Jan 09, 2017, 06.15 PM | Source: CNBC-TV18
Udayan Mukherjee said that the momentum is with developed markets right now which is reflected in the US market rally.
Udayan Mukherjee (more)
Consulting Editor, CNBC-TV18 |
The momentum is with developed markets right now which is reflected in the US market rally, he says.
The protectionist policy under US President-elect Donald Trump has weighed heavily on the Indian IT sector and from the point of view of a long-term investor, would prefer to not get into IT stocks, Mukherjee said.
He further advised investors to stay away from fertiliser companies and termed them as long term wealth destroyers.
Below is the verbatim transcript of Udayan Mukherjee’s interview to Anuj Singhal & Sonia Shenoy on CNBC-TV18.
Anuj: This year we have again seen developed market out performing compared to emerging markets, you get a sense that that theme has some more legs to go?
A: If you look at the flows they continue to be negative. They are not hugely negative, but for the first seven or eight days that you alluded to foreign intuitional investors (FII) continue to sell. I think they have sold about a couple of Rs 1,000 crore. That is consistent with the picture that we are seeing in many emerging markets. So, the year has started on that note where the selling in emerging markets is not as aggressive as what we saw in November and December. However, nevertheless on the margin they continue to be sellers and more of the money is going back to dollar backed assets and to the US markets which is showing you quite a bit of performance.
As you know money in the near-term always follows and chases performance. Right now the momentum is with the developed markets. The Europe is not doing too badly either and the US market has been on a tear say election result day. The dollar still continues to be fairly strong, so there is no reason why the momentum chasing money would desert developed markets for the momentum.
At least in India we have been buffered somewhat by the domestic intuitional flows which continues to be encouragingly robust and that has showed us that we did not have a very bad start to the year and we have limped back to 8,200 plus at least.
Sonia: The market fears post the Trump victory have actually played out especially in the IT sector. We have seen this protectionist voices re-surfacing specially with stricter H1B visa norms. As a long-term investor in IT stocks how should one approach it?
A: The picture is not clear and it is not just because of the rhetoric that you are hearing from the US. I think the IT industry is facing a fundamental volume problem and that is not going away. On the margin these irritants are ensuring that the pullback rallies don’t last beyond the point. Right now to go into the vanilla IT companies I think it is not a very prudent thing to do unless you fear that the market will have a lot of downside in the next couple of months and you want to relatively protect your portfolio. As you said for a long-term investor I wouldn’t buy too many IT stock right now. I mean that has been my consistent view for the last many months and there is nothing to change that view.
Periodically, you will get these 8-10percent rallies in the IT stock because they get oversold and they reach valuation levels which appears tempting relative to their recent past. People buy them they get a bounce and then again something happens and people lose confidence and the stock starts drifting lower. I heard one of your analysts, your expert just now say that since IT has some weightage on the Index you must keep some in your portfolio. That may be true of the professional fund manager, I don’t think any individual investor is under any such obligation to hold a sector because there is some representation in the Index. I think that is a mistake which a lot of people make feeling that they should own a slight in every sector in the market. I think at any point 50 percent of the sectors in the market should be given a wide berth and a leave.
Anuj: We will have earning season starting tomorrow. How crucial is that in scheme of things considering that we will have the one month of demonetisation impact clearly play out in the numbers, at least the December month?
A: Earnings won’t be great, but signs are that you may not get a completely clear picture of what the earnings picture is likely to be going forward just from this quarters numbers. I think what would be most important, I mean you can analyse what the sectoral disappointments could be. However, I would watch with great interest what the price action is post the earnings because if it is the case that you see stocks actually not falling too much even when the earnings are pretty bad that could be the first encouraging technical signs for the market that stocks are not responding to bad news from the earnings because it has been priced in advance.
So, I think the pricing or the price action of many stocks post the earnings would be quite interesting to watch this time. You know which are the sectors which will come up with not so great earnings this time - FMCG, probably IT, consumer durables, cement, two-wheelers, probably telecom these are sectors that you don’t want to be in, in a larger way before the earnings. Not suggesting any short positions there because a lot of the price damages are already in those prices, but at least not own a lot of them going into the earnings this time.
Anuj: Pharma stocks, the days of these companies getting 40-50 times are well and truly over, but what have you made of the kind of de-rating that we have seen in the second tier pharma names now, Divi's Laboratories and now Granules , we have seen a lot of price damage?
A: It has become unpredictable and that is the problem with the space. You don’t know which stock will explode in your face on a particular morning. I think that is shaking confidence and when confidence is shaken in the sector the way the market translates it is basically by compressing the P/Es because you have to account for that kind of uncertainty and that is pretty much what has been going on with the pharmaceutical space over the last one to one and a half years that slowly price earnings multiples are coming down as investor confidence is getting shaken by these serial episodes of either a USFDA probe or a plant issue.
So, it is a grey area, I wouldn’t write this space off completely because there are some excellent companies out there. Prices have corrected quite significantly and once we get a little bit more clarity about which way the USFDA is leaning towards once the current probes are settled, the sector might breathe a little easier. However, by that time which stocks would be down 40 percent in difficult to say. So, you don’t buy a whole lot of pharmaceutical stocks, but some of these names probably will give you very good returns.
It is just a question of the risks that you are willing to take in this space because if you own three or four chances are that one or two will be turn out to be one of these howlers, which are showing up and that is a disconcerting type of thought for an investor.
Sonia: As we head in to the Budget, generally a lot of these pockets like fertilisers, sugar tend to rally in hopes of some sops, some subsidy coming through in the Budget. Would you be wary about the spaces like this because it is just a one –two day rally that fizzles out immediately?
A: The rallies are very big and I am surprised that these stocks have rallied 25-30 percent. People have very short memories. Fertiliser is a sector which I dislike quite a bit because sometimes people don’t look at the past track record of some of these companies. Essentially, these are companies, which allocate capital badly. They pollute the environment and they have terrible return on equity or return on capital employed.
These are all the hallmarks of a bad business and the stock market over a long period of time punishes such sectors. I will give you an example of two stocks which went up last week. One is Chambal Fertilisers . Chambal Fertilisers -- Rs 85 was a Friday’s closing, I don’t know where it is today. You go back 10 years in time what was the stock doing in 2007. The stock price was Rs 85. It went up to Rs 115 in 2011 and it is back to Rs 85. Over a 10 year timeframe the return on that stock has been zero on a seven year timeframe the return is negative.
These are long-term wealth destroyers, no serious investors should be looking at fertiliser companies. Periodically, they will give you 30-40 percent, sometime 100 percent kind of rallies, but as you said yourself they will fizzle out. This is not just Chambal Fertilisers.
Look at RCF , the stock is at what Rs 55 now. It was Rs 125 in 2010, we are 60 percent lower or 70 percent lower than where the stock was seven years back. Now why would you want to own such businesses when you have spoilt for choice in India with good quality businesses? Fertiliser is a sector which does not belong in the book of any long-term investor. Nobody will ever convince me to buy one of these stocks.
Anuj: Some of these PSU stocks have seen a big rally. The Nifty CPSE Index had a new high and of course the rally started with the oil marketing companies long back but off late any PSU stock that you look at is doing well. Is the market betting too much on the government focus on investments via the PSU companies?
A: It appears like that and there is a lot of talk in the market about large scale privatisation, lot of injection of liquidity in to some of these companies. Some of them have credible business. Like you speak about a Power Grid , even an NTPC , these are good business. You talk about oil marketing companies the tide has turned in their favour after a long time. Hopefully, crude prices won’t go up too much to spoil the party. However, look at some of these names which are going up, what are these companies made of? I mean why are these stocks going up, MTNL -- what will the government do to a stock like MTNL that its stock deserves to go up 10-15-20 percent. There is a lot of froth which is creeping up and that is not true just of the PSUs. You look at the last 7 or 10 days in the market. I think the quality is worsening than the kinds of names which are leading -- fertilisers, some bad PSUs some of the low grade commodities stocks. Stocks like JP Associates . This is not the kind of leadership that you want to see even on the trading board for a market.
So it probably is the case because the market has reached some kind of resistance points which is the top-end of its range around 8,300 and I don’t think people have conviction or too many economic reasons to buy the market above that level and therefore, it is spreading out and spreading out sometimes in very undesirable directions.
Sonia: How does a long-term investor approach the next one month or one and a half months in the market because, so far it has been very range bound every time you get to the upper end of the range we face a bit of a hurdle, what should the strategy be now?
A: Range bound is good given the times that we live in, so if the market can get away with 7,900 to 8,300 over the next couple of months, I would say it is a job well done. Investors should not lose heart at all. If 7,900 holds out as the floor for this market then it should be called a very resilient market and the market, which is showing strength not weakness under the circumstances in which we are trading today.
I don’t know about the next one-one and a half months, but the next two or three months if you get good opportunities, I would firmly be on the buying side for a long-term investor because we have already got some opportunities in individual businesses. Chances are that we will get some more opportunities over the next few months. It is difficult to time whether it is one month or three months because the window should be kept a little wider, but this is a window of opportunity and long-term investors will do well to accumulate on very bad panic days.
I don’t think the current levels where we are trading right now -- close to 8,300 -- they are necessarily the best levels to deploy money but the moment you get closer to the lower end of the trading band or if that has broken for some reason and we drift even lower. I think when everybody tells you that the market is actually going in to a long bear phase and we are going to 6,900 and you hear a lot of bad kind of calls or negative calls on the market, I think those are the days where you need to be brave and go out and buy more of the stocks and keep accumulating through those very bad days.
I think I would look at the next three months with a view to buying rather than selling. If you are a long-term investor than you would hope that markets give you those kind of price opportunities once again as, we wade through the Budget and some of the other ugly news which the demonetisation is likely to throw up.
According to Ashwani Gujral of ashwanigujral.com,
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