Pankaj Vaish, head South Asia markets, says that markets need a small catalyst or some one in the government to read charts. It is at a cusp where one or two meaningful steps would get a stampede.
Pankaj Vaish, head South Asia markets, says that the market needs a small catalyst or some one in the government to read the charts. The market is at a cusp where one or two meaningful steps would get a stampede.
A lot scepticism is still there in the market and the weak macro conditions are not helping, feels Vaish. However, this has not led to complete selling and people are hedging their portfolios, he added.
As the Nifty scales higher, Vaish believes the next technical level for the index would be 5600.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What do you hear around you disbelief and skepticism about this stealth rally or have people enjoyed it?
A: We still see a lot of skepticism. I think people are still scratching their heads, there was a lot of misguided anger in a sense. We were all frustrated with the way things were developing, the macro was developing and lack of policy action. But, I think you never want to confuse what my first year trading guru used to tell me. He said, never confuse your emotions with your portfolio and I think people sometimes make that mistake.
You show your anger by saying I am not going to invest in this country. But the fact of the market is that market doesn’t know that you are not invested, it doesn’t care. You have to stay calm and rationale.
I think the negativity had gotten quite extreme. The last time we spoke at Citi conference right at the beginning of June, the markets were just above 4,850 or thereabouts and macro obviously has been a problem. But I think at some stage, this is the theme we kept repeating that the valuations will have to come to the fore, you have to start analyzing companies, fundamental by fundamental.
The good thing that has also happened is globally the correlations have broken down. People are making distinctions between the asset that they are investing in and there is some fatigue of this whole Greece exit issue. Nobody sells off in a lockstep manner just because there is some bad news out of Greece. You can see the S&P 500 is about 8% from its all time highs before Lehman crisis and many other stocks have hit all time highs. Even the Indian equity market is up about 12% from our June conference.
I think there was too much skepticism, there still is a fair amount of skepticism. The only good thing you can say is people didn’t sell enmasse, they didn’t say okay get me out. They did put on a lot of INR hedges because last year a lot of portfolio managers got burnt in forex. This year we saw some of that, we also saw exporters hold back on not selling because of the cancelling and rebooking ban that had been put in place.
Now that is partly lifted with 25% and that is doable. I think the makings are there, perhaps for a further move up in the markets and perhaps for some appreciation of dollar-INR.
Q: How much more do you think in the near-term is possible in the Nifty?
A: Technically, I guess 5,600 is the next level. From there for it to breakthrough further will require some real steps. I think it will require either something on fiscal or ironically, if the gross domestic product (GDP) print were to come below 5% for this quarter then I think the pressure will be quite heavy on the Reserve Bank of India (RBI) to do something, perhaps even in the September policy meet.
We think that they will want to delay it further because they will want to see a little more results come through on the inflation readings but even 4.9 will be a massive sticker shock.
Q: Do you think it is possible this quarter?
A: It is possible. It's not our base case forecast but there are so many statistical adjustments that go into it. So whether its 4.9 or 5%, it is hard to say but Rohini, our economist thinks that there is some risk of that. If that were to happen then there will be that big feeling that are we back to the pre 2003 sort of period, which is a real risk we have to stay away from.
Now if we cannot skirt it, there will be some serious pressure. We used to be well-known for growth; we are losing that battle as well and then there will be some pressure in terms of reviving growth.
Q: What has client positioning been like. Would you say that in this rally from 4,900 to 5,400 people have merely covered up their shorts or have you seen some serious long positions?
A: I think on a lot of short coverings took place in January, so that was at least a good smart thing to do for a lot of investors. I met a whole bunch in early February and I remember telling me that they are covered; especially financial people were very short so they had covered those positions which they were thankful for.
Now I get the sense that people are perhaps at their benchmark, maybe even slightly underweight but nobody is celebrating this rally, nobody is saying I am 10% vis-à-vis my benchmark would be 7% or something of that. I think they will still chase. I do not think anybody is in a preemptive mood yet. Dollar INR is the place where I think things could get more interesting if we were to break these recent lows like 5,490 or something.
I think it is a scope of running another 4-5% relatively quickly because some of those hedged by FIIs could get lifted as well as some exporters who held back will feel the need to get back in one year forward points or near their highs. Those could also provide an extra impetus for people to hedge. So there are a few things lining up.
It just needs a small catalyst. It really needs somebody in the government to read charts. I say that jokingly, but it is really at that cusp where one or two meaningful steps would get a stampede. I think it would get people worried because they are underexposed to the Indian market and would cause almost a negative feeling, people needing to chase just to stay afloat. It is a possibility that is setting up and the market is not positioned for that right now.
Q: If that catalyst were not to present itself in the next 3 or 4 weeks, do you think the weight of fundamentals and poor macros can drag us back to where we came from?
A: I think it can push us back. I don't think it will take us back to 4,800.
Q: Is that safe for the year?
A: I think we have rejected that. In a global context, for S&P 500 to be at 1,420 with all the bad news we still hear about real estate and the banks in US, the fact that we are still only 8% from all time highs is remarkable. People know that Apple is wherever it is but people also may not have realized the likes of Amazon are at multiples of where they were before the bubble. So there is some sense of value; we have, perhaps, got too pessimistic and that if Greece were to exit, it’s not the end of the world and I think that realization has set in.
So, I think we have rejected the 4,800. We could get knocked back to 5,100 where we spent a lot of time in that range but I think because we still have hopes of Reserve Bank of India (RBI) policy action; we will also have hopes of the new finance minister trying to engineer one-two helpful things. Our strategist Aditya Narain has re-accelerated earnings per share, so for the next fiscal year, he is looking for 13% or so up from 11%. So that cycle, hopefully, is kicking in. I think that will keep some sort of a floor in the market. We could get knocked back a bit but I do not think we will go back and revisit the lows of last year.
Q: Why do you have such a conservative index target then? If your view is that you are getting more and more constructive then why just 500 points more from where we are on the Sensex?
A: This was put in December of last year; at that time people probably thought we were cuckoos for even saying that there could be such a big move up in the market. So I think he is just sticking to it saying that that’s the target for the year, and in my estimate, we could overshoot it a little bit. But strategists like to do less frequent changes to their targets to have some meaning to the changes that they are making. But we have been consistent. We have been optimist throughout on the market; we have raised all the worries on the macro front but on the market, we feel that this would be fine.
You had asked me in June, when the market would hit a new all time high. I had said somewhere between the election to a year before that, somewhere in between 2013 and May 2014 and you said you are quite an optimist. I think we can still stick with that story saying that there is enough in the pipeline and possibilities of rate cuts as well as real growth that we can possibly go hit a new high in a year from now.
Q: You think we have put a base behind us now. You can say that with some confidence?
A: Yes. I think so.
Q: So should people get on with building portfolios, now that the overall market risk seems diminished?
A: In June and even before that our clients called to find if each one of these pullbacks were opportunities. For institutional players, people who have missed it, I still think it pays to be long; and if you are the trading type, you can put stops below the recent lows. But broadly speaking, over the next couple of years, we are still quite constructive. I think there are some good valuations out there.
Q: I remember the last discussion when Manmohan Singh took over the finance portfolio for a bit but he passed it on, he didn’t keep it for too long?
A: He passed it on and we were talking before Mr. Pranab Mukherjee was nominated. My view was that – because he richly deserved it, he should get it - and then if Mr. Manmohan Singh would have kept it, which started some part of this rally. I think it gave the market some confidence that hopefully an activist finance minister will be able to do a lot of things.
Mr. Mukherjee, unfortunately, was just occupied in so many other jobs. But I think that was the hope. He passed it on to Mr. Chidambaram who has a good reputation in terms of taking action and he is efficient, he wants to get stuffs done. So you feel some sense of urgency in the ministry of finance that things have to be done.
Q: Will he be allowed to do that given the kind of rhetoric that you are hearing from New Delhi? It seems like a very hostile environment there.
A: It is a hostile environment and it's very easy for me here to sit away from Delhi and dole out unwanted advice. I do not know but sooner or later the pressure will build that while you are sitting there to take some of these actions. You cannot let one ally hold you hostage for the rest of your term here because then it will be a very forgettable term. So I think sooner or later, smart people like Mr. Chidambaram will want to sit in the chair and take some action.
Q: How should the market read politics right now; is there a real chance of an election happening before 2014, is there a chance of an even more fractured mandate coming through as some of the recent polls are suggesting?
A: Yes, the first part – it sounds like it is in nobody's interest to do an early election. I don't think Bharatiya Janata Party (BJP) would want to go through with that. There is no upside for them if you are surrendering 100% of your seats into by-election. So I think it is in nobody's interest.
My dream obviously would be a grand coalition. This is a time when the likes of Arun Jaitley, Sushma Swaraj, Dr Manmohan Singh, Mr Chidambaram should be able to come together and say, 'this is our time, we are slipping in growth, this is our time to come together, forge an agenda and discuss it before you bring it to parliament.'
If Israelis can do it, I don't know if you follow Israeli politics very much, it used to be very aggressive and very dirty.
US, on some portions, have been able to agree on it, which is again very aggressive and very dirty at times. There are certain times in your history when you have to do that. So if they could do, that would be great. But again, I am sitting here in Mumbai in a studio saying all this.
In terms of a fractured mandate, it sounds like that is a possibility. Again, maybe that will push us to a grand coalition at least on the economic agenda. I think everybody is trying to almost get by with the minimum sort of governmental support and then go about its business. So if you think about it, given the macro that we have gone through, it rallied about 12% June even though the macro has not improved in any way. I think people are still trying to find ways of doing business.
The fact that our equity strategists are still looking for higher growth, if you look at NPAs in banks, while PSU banks have not had good numbers, private sector banks have done a remarkably good job.
In this environment where you keep hearing complaints all the time about how things are not good, there are definitely pockets of strength, there are values to be had, the market is just trying to get enough coherence in government policies. Hopefully, I think that will come through regardless of who is in power after the next election. There will be some feel-good factor, and hopefully, they will have the good judgement to appoint some person as a finance minister.
Q: What drives the market in the interim - is it still global liquidity, will macro be just a wall of worry for the market to climb over the next few months or does it peg it back at some point?
A: I think the announcement that we saw from the Fed minutes have, in fact, put the burden of proof on the other side saying that we will do another round of quantitative easing unless numbers improve a lot. This will be another sort of tailwind for the market globally. You are seeing European markets do better. I frankly feel the financial sector has been beaten to death.
Let us leave Citi aside for compliance reasons in this discussion but broadly, a lot of names are trading at half book value of beaten down books and the amount of compliance noise that has come through for the industry. So I think a lot of bad news is well built into these things. Most of these settlements will probably be less than what the first estimates are.
Our probability, for example, on Greece exit has gone upto 90% now. Our chief economist used to say 50-75%, now he says 90%, he thinks it may happen even as early as September or October and it doesn’t even cause much of a ripple in the market anymore because I think people realized what that means for Tata Steel.
So I think it is just that; peeling back the worries that you had built in of all kinds of things going bad while the monetary stimulus globally is still very strong. The fiscal constraints that people were worried about are getting deferred. I think even the one in the US will quite likely get deferred and those are meaningful fiscal constraints, a couple of percentage points of GDP. So that is very good monetary and fiscal support globally.
In India, for example, we have seen probably about 65-70% of the flows through ETFs. So there is some of that money that has been looking to get back into the market, and perhaps, household money and so that has provided support to the market as well, I think that can continue.
Q: Do you see a situation where all these asset classes continue to rally together - gold, crude, equities as they have for the last few weeks?
A: Gold and crude are good for us to watch and talk about. But I do not think, in a meaningful way, any portfolio manager will take money out of gold and put it into equities and then say, ‘I am finished with my cash, I do not have any more cash to deploy’.
If they want to, they could still go and do over-the-counter (OTC) swaps or they could buy Futures. So it is just how they want to construct amount of risk they want to have in their portfolio. So all of these tend to rally as liquidity is there, so if there is the third round of quantitative easing (QE3) , I think all of them will rally.
We could worry about that at some stage that will mean higher inflation for India, and thus, RBI will be less inclined. I just hope that doesn’t happen because I think the co-relation of our policy rates to inflation has not been that strong. There was, in fact, the RBI paper that also talked about it and with a long delay.
So I think we should just hope for the fact that there is a realization that growth has decelerated to far too worrying a level and that it needs some action. Obviously, some cover on the Wholesale Price Index (WPI) readings and consumer price index (CPI) readings are helpful. So maybe they will wait one-two more months to see that happens. But it can only be constructive from that side, they cannot tighten. So at the margin, things are setting up right even for the Indian market.
Q: So you do not think that this is just another trading rally?
A: Since a lot of the other global things that I watch, have broken out finally. So it may be different. It sounds like it has a different feel to it, it also has different participation in it.
The January one was clearly just a lot of short covering and people are just saying that they have missed this. You had rupee, in fact, get down to 49. At that stage, it was also shooting on the nominal effective exchange rate (NEER) on that side, so a 52-53 is a more appropriate level. So in some sense, I think it is a little bit more balanced, it's also technically stronger. Some of the big worries about the fiscal constraints as well as the Greece fatigue that we had globally have been peeled back.
Now, another change that has happened is that now you have the German chancellor, Merkel clearly saying that she supports the ECB programme to do bond buybacks in the secondary market. They have floated the trial balloon of keeping a cap on yields and Italian and Spanish bonds. It has, so far, been rejected but that’s how Europe has worked. They always float a trial balloon, then the idea gets introduced.
They deny it and then in the next round of worry, they say they have to go to that idea. So I think we have moved many steps forward in terms of now putting the full muscle of ECB behind this support. So qualitatively, there are differences, and hopefully, that’s why we will not go back.
Q: Would you go as far as to say that we could be in the foothills of something bigger or you take it still six months at a time because things are still too fluid?
A: No, like I told you, I think we will eventually go and make a new high in the next 12-18 months. If I think back and say whether macro can get even worse from here, the probability is low because we are almost at the bottom, we are at 5% GDP, and inflation that has seen double digits seems to be coming down. So on the macro front, I don't think things can get worse, fiscal constraints around the world are getting pulled back.