Moneycontrol
Dec 07, 2016 08:34 PM IST | Source: CNBC-TV18

Private capex unlikely to move with 25 or 50 bps cut: Udayan

"I don‘t think the market is range bound it is just pausing after the fall," said CNBC-TV18‘s Consulting Editor Udayan Mukherjee. The market is moving towards 8500 mark, but moves beyond that looks unlikely.


The stock market is now taking a pause following the correction that was recently seen. It is wading through various events like referendum in Italy, RBI policy meet and US Federal Reserve’s meet this month, says noted commentator Udayan Mukherjee.

"I don’t think the market is range bound, it is just pausing after the fall," Mukherjee, CNBC-TV18’s Consulting Editor, said in an interview. The market is moving towards 8500 mark, but moves beyond that look unlikely.

Support for Nifty is currently at 7800-7900, he says, adding, Bank Nifty so far has been supportive. A 25 basis cut interest rate cut is priced in for today’s policy meet. A 50 bps cut could push up market a bit to 8250-8300 level.

However, Mukherjee believes private capex is unlikely to improve even with a 25 or 50 bps cut.

Speaking about demonetisation, Mukherjee said that while the plan was good, its implementation was faulty, he said. 

Mukherjee believes that this is a good opportunity to buy high-quality consumption names, but slowly looking at the price action.

Below is the verbatim transcript of Udayan Mukherjee’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: Now the market is in very confusing place because of the demonetisation impact that nobody can gage how do you see times pan out from here?

A: We are waiting through a lot of events now, so I think the market is doing the prudent thing of having taken a fall through the month of November and now pausing to see what the events hold for it.

So, one by one events are playing themselves out, we have had an event in Italy which the market for the moment has shrugged off. We have an important local event today. Again in the middle of the month or next week we will have the Fed which is perhaps the most important event of the month. I think a combination of these events will tell us where we head from this consolidation phase.

I don’t think the market is range bound it is just pausing after the fall between and therefore when it pauses it has to find some kind of level and that level is 8,000-8,300. That is a very tight range and I don’t think it will hold for very long.

On the way up if 8,300 gets taken out for some reason because of some relief which comes in from any quarter we could see the market head back to 8,500 though it is not a very high probability scenario. However, beyond 8,500-8,550 would be quite a surprise in the current back drop that we have for us right now.

The downside is still open, the market has taken support around 7,900-8,000 and I think there is some buying which emerges when valuations for many stocks particularly in the consumption basket reach that 8,000-7,900 kind of level. So, you will probably see that hold out for a bit, but I suspect the events will finally have a say on whether the downside is lower than 7,900 in the next four to six weeks.

Latha: I just wanted to ask you when we are talking about 17 years you have seen every minute of the market in the last 17 years and sitting in this side in the seat where I am now what really stands out as a moment that you just can’t forget, the most memorable moment?

A: There have been so many, but I think the two events or the two kind of phases which probably give you goosebumps is on the bullish side I didn’t take so much to the TMT bull market which played out around the year 2000 because it was very uni-dimensional. Somewhat like what we have had with consumption and financials in our market out here; probably accentuated a whole lot but the rest of the market was not doing much.

I think the 2007 bull market was something really sensational. I haven’t seen anything like that in my life, so it took your breath away the way stocks move over a two year kind of period and you got to figure out what a real bull market is all about and that is a stuff of goosebumps.

I think on the other side the bearish side post Lehman Brothers, you got that gut ranging feeling of what serious capital destruction can be like and on the other side I must say that I have never seen anything like that. I hope I don’t see something like that again in my life because that was a life changing event for so many people in the market.

I think these two phases stand out on the positive and the negative side is something which you probably see once in 20 years in your career watching the stock market.

Anuj: You have seen one of the biggest bull market one of the biggest bear market what is the next thing for our market? Do you think we could have something similar to 2003 and 2007 phase, the mother of all bull market?

A: One lives for that in the stock market because those four years made some many people rich beyond their imagination. It is not about the Nifty going up 7 times I know people who multiplied their wealth 100 times in that four year phase. So, you started with may be Rs 1 crore and by the end of it you had Rs 100 crore. It is a life changing experience. The backdrop is such right now that you will probably have to labour for a bit longer. If I had to bet I would probably bet that maybe 2018,2019,2020 maybe years which are maybe the market won’t go up as many times.

However, there is a very good chance that once we get cleansed of this kind of a slowdown and maybe another year and the bit, down the line CAPEX finally starts to recover and you could get probably some of the forgotten sectors those kind of bump up coming up. However, I suspect that before that there might be an accident or two and you might have to probably linger along and just stay the course in the market and then wait for that big up move to come.

I must warn you and this is not a bearish call that whenever that bull market materialises maybe it will take a different shape and form because the way winds are blowing across the world it seems to me that probably the heydays of the capitalist kind of fervour is probably on the vain and that has implications for liquidity and the kind of momentum that next bull market might have. So, a bull market will happen at some point, but it might be a more tempered one than the one we saw in 2004 to 2007 but that is fine you will still make money, but may not be that kind of money.

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Latha: Let’s get to more nearer term analysis. We have a little better idea of demonetisation; we swung from perhaps first calling it a great reform and then getting bogged down by the cash crunch or even some of them calling contraction of the economy. What does it look like now that the economy will escape with minor bruises maybe a quarter or two?

A: It maybe that, but I think the government’s tone is now changing from attempts to bring about a cashless economy and that defensive kind of posturing seems to suggest that they are also, in the heart, admitting that it has not quite worked out the way they thought it will work out -- already Rs 13 lakh crore have comeback and probably all the Rs 15 lakh crore will come back into the system, if maybe a few thousand crore here and there, so that largesse which we were expecting is probably not there for the government to give out any longer. I just hoped that after that failure to get that Rs 4 lakh crore buffer, the government does not get angered into an IT witch-hunt, which is my biggest fear right now, because when demonetisation happened, it did not discriminate between honest and dishonest citizens and if a witch-hunt happens, it will also not discriminate against honest and dishonest citizens and that again will lay a burden and freeze people’s consumption behaviours and I don’t think we can afford that any longer.


The commentary which I am hearing increasingly makes me very worried that now the ball might shift to the IT department’s hand and that has never a good idea and I hope the government desist from that. Maybe, we will limp back to life, as you were suggesting in a couple of quarters, but you also have to ask the questions - all you are talking about is damage limitation then was this process or this whole exercise worth the trouble and the pain that it caused. In the starting stages we were talking about the high risk-high reward, I hope it doesn’t turned out to be a very high risk and very low reward kind of an exercise which panned out, the benefits of which if at all maybe seen and that to in a nebulous farfetched fashion many years down the line, it increasingly look like that to me.


Sonia: You spoke about how consumption is getting crunched down. We were speaking with Ridham Desai of Morgan Stanley and he said that this is perhaps a good time to be buying consumption stocks, your auto stocks, your NBFC names. Would you be as sanguine?


A: I would agree with Ridham that this is a good opportunity and because valuations have cool down in many of the consumption names, but as I said earlier I would buy it slowly, look at the price patterns of the consumption stocks as well, the stocks fell very hard then they recovered, but the movement they recovered 5-6 percent they attracted fresh selling and these stocks are not trading very much of their November lows any longer, so the market seems to have stabilised, but you haven’t seen after a 20-25 percent fall in consumption stocks, I am not talking about a FMCG here, but these stocks have rebounded just 5-6 percent. I think the price action is also suggesting that there might be absolute price downside to many of the consumption related names, so buy but buy slowly so that you get a good average entry price.


It is still the basket which will do the best even if it underperforms for the next 3-6 months and you need to be buying high quality names out here, but my sneaking suspicion is that you will probably find prices in many of these high quality names which are lowered than what you would have envisaged when this exercise began.


Latha: How important is the policy. What would you watch out for?


A: As you well know I think today aside of the rate action there is so much the market is watching from the Reserve Bank of India (RBI) – whether they will withdraw some of the cash reserve ratio (CRR) mechanism and what it does to the banks and I say this because banks have become so important in holding up the market right now, banks haven’t fallen a lot, a couple of the private banks have shown a few chinks, but generally the Bank Nifty has been supportive for this market while other players have sort of let it down. So I think it is very important that rate action aside, banks come out on the right side of it after the policy today, because if that is not the case then I think we will have a swift move down to that 8,000 level for the Nifty, if banks start to come off post policy today.


I think 25 basis point is a given and if it is only 25 basis points unattended by anything else, which is market moving on the positive side, the market sells off today and it does not move higher after that rate cut. If we get 50 basis points, while people are talking about it, it may not be fully baked in, in terms of a stock market reaction. The bond yields have already softened about 50 bps since the announce of demonetisation, so in a sense the fixed income markets have priced in the possibility of a 50 basis points cut, but the stock market might have one dash up if we get 50 basis points today, maybe up to 8,250-8,300 kind of levels even.


The bigger question is not what happens today. The key question to ask and that is what a lot of people are debating is what happens if we do get a 50 basis points hike, is it enough and how does it helped the market beyond the sentimental reason. The two big things is when people get excited about a rate cut is whether it stokes investments or whether it stokes consumption and I think on the first question we should all agree that 25 or 50 basis points is not what is holding back investments even from here on.


However, with the kind of excess capacity we have in the system and the demand destruction which most sectors are staring at as we wade through demonetisation, I don’t think there is any question of private capex recovering because of a 25-50 basis points cut from the RBI, which bring us to consumption - how much of a lift does consumption get if RBI cuts by 25 or 50 basis points. Now I think for the next 3-6 months it is going to be a non-event in terms of consumption, because it matters far more how people are feeling psychologically about consuming and spending right now than the carrot of a 25 or 50 basis points cut.


Eventually, it might matter, but I do not see people rushing out to consume in the midst of this drama playing out, because the RBI chose to cut rates or banks choose to cut rates. It is a distant trigger in the minds of people right now and in terms of housing finance – with all the problems that the real estate sector is facing right now, it will take away a lot from the trigger that RBI might have provided, if it was just a 50 basis points in a neutral kind of scenario without demonetisation. In my book optically it will seems like a big trigger, sentimentally it might helped the market for a bit, but in the 6 months, I don’t think it is a big event or big trigger for the market per se.


Latha: This actually was something which people were talking about but I was a little scared of this that the withdrawal limits will remain for good, it won’t be at Rs 24,000 but it will remain for good, is that likely to lead to black cash that was my big fear?


A: The government is doing many things on the hoof right now, it is trying out things and then if something is not working it is getting negative feedback, then it is trying something else out – I just wish that this was a more thought out exercise. I know we have hindsight and on hindsight it is 2020, but increasingly over the last few weeks my feeling is that the intention behind this might have been noble, the plan was faulty and the execution was disastrous. It is difficult to see. All of us now will clutched at the straw that this will lead in some way and I am not very clear about what Ramesh Damani, Member of BSE is saying on how this exactly will lead to a black money less economy. If you have your nose on the grounds you will hear of how well the system has played this thing to their advantage, how many people have actually become rich and the reason why all this money is coming back into bank accounts through various ways – this is not going to beat the system and I don’t see how this will eventually lead to less black money in the economy, so I am struggling.


This is a hope all of us have that the government has done something dramatic and the end result will be that there will be less black money, but I haven’t seen too many very well thought out arguments. On the contrary I have read a lot of very good arguments from extremely knowledgeable people about far more knowledgeable than I will ever be about how this will not work and I am not prepared to dismiss all of that.

Latha: Wanted to toss what Ramesh Damani was saying that lately there is a pattern of PSU stocks doing well, you want on build on that pattern?


A: The price action is tremendous in and not just last week or last month, look at the oil marketing companies, I mean in a sense they have been leaders for some many months and quarters now. So, I think PSU price action is very encouraging but I don’t know whether buy themselves they might be a cluster of outperforming stocks, but I don’t know whether in themselves they are big enough to lead a bull market. So, you might have a cluster of 8-10-15 stocks which do quite well but I don’t know whether they can lend a banking kind of a leadership or a consumer kind of leadership to the market which was your question. It might just be a very outperforming sector.


My sense is that and I do not classify 700 point rally in the Nifty as a major bull market, so these rallies of 800-900 points are fine but they are not what you are describing as a real bull market which has been triggered off by leadership. So, for that we need something far more substantial a break into a new high and a consistently trending market. My sense is that this time the next big bull market when it happens we have had a consumption led market for the last couple of years where regardless of what the Nifty has done consumption stocks have done very well.


I think they will continue to do very well but I think real kicker will happen when capex finally recovers. I see that many of these infrastructure stocks which are not the flavour of the season right now might have to wait for another four to six quarters. However, when they move they will not move by 20 percent they will probably move by 5x and 7x. So, I would say that the next bull market is probably not three months or six months away, but if it happens in 2018 then don’t be surprised if the forgotten infrastructure sector actually comes back into limelight in a big way and leads the kind of stuff that you were talking about. So, that is my call that eventually for a real rip-roaring bull market capex has to recover. If capex recovers I think infrastructure will have to lead once again. It has been out of the game for too long and it will probably be out of the game for some more time, but I think eventually it will have to deliver and contribute again.


Before I leave, since you are sitting with two such veteran investors, I think all the viewers who are watching you today, the one thing they should take away from your two guests is the fact not that what stocks they select because I see a disproportionate premium to peoples’ attention to what stock who is buying. What did Rakesh buy? What did this guy buy and I think they missed the most important lesson that they can take away from the guru that they are revering in trying to follow their stocks selection.


What they need to follow is the holding time of these people. The patience that they have exhibited and I think that is what rewards them so much, not necessarily the stocks that they select, because even in a great portfolio you will find 50-60 percent duds; but the ones which have made a lot of money for off they have held for 14-15-18 years and that has what has made them so rich.


Peter Lind said this beautifully that the biggest returns in my portfolio of the stocks I buy do not come in three to four weeks after I have bought them or even three-two four months after I bought them. I find that they come three to four years or the third and the fourth year after having bought them.

I think patience’s is the key and it is a lesson which has lost on most of our viewers which is why they do not go on to become Raamdeo, Rakesh and Ramesh of the world.

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