State elections don't affect the Central Government's policy trajectory and so may not affect the market, says Gautam Chhaochharia, Head Of India Research of UBS Securities.
Although, he adds that investors have been closely following Prime Minister Narendra Modi after his decision to ban high denomination currency last year. So, any BJP win or loss by a huge margin is likely to affect market, he adds.
State elections are either underway or recently concluded in Uttar Pradesh, Goa, Punjab, Manipur and Uttarakhand. While BJP is confident that it will return to power in Goa, things look bleak for the party in states like Punjab and Uttar Pradesh, where regional parties seem to have the upper hand.
He also says there is no need to overinterpret the third quarter earnings as it was a unique quarter due to demonetisation.
Talking about what to expect from the market, Ashwani Gujral of ashwanigujral.com says it may remain range-bound in the next week. He says market may not see a further upmove from here. So he suggests booking profits if Nifty drops below 8,700-8,720.
Below is the transcript of Gautam Chhaochharia and Ashwani Gujral's interview to CNBC-TV18's Prashant Nair and Surabhi Upadhyay.
Surabhi: This 10-11 percent one-way move that we have seen from December 26, 2016, has it caught you by surprise?
Chhaochharia: Yes and no. so obviously, given what we have been seeing into December, the extreme pessimism around demonetisation. So off that low base this sharp move, given how post demonetisation numbers have played out should not have been a surprise. Now it is in the context of what is happening globally so while we are sitting here in India, we just look at Indian markets. We should also look at what is happening globally in terms of market movements. So given these two contexts, not a surprise, but if you had asked me in December whether it is going to move up 10 percent in January, then obviously, I could not have foretold that.
Prashant: Just a simple point. Do you believe that this market rally reflects the fact that not just the Indian economy but the global economy is in some healing, is in some way getting better? Is it reflective of the underlying?
Chhaochharia: The global market support which is benefitting India also is hope building out about some kind of US recovery from the new government policies there. Both, in terms of the current data points holding up or showing a more resilient economy as well as hopes for recovery therein, in the US with the new government coming in.
India specifically beyond the fundamentals, on a fundamental aspect, the market rally is also being helped by the respite from some extreme pessimism around demonetisation. But also, you have to remember in India specifically one of the biggest themes we have seen over the last few months and which is the most common thing which we hear from investors also is the local mutual fund flows. So that flows obviously always helps markets do well and as of now, that seems to be continuing.
Prashant: It is now being increasingly acknowledged that we will not see big tax reform in the US this year, that was the big expectation. Does that take away some amount of concern for emerging markets and especially specific sectors like IT and pharma?
Chhaochharia: Tax reform, I do not know whether it will not happen or happen in this year, frankly. Again, it is just market expectations going up and down. Anything more, anything draconian or extreme like putting a big border tax, obviously has multiple implications including local legislative requirements there in the US.
Having said that, in India\\'s case, IT and pharmaceuticals, obviously that was one of the big overhangs. If that gets postponed or market starts believing that that is not happening, it does help the sentiment for these sectors.
Surabhi: Let us talk about how we stand now with respect to earnings and what all the market has already factored in having seen the numbers. I was reading a couple of notes and some of them seem suggest for instance, one note was pointing out how if you actually strip out something like metals and maybe some of the banks because they were dealing with a very low base anyway. So, therefore optically the numbers look great and metals have had a great rally with commodity prices. Barring that, how do you sum up the rest of the earnings season and what we have seen from various quarters?
Chhaochharia: The point you made, we completely agree with that, but adding to that, the point we have been making is we should not over-interpret Q3 numbers either way because Q3 numbers are in a way unique given the disruptions caused by demonetisation driven liquidity crunch. So, supply chain got disrupted, credit got disrupted, etc. and how companies reported those numbers because you are seeing company reported numbers. Is it necessarily reflective of underlying trajectory? It is difficult to fathom at this stage because we have seen within sectors, some kind of disconnect between companies reporting underlying numbers.
And across sectors also, we have seen some kind of disconnect. So, it has not been a uniformly simple linear story. So, till a quarter back, you would normally see a particular set of companies reporting broadly similar kind of trend, little bit market share gain and loss here and there. But in this quarter also, we have seen a wide range of numbers. Most of these numbers are still much better than what markets feared, a part of the markets feared in December in terms of extreme impact from demonetisation, but still the numbers the range is wide. So, I will not over-interpret it either way.
So I would rather for the March quarter to take a call, but our sense is if you look at the numbers, just to aggregate the numbers and what it means, still we are seeing estimates for Nifty for example for fiscal year 2017 still at about 11-12 percent growth. So, they have been cut almost 4 percent since demonetisation, but still 11-12 percent growth and that implies in the fourth quarter another 25 percent growth in earnings which seems unrealistic.
So, we will see more earnings cuts definitely. But markets are taking the Q3 numbers without a pinch of salt, in a way thinking that everything is hunky-dory in terms of on the ground post demonetisation which is being overly optimistic on the other side.
Prashant: March 10 2017 is going to be a big day, March 11 is when we get the state election results. Is that the next inflection point where we will see some sort of a move up or down can’t say, there are no exit polls or anything to guide us at least not till that point. What is your sense, how important is that?
Chhaochharia: From a local market catalyst perspective, I think this will be a relevant event. Normally our view has been that state elections don’t matter for markets despite all the noise and commentary we get because state elections do not alter the central governments policy trajectory. However this time given a lot of investors are thinking and debating about Narendra Modi’s popularity post demonetisation, they could be looking at this election as a hint towards that. It will also be relevant if the state elections leads to any change in policy stance and trajectory of the central government.
Till now over last two and half years we have seen a fairly steady policy direction. Will this election change it or not will be the fundamental driver. However in the near term around the actual results parts of the market would look at it as some signal. That signal will matter only if there are extreme results and not somewhere of a middling result. For example if BJP wins UP very well or strongly or loses very badly then you could see impact on markets.
Saurabhi: IT – lot of news with different companies, season of buybacks etc as well. If I am not mistake, you recently turned overweight on the sector, you were negative for quite a long time and then the call became slightly optimistic. What made you change your view and what is the expectation? We keep hearing about a lot of noise on the headwinds, whether it is H1B visa, the overall outsourcing model etc.
Chhaochharia: Our negative view for last three years has been on the concerns around move towards digital which could hurt the incumbents outsourcing model. However as you said now that impact on outsourcing model from digital is a fairly widely acknowledged and agreed upon view. These stocks have derated sharply over last year and a half. So, in our view that risk from move to digital is getting priced in into the stocks.
On the other hand in our view the H1B visa issue etc will remain an overhang in the short term. However fundamentally again will it have a material impact on their numbers? In our view unlikely over the medium term, though short term obviously you could see some pressure.
Why we upgraded it is, beyond the pessimism being priced in, we do think there is cyclical upside to these companies stock wise – from US banks spending going up, European post Brexit spending going up. We are already seeing signs of software spending going up last year which is typically a precursor to IT services spending. So, in our view the cyclical uptick likely in FY18 for IT services companies is not built into estimates and definitely not priced in. That is why it is a tactical call for next one year or so that IT services companies could be a good portfolio overweight call for many investors.
Surabhi: Two of the biggest IT outsourcing companies of this country have been in news for reasons beyond earnings. I just want to get your sense, the sort of headlines we have seen in terms of the differences between founders and management at Infosys and there is a change of guard at TCS, whether that could alter the real hard numbers as we see them in the next couple of quarters?
Chhaochharia: It is possible they could. We have seen that historically how companies not just in IT services but across sectors when they have top management changes, it can impact the performance going forward. However the question is at specific company level whether they can manage these issues and leave it at worst to be short term hiccup rather than impacting the organisation dynamics from a medium term perspective. So, that becomes a company specific call. We do incorporate such company specific issues and concerns in our stock level calls and it will be very different across companies rather than a universal trend.
Prashant: There is a lot of mergers and acquisition (M&A) in the air, it is up in the air right now. There is talk of IndusInd Bank, Bharat Finance, there are these two big banks apparently who are talking to each other for a merger. Do you think a lot of this will get done? There is need for this to get done?
Chhaochharia: That is a tough question to answer, whether there is a need or not because there is no desperation in terms of capital requirement as such, but obviously, if M&A happens because of creating synergies, it does help specific companies. Now whether it is good for macro or not is debateable because you could also have a situation where merger, etc. also creates some kind of impact on jobs etc. It is a very tricky question to answer frankly, but at a stock level, at a company level, if the synergies are there, the markets will take it positively.
Surabhi: Let us just talk about the index first, how do you look at the strong close that we got on Friday and where we stand now?
Gujral: Friday was a manipulated market because it was a technical factor which led to that 700 point rally on the bank Nifty. In our country we don’t have the precedent of preparing markets of what is going to come so that volatility can be avoided. Then mid-day we come up with another circular saying that now the ban is in place. So, today’s action I won’t go by it because it is not created by an economic event or a demand supply situation. The market was shaken up because of news which may not matter on Monday.
Overall the buyback on IT, the HDFC move, both of these things could not take the market above 8850. So, basically 8820 stands. Bank Nifty has had a pretty lame breakout above 20500 but I am not too sure that will sustain once this news flow is out of the system. So, basically last couple of weeks we have been in a narrow range and possibly it is only going to be minerals, metals, oil and gas which is going to keep the market higher. Otherwise the other strong groups don’t seem to have the traction for the market to get to fresh highs.
Prashant: Listening to you, it seems you have one eye on some lower levels as well, am I right in that interpretation and would you want to do anything about that?
Gujral: The range has not broken out. So, anytime a range does not breakout with fairly strong events then 8700-8720 remains in play. As long as that holds maybe there is a bit of hope but the market hasn’t done anything different from what it did last week. It is still in a very narrow range and sitting on top of a 10 percent rally. So, that is the point of danger. People should have a trailing stop in place around 8700-8720. In case that starts to get taken out, take your profits and move out because we are underperforming. Yes we had 10 percent rally but look at what the other global markets did. That way metals and oil and gas is likely to outperform. Rest of the market is pretty much range bound.
Surabhi: Let us come to your picks for next week, let us start with Tata Motors – a newsmaker this week, which way are you betting and which way are you advising people to be after the massive fall?
Gujral: Whenever stocks go through a climatic action and we saw climatic action for two weeks, so everybody who had to get out, is now out and the people who are in, are people who are buying and really know what they are doing. News is bad today, everybody knows that, that has no value. However when things get better this stock can easily trade at Rs 550-600. So, this is kind of a longer term call. Also you have made some sort of an island reversal at Rs 430. Rs 430 was the Brexit day low. So, if nothing you can at least have a fairly strong pullback rally from here. That way Tata Motors, a short term target is probably Rs 520 but I won’t be surprised if things get better and it goes back to Rs 550-600 also.
Surabhi: Any other picks for the week and may be a quick mention on Reliance as well.
Gujral: Reliance has held up the market and it looks like Rs 1080-1100 will get crossed because now it is a commodity stock. Whenever commodities do well RIL must participate. It was kind of subdued earlier but now it appears that it is kind of outperforming. So, that could be one of the stocks to look at for next week.
Also Petronet LNG, it moved sideways for a long time. Today it kind of broke away from that action. So, I think levels of Rs 500 in next couple of weeks is easily possible.
HPCL, again four days of fairly strong downside but it is a stock which is still in a bull market. So, possibly you could see targets of Rs 570-575 next week. The risk reward here from a short term angle is pretty favourable.