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Chhaochharia is not too impressed by the rebound in second line shares over the last week. He attributes it to covering up of short positions more than fresh buying. He is bullish on United Spirits and bearish on Titan.
Gems and jewellery shares are unlikely to regain their record high levels anytime soon, feels Gautam Chhaochharia of UBS. Jewellery shares have taken a beating over the last couple of months ever since the Reserve Bank of India started putting curbs on gold imports.
In an interview to CNBC-TV18, Chhaochharia said Titan’s underlying business fundamentals were weak and advised investors to sell the stock.
Chhaochharia is not too impressed by the rebound in second line shares over the last week. He attributes it to covering up of short positions more than fresh buying.
He says investors have become cautious on emerging markets in general, though India is now better placed compared to its peers in this space.
Chhaochharia says the Nifty may get past 6400 only if there is credible macro-economic data to support. He is not hopeful of a recovery in earnings growth in the June quarter, but expects bottoming out of demand to start in September. On consumption, he feels the tailwinds could continue near term. He is positive on oil and gas shares, and United Spirits .
Below is the verbatim transcript of his interview to CNBC-TV18
Q: First a word on what you are hearing anecdotally about whether or not the mood is changing a little bit in the near term towards emerging market (EM) like ours and whether some of this pressure we have been seeing by way of outflows is alleviating now?
A: It is still too early to say on that. The mood on the emerging markets as a broad asset class has still not changed completely. In fact that has definitely taken a beating from the last few weeks of nervousness. India’s positioning worries related to other emerging markets is gradually dissipating.
Two clear reasons which we have been highlighting to investors I think which is gradually getting appreciated.
1) One is that India’s dependency on the carry trade sensitive bond flows is far lesser than other high current account deficit (CAD) countries. It has gone up compared to India’s own history. Therefore has caused the short term volatility but in absolute amounts as well as a percentage of CAD funding. It is far lesser than a lot of other high current account deficit countries. Therefore, this entire emerging market bond linked volatility could be far lesser for India going forward than what we have seen.
2) The entire hedge towards commodity prices, long term, medium term and short term, we have seen very strong correlation between strong dollar and commodity prices including Brent as well as gold. We have already seen part of that play out and that kind of alleviates the pressure on India’s CAD. Also other macro parameters like fiscal and inflation if these commodity pressures move in line with dollar.
If we assume gold at even USD 1,300 per ounce and Brent at USD 100 per barrel, even at 60 INR, you are looking at CAD broadly improving almost 50 basis points as a percentage of gross domestic products (GDP) in FY14 versus FY13. So, it depends on how the commodities move versus the dollar. That is also kind of unique for India specifically compared to a lot of other high CAD countries.
So these two factors do mitigate the nervousness about the volatility from the global emerging market worries for India specifically.
Q: Do you expect to see a trading range for the market from between 5500-6400 and we came off from the lower end of that range. What do you expect to see through the course of earnings season and do you think that range will get challenged on either end because of what earnings quality may show through?
A: Not really. This is the third time we are seeing that trading range holding on broadly. That will still hold on. For it to really breakout on either side will need factors beyond what we have been seeing for last few months.
For Nifty to breakout beyond 6400 levels what we need is a more credible economic data locally beyond just hope. We are also in the camp of hoping for a cyclical economic recovery even though a mild one, but still early days.
The direction of the government has definitely changed versus last year. They are on the same path of trying to get the economy back on track. However, it is still very early days. And it takes time.
Once we start seeing that happening maybe in next 2-3 quarters then possibly you could look at a more reasonable case of market breaking out beyond current range.
Q: In that sense there has been some genuine effort by the government to step up reform in the oil and gas space either in the form of the gas price hike or consistent diesel price hikes as well. How would you approach the oil and gas space now?
A: We have just upgraded the Oil Marketing Companies (OMC) today morning. That was because the stocks had corrected and this trend is likely to continue from hereon in terms of government continuing the diesel price hike.
The big challenge there obviously is the currency, which we think is overdone. However, beyond that the space does look attractive. Both the marketing companies including players like Reliance Industries and Oil and Natural Gas Corporation ( ONGC ) look to be well placed to benefit from this entire thing.
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