The year 2017 has a lot in store with corporate earnings and Union Budget just round the corner. Sharing his take on how the year is likely to pan out for investors, Aashish Somaiyaa of Motilal Oswal says January is a good month to invest and advises not to defer investment decisions.
High liquidity and lower interest rates also give investors investing opportunities during January, he says.
"Before the next quarter results, which are likely to be equally going nowhere, the attention of the market will be more on what came in the Budget and election result and the fallout of all those things,"he says. He does not rule out the odds that the Nifty could tread well past 9100-9200 level to touch new highs this year and index returns could touch 10-12 percent.
Market expert Mitesh Thacker betted on the midcap stocks. He is bullish on two stocks, JSW Energy and EID Parry.
Below is the transcript of Aashish Somaiyaa and Mitesh Thacker's interview to CNBC-TV18's Reema Tendulkar and Anuj Singhal.
Anuj: Guys like you of course have seen a lot of domestic liquidity, a lot of support for the market has come from domestic institutional investor (DIIs). What is your sense, in 2017 will we see more DII inflows, more foreign institutional investor (FII) outflows and market not doing much or do you see a bit of a trending year?
Somaiyaa: First three months to six months are obviously going to be eventful because like you rightly mentioned, we are getting into the result season and then February 1 is the Budget. Typically people are a bit worried about results, this quarter and the next one. My sense is that October-November-December may not be that bad because if you see the first 45-50 days, was quite fine. For variety of reasons we actually saw preponement of demand and then when you see January-February-March results, that is where I think the full blown effect will actually be seen.
However, by the time the March end quarter results come, people will be already talking about election results and so on and so forth. So, I think first three to four months are going to be volatile. As far as flows are concerned, I think it is pretty much structural in nature because interest rates falling, owning real estate and gold being pretty uncool right now. We are seeing sustained registration of more and more SIPs so that is Rs 4,000 crore a month right now. I can be pretty sure it will be over Rs 5,000-5,500 crore by the time the year ends.
Reema: If someone is a new investor in the market and they have said that in 2017 we want to start investing, what would be the positioning that you would recommend in your portfolio, in their portfolio considering that we have the earnings season and the Budget in one month?
Somaiyaa: These are tricky times but if you really ask me to take a call, I would say that January is probably a good month to start investing and that is linked to some of the reasons I told you because it is very well expected that the Budget, the government is going to become a big spender or a big investor in the economy.
The second thing is that there is a huge collapse in interest rates and very high liquidity. So, my sense is that January will give you opportunities to invest but once the Budget and the election results are out of the way, you are looking at a completely new zone that is my own sense. So, I would tell people not to keep postponing.
Reema: And in terms of a sectoral approach? How much in Banking, Financial services and Insurance (BFSI), how much in IT, pharmaceuticals, etc?
Somaiyaa: Our house tends to be pretty bottom up because we start with our filters in terms of, we are typically high quality, high growth, buy and hold kind of investors. So, while we do not end up doing too much sectoral work, but my sense is that stuff like banking and financial services would be there, non-banking finance companies (NBFC). We are not so much into the microfinance end of it, but definitely consumer finance. We are pretty heavy as far as let us say autos are concerned. The other sector which we find good amount of exposure is pharmaceuticals. So, basically these are the high quality areas that we are actually concentrated in.
Anuj: Two days back I was having a chat with Gautam Sinha Roy. Of course, one of your fund managers. The interesting bit which stands out is that you have a lot of auto names in your portfolio and of course, the outperforming ones, the likes if Eicher and Maruti. Do you get a sense that some of these stocks have put the demonetisation woes behind them and say for example, for Maruti or Eicher, we could actually see lifetime highs pretty soon?
Somaiyaa: Honestly, I would wait for January, February and March to get past. I would wait for another quarter to actually declare victory if we were to call that. But we know that a lot of these sectors are also getting tailwinds from stuff like the Pay Commission and plus they are also seeing financing. Bulk of it is financed as far as Maruti is concerned. So, if interest rates are low and there is so much of liquidity, pretty much now you will start getting desperate phone calls for you to take a second car and a third car and a second home. So, that will be a tailwind for sure.
Reema: You spoke about the financial space where you have an exposure. This week, we saw very steep rate cuts by State Bank of India (SBI) and it was followed by the other PSU as well as private banks and the NBFCs. SBI, HDFC, etc. were under pressure this week. How did you read this news?
Somaiyaa: Clearly, if you see from their perspective, if you see from demonetisation announcement till now, huge distraction. We ourselves deal with banks so we know that there has been tremendous distraction. So, in a sense you can say that a derailment from their normal efforts as far as business is concerned, non-performing asset (NPA) recoveries, etc. are concerned, that is one derailment. Second is obviously, you are flush with funds and there is no credit offtake and there is going to be pressure on the margins. So, no debate about it. They will have headwinds for some time to come.
In fact, on the other hand, if you see what has started flying is NBFCs because they tend to borrow from the banks. So, it is a bit of a value migration there. At least from a near-term perspective, that seems to be a trend.
Anuj: So, NBFCs may outperform the banks?
Somaiyaa: You can clearly see it. Take an example of a Bajaj Finance for instance, in the last few days, that is what has benefitted whereas the traditional banks have been under pressure.
Anuj: One of your top holdings is Infosys. What we saw on Friday of course was another headwind. Not that IT companies needed that, but do you get a sense that we might be in for really tough times? So do you think the stock price now is factoring in the worst so maybe at Rs 900 will factor in the absolute worst?
Somaiyaa: It is not so much only about the visas. Even before Mr Trump came in and this element or fear of protectionism came in, even before the talk of visas, any which way, we are all looking for a more business trend change. How many of them are transitioning into the next era of so called IT services. So, it is more about having confidence in a bunch of companies which will make the transition and another bunch which may or may not make the transition. So I seriously think it is more to do about that. It is too early to get jumping about what actually will happen on the visa front. We will have to cross that bridge when we get there. So, people are watching more for the business model change rather than anything else if you ask me.
Reema: Do you think the market is accurately pricing the earnings right now or the earnings downgrade cycle has still not ended?
Somaiyaa: You look at it in very oversimplified terms. We were at about 18-19 times forward and we are now 16 times forward as far as Nifty is concerned. So, why I said oversimplified manner, you pretty much knock down about a year and half to two years of earnings, that is what it would translate into. I do not think that anybody has ever come with a prognosis saying that we are going to lose one and a half to two years of earnings. Obviously some sectors will do well and some will do badly, but my sense is that yes, the market is factoring in a lot of the bad news. And leave aside the market, there are many good stocks which are down by about 30 percent or so depending on which sector you are talking about. So, I would say yes, the market has factored in the worst. And like I mentioned before, before the next quarter results which are likely to be equally going nowhere, before those really start, the attention of the market will be more on what came in the budget and election result and the fallout of all those things.
Anuj: The other interesting bit of this week was that we saw some stocks gaining ground where the businesses are okay, but the balance sheets have been broken. The call is that this year could be about balance sheet repair or at least interest costs coming down. Would you subscribe with that view and would that be a good space to enter?
Somaiyaa: It does not fit into our framework really, but everything that benefits from, because you are going to see a phase of seriously low interest rates and you are going to see a phase where credit offtake is not there, so there is competition for actually giving money out. So, from that perspective, definitely it helps. It does not fit into our framework purely because we do not look at these six month-one year kind of trend changes. That is the whole point.
Reema: There have been no changes that you have made in your portfolio in the last one month? And if yes, could you tell us the changes and why?
Somaiyaa: Actually no changes in the portfolio.
Reema: Since demonetisation then?
Somaiyaa: I will tell you the reason why. It is not that we are not trying to say that it just does not matter. Of course it matters. You can see what is happening in the market, but if you really ask me, I am happy we did not make too many changes, because whatever the prognosis on November 8 was actually, all of it has been changed and proven wrong subsequently week by week. Let me explain. On November 9, most people would have said let us buy banks. Real estate is wiped out, consumption is wiped out. That is what the original story was. And from there on, every week that mood has changed. Where we are sitting right now, people are saying that whatever is consumer non-discretionary or staples will bounce back when the cash circulation improves. People are saying that banks are in trouble and NBFCs will actually do well because they borrow from banks. Aashish Somaiyaa lot of the auto, it is a dispersed kind of performance, not everything in auto got smashed out. So, what I am saying is that it was uncharted territory. Nobody knew exactly how it will play out and just because a particular news comes, we believe more in gauging how things shape up and then trying to, because we are reasonably strategic investors. Our holding periods are typically 3-5 years on a particular stock. So, while it might surprise a lot of people, but there are no dramatic changes in our portfolio in the last 2-3 months.
Anuj: What are the odds that this market makes a new high in 2017?
Somaiyaa: New high means we have to be well over 9100-9200 kind of number and I won't rule it out for sure.
Anuj: So, you can see 10-12 percent index returns as well?
Somaiyaa: Yes, because there are definitely pockets where one will be able to invest. Secondly, we are starting with really low expectations.
Third point is there are trends which we discussed - because liquidity is high, interest rates would be low, government will definitely be a big investor as far as the economy is concerned. There are certain sectors which will win because you will see movement from unorganised to organised. Lastly I am very confident about subscription from domestic investors, I think that is on a rise.
Anuj: What did you make of the week and what is the call on Nifty or Bank Nifty for next week?
Thacker: The week was positive one. We did try to get past the 200 day average and in technical terms that was the only significant event but we failed to do that. May be after hitting the 200 day average after a long time, it might take more than the first attempt to get past the average. So, my sense is that next few days could be possibly spent in the range of around 8200-8280 for 2-3 days and then we might gather the strength to break above the levels of 8270.
In case we start breaking below 8200 then I would possibly look at some more or a deeper correction.
Reema: What about individual trading ideas, what would you recommend?
Thacker: As the index is struggling to get past 200 day average, the midcap segment is very active, lot of breakouts taking place over there. So, I have two buy ideas from the midcap side.
First is a buy on JSW Energy where I would suggest buying in the range of about Rs 65-64.50. Keep a stop just below Rs 62.50 and look for Rs 70 as the first target.
Second, from the sugar pack EID Parry had the highest ever weekly closing. That is a buy with a stop at Rs 269 and a target of around Rs 300.
Anuj: Wanted your thoughts on IT index itself and some of the large cap IT names. Have the charts got damaged again and can we see stocks going back to 52-week lows?
Thacker: I am not sure that we will look at retesting of the 52-week lows but in the short term at least the charts have clearly been broken or the up move which had started from 9400 levels on the Nifty IT index has kind of come to a halt. I think there could be some more correction. I think 9780 is the most logical pivot level.
In case the Nifty IT index breaks below 9780, I would look at retesting of around 9400 levels.