Mar 21, 2017 02:50 PM IST | Source: CNBC-TV18

JM Fin's Gautam Shah sees 2000-point Nifty rally in 12-16 months

Gautam Shah of JM Financial feels investors currently have no reasons to book profits. He has also set a near term target of 9,500 for the Nifty in 4-6 weeks and remains upbeat on power and capital goods indices

Riding high on likely political stability and a factored-in interest rate hike by the US Federal Reserve, the Indian market has seen strong movements in the past couple of weeks. Equity benchmarks clocked record highs and have held on the key milestones.

However, the current week has seen investors booking profits, dragging the indices slightly lower. Is that the right approach or is there a scope for the markets to head higher from this point?

Gautam Shah, Associate Director & Technical Analyst at JM Financial believes this is still a nascent stage of a bull market and sees no reason to book profits. He highlighted the manner in which indices have achieved key levels and that is noteworthy.

There were two attempts to touch and cross 9000-mark on two occasions earlier, but there was no occasion to rally beyond that level, he said. “This cross over (to 9000 and beyond) is genuine and reliable…the consolidation in the markets ahead of the UP elections was healthy,” he told CNBC-TV18.

Shah has positive targets for the Nifty going forward. He has set a near term target of 9,500 for the Nifty in 4-6 weeks. In the medium term, he sees the index touching 11,000 level in 12-16 months.

On index-specific bets, Shah is upbeat on Bank Nifty along with metals and oil & gas. The dark horses, according to him, are going to be power and capital goods. “The index suggests major breakout on the power index, which will have ramifications over 1-1.5 years,” he said. Barring banks, which are a favourite, people should invest big in these sectors, he added.

On defensives, he expects FMCG to be an underperformer. On ITC, he highlighted that though the stock has performed well in two months, he is unsure if it the stock can match the pace of upside of other stocks. Shah remains negative on pharma sector as well as it is a gross underperformer. He has a similar outlook on telecom as well as he sees no juice left in it.

On non-banking financial companies (NBFCs), he sees many stocks that have a potential of 30-40 percent upside.

Anuj: Big move on the Index, what next - a move towards the 9,600 or do you think it is time to book profits?

A: There is no reason to be booking profits in this current market scenario. I think we are still in the nascent stage of this bull market and the manner in which the market has crossed over above the important level of 9,000 is something to take note of. I think you need to go back in history and check as to how the market has behaved around the level of 9,000 because history will actually tell you what is going to pan out over the next 6-12 months. There have been two attempts to get pass 9,000 in the last two years. It happened in early 2015 and late 2016, but in both those occasions the evidence was just not there for the market to sustain and rally beyond levels of 9,000.

In fact in 2015 when we got there, the market had discounted the election results and it had just run too much ahead of itself and that is probably the reason you started that big correction from around that level of 9,000 and then in 2016 as we tried to get pass the number, the global market scenario was not conducive for Indian market to rally beyond the same, but this crossover which has happened in the last couple of week is far more stronger, far more genuine, far more reliable on the charts and it is really been backed by a number of technical triggers. The manner in which the market consolidated just before the UP election results, I thought was very healthy.

So, the way we look at it I think from the short-term perspective the market has a lot more upside. We have a near-term target of about 9,500 and we expect these targets to be achieved in the next 4-6 weeks. I also believe that the market has made a very strong base around the 8,950-9,000 mark. So, any and every decline towards the same should be used as a buying opportunity.

On the other had if you really look at the medium-term or the longer-term charts of the market you will see that breaking pass the level of 9,000 is almost like breaking the shackles and this has opened up substantial upside from an investor’s perspective. So, we as a technician would not be surprised if the Nifty goes to as high as 11,000 levels over the next 12-16 months. So, the set-up is as good as it can get. People who fear entering the market at 9,000, I think that is not justified because the entire scenario has changed; global markets are very supportive. India VIX has almost collapsed to the kind of levels it is trading at and for the first time in long time Indian politics has been a catalyst for the Indian markets to do something good and that is actually a welcome change that we have seen.

Latha: Who would lead this rally, which stocks?

A: So, far it has been the Bank Nifty, no rocket science. I think the Index is up about 35 percent in the last many months. However, as this rally is playing out we are noticing that many of the underperformers are actually joining the party. We all know what metals have done in the last 6-8 months. Oil and gas has done phenomenally well after almost 5 years of underperformance. Earlier some of the oil marketing companies were leading from the front and now with Reliance joining the party the oil and gas Index is looking stronger and stronger.

I would like to highlight here two other Indices which are emerging and could potentially be the dark horse for the rest of 2017. Firstly, I think power, I think not many people are looking at this Index, but if you look at the set-up of the last few months it suggest that there is the major breakout on the power Index that has ramifications for the next one-one and a half years. Power as a sector as really underperformed for almost seven years now. There is a lot of make-up to do, so if people are looking at stocks or sectors wherein you can enter comfortably without worrying about the risk reward, I think power is something that we would look at.

Second, capital goods which has sort of been an underperformer in the last couple of months has now started to look extremely positive on the charts and that is an Index that could potentially give you about 20 percent upside over the next six months. So, barring banks which continue to be a favourite the names which I mentioned I think is where people should look to invest substantially.

Sonia: It seems like it is going to be the year of the underdog, right; power, capital goods, we have seen Reliance after so long spiking up. The other underdog has been ITC, not too much for the last many years but now it is starting to exercise its might. You expect anything from that stock or from the FMCG basket as a whole?

A: Not really. When we are talking about substantial upside in the market and when the trend is as clean as you see right now I don’t think the defensives like FMCG, pharma or IT will do too well. Yes, ITC has done very well as a stock in the last couple of months but I am not very sure whether it can actually match up with the kind of pace that some of the other stocks and sectors are going to see in terms of upside. So, I would like to believe that FMCG as a sector would be an underperformer. If somebody is over weight in their portfolios in these three defensives sectors it makes sense to get out. It is not that they will fall but just that they might not come up with pace of some of the other sectors which are likely to do much better.

Anuj: Would you add midcap pharma to that list as well because while today has been bad because of news flow, of late we have seen some buying interest?

A: It is all about relative strength. In technical analysis when you have to do pick and choose you have to look at relative strength and the beta. If you look at what pharma has done vis-à-vis the Nifty or some of the other sectors I think that is gross underperformance. I think this is going to continue and there is no reason to stay heavily invested in the pharm space. There was a time before the election results wherein IT and pharma has started to do well in anticipation of maybe markets correcting a little bit but that scene has changed completely and that is the reason we are not recommending investment into defensives at all.

Sonia: Telecom is the space that had a lot of promise when we started off the year some of them giving 20-25 percent returns. What do you do with the Telecom now any prospects on the up side here or completely stay away?

A: I am not very sure whether there is too much juice left out there because there is a case of buy on rumour, sell on news that seems to be playing out. I think as there was so much speculation in last few months I think a lot of these stocks ran-up substantially and with the developments of the last few days it does seem as if these stocks are now going to be a market performer. I really don’t see too much of an outperformance there and given the kind of dynamics the sector has or the metrics that we are working with, there is no reason to be heavily invested in the telecom space. At best you could trade it from time-to-time for momentum but definitely not a buy and hold.

Latha: Finally, big performance of 2016, the non banking financial companies (NBFC) space in the midcaps. Will they have more glorious days in 2017?

A: Yes, I think so. Unfortunately I can’t take specific names but a lot of these stocks are setting up for a potential 35-40 percent upside. When you are talking about 15-20 percent on the Index, these market outperformers can easily give you anywhere between 30-40 percent. So across the board the popular names look very interesting and a lot of these names are gradually moving higher taking out one resistances after another and post the demonetisation; the two months of consolidation that we saw in this sector and since some of the other spaces, has really set-up the medium-term, long-term set-up really well and that is a reason we would be quite positive there.
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