of domestic and international factors.

On matters at home, the domestic recovery does seem to be grinding upwards, it is a cyclical recovery and it does seem like a relatively steady recovery. We will also have a reasonably constructive session of parliament; more likely that coal and insurance will go through. Land acquisition perhaps could run into some heavy weather and so could goods and services tax (GST) but net-net we seem to be heading for a more constructive session of parliament in the Budget session compared to the winter session. So, there is good news coming on the domestic front I feel.

On the international front, the consensus view that I read from the global newspapers is that the ECB will have to get into negotiations with Greece if the new government decides to renege on its debt commitments. That is fairly big ticket bad news and the ECB stimulus is designed to counteract that. So, you will get a couple of weeks of volatility as we go through the post election turmoil.

However, the big think to look out for in the months ahead and I state this after a lot of thought is matters in China. With each passing month it is becoming more and more likely that the RMB will have to unpeg itself to the dollar. As we saw with the CHF/euro, once you break these pegs you could have major currency movements. If the RMB depreciates sharply to the dollar in the next 12 months, that has some significant negatives for the rest of Asia.

If you ask me, most of our global clients will focus on that rather than QE as the big dealer. Breaking of the dollar RMB peg and a sharp depreciation in the RMB is probably the big global macro to watch out for over the next six-seven months and it does look with the passing months to be more likely event. This sub 50 PMI is bad news for China.

Latha: You will have to break this up into how a stock market investor or trader will have to approach. Will this mean that those who have been relying in doing well on exports are going to get a beating as the Indian rupee seems to be appreciating definitely versus the euro and may be even versus the renminbi, as well would you now say that there is a trading buy in the metals?

A: As you would have heard from me over the last few years, our view for investors has consistently been don’t focus too much on short-term activity. So, the way we are looking at it is that we are in a cyclical recovery; it does make sense to be overwhelmingly in cyclicals. 70 percent of our model portfolio is in cyclicals and within cyclicals we are focusing on the higher quality sectors.

Unfortunately metals rarely make it in that higher quality bucket. The state of balance sheets of these companies, the way they have managed their capital expenditure over the last decades, doesn’t engender that much confidence. So, I wouldn’t have too many metal stocks in my portfolio. The way I would try to play the recovery is focused on the better quality names in auto, in BFSI and in industrials rather than going towards the metal sector.

Sonia: You have been bullish on these spaces like autos and BFSI for a while, taking one sector at a time in the banking space would you continue to back the leaders of the rally or would you churn to some other stocks expecting them to play catch up and if yes which ones?

A: The big call on banking is should one move disproportionately towards PSU banks given how well PSU banks share prices have done over the past year. My view is an emphatic no. I don’t think there is that much in the pipeline in terms of PSU bank reform. A lot of what is coming out of Delhi is some platitudes on the subject and I don’t think we will see that much by way of substance on the PSU bank side. So, our view emphatically will be that stay with the better quality private sector banks, ideally the small and midcap private sector banks where there are several good names. Due to the new Sebi rules I won’t be able to discuss names with you because I don’t yet have compliance but better quality private sector banks rather than public sector would be emphatically my point of view to play this recovery in our country.

Latha: We were discussing earlier that if there is tidal wave of liquidity then expensive stocks will get more expensive. One of our guests even said that the market will even want to look at 5 year valuations rather than 1 year valuations. Do you think that valuation concerns could be thrown to the winds at least initially?

A: The way things will pan out my reading is that we have seen this over the last year is as you gain more confidence about the economic recovery you will see investors move away from the stocks which are sort of the headmasters favourite, the well-known bellwether names which are loved by everybody. You will see investors going down the quality spectrum a little bit towards the second rung names. So whether it is in auto or whether it is banking, whether it is in industrials the second rung names will have a better run as we become more confident about a decisive economic recovery in India.

I don’t think the broken balance sheet names will have too much of a run, they simply don’t have the sustaining power in their balance sheet or in their management quality but I definitely believe that the second rung names both in terms of market cap and in terms of quality, the second rung names will have a much better run in the next 12-24 months. My reading is that we have already seen a fair bit of that over the last 12 months. So, it does make sense to say that I am not going to play the four times book value bank, I am going to come down the quality spectrum a little bit and look for reasonably good quality banks at say two times book value.

Similarly in the auto sector I am not going to go for the markets leaders at 19-20 times earnings. I am going to come down the size curve and look at a motorbike manufacturer at 13-15 times earnings. The second rung players will have a much better run in the next 24 months then they have had in the previous 24 months.

Latha: You would rather see the midcaps going to 20,000 rather than the Nifty going to 15,000; the rally there is going to be sharper?

A: Yes, the small and midcaps will have a much better run. They have already had a good run since last September. September 2013 to date, small and midcaps have done well. I think that outperformance will sustain.

Sonia: Your target on the Sensex is 30,000 by March 2015, seems like that is coming two months early, would you scale up your estimates on the Sensex not just for this year but for next year as well given the kind of positive news flow that we have had in the past couple of weeks and months?

A: I think we will stay with 30,000 for this March and 36,000 for next March. March 2016 our target has been 36,000 and the reason we will stay somewhat circumspect is there are fairly meaningful headwinds for India. We shouldn’t forget on a day of euphoria that we have a baking system in a fair bit of trouble, a banking system which is woefully undercapitalised, we have a infra sector which is barely firing, an infra sector which doesn’t have a viable funding model.

We will have a session of parliament wherein all probability the Land Acquisition Bill or the land acquisition ordinance will run into very rough weather. So, it is worth being somewhat circumspect on a day like this and saying that we have fairly serious problems still with our economy although we are in a cyclical recovery with better policy making than we have seen for sometime.

Latha: You bet on realty now; it is an ace interest rate play?

A: It is a very good example of second rung plays being the way to go. I wouldn’t play the largest realty stocks out there, they don’t have the sort of capital allocation discipline which we look for in champion franchises. However, there are players in Bangalore real estate market, in the Mumbai real estate market, well run real estate companies, good balance sheets, sensible cash flows, prudent management teams who I do think will be good plays in this 50-70 bps more of rate cuts in the next 12 months and a well run real estate company in city like Bangalore for example should be able to capitalise on that quite well.

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