Is Nifty stuck in a congestion zone?

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Is Nifty stuck in a congestion zone?

Akash Prakash, CEO, Amansa Capital says that Nifty has stuck in a congestion zone for some time.

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It has been a strange kind of a bull market in the last one year.The market has been grinding up while breakouts have only seen mild range expansion every time. But in the last couple of days we have seen a significant pick up in the momentum in the market and therefore it is a pertinent question whether the whole range bound pattern of the market is about to breakout into a significantly trending market.

In an interview to CNBC-TV18's special show Tracking The Bull, Akash Prakash, CEO, Amansa Capital says that Nifty is stuck in a congestion zone for some time.

Here is a verbatim transcript of his views. Also watch the accompanying video.

Q: Is this a big breakout from the range and can we start trending once again or is it too premature to say that?

A: I think it's still premature to say that. I think that obviously 5500 on the Nifty was a very critical level, it has gone beyond that. Let us see if it sustains there, hopefully it does. I think  we are stuck in a congestion zone for some time.

Q: So you don't think this will have an explosive blowout over 5500 which can very quickly take us towards 6000; it is unlikely?

A: In a way you hope it happens but I still think the odds don't favour that yet because that requires consistent buying from overseas to continue at a pace it has. It could happen but I still think the odds favour us, drifting up slowly and gradually the way we have done over the last 6 months that is my sense. It is very difficult to say because it is very delicately poised. I still think the more likely possibility is a slow and gradual move up and oppose an explosive 5-10% move in a matter of 7-10 days.

Q: The difficult thing to map here is liquidity coming in by gush full over the last few weeks, what is your sense of what is keeping this going for India, this kind of dollar flow?

A: I agree, that is the surprising part but if you talk to most investors who I speak to, people running funds most funds are not really getting that quantum of inflows as you would expect given the amount of foreign buying. It is not exactly clear where this buying is coming from. Is it coming from three macro funds, through ETFs, is it sovereign wealth funds? I am not exactly sure where the money is coming from because most of the India specific funds are not seeing huge inflows.

But what is happening is a classic situation where as the world gets more and more worried about global growth prospects talks of double digit growth in US, Europe , Japan etc, I think India is obviously standing out as an area where there is a clear and demonstrable growth and consistent and sustained growth without that much of an overseas impact. Even if there were a double dip, I think India would still grow pretty strongly.

So in an environment where growth is a real premium and sustained visible growth is at a premium, I think India is benefiting from that. It is just getting bid up because it is one of the few geographies where people feel comfortable that the market or the economy will grow at 8% over the next few years in a reasonably visible fashion.

Q: But if that were the case, if the money was just being driven by fundamentals, traditional channels like long funds would have got quite a bit of the money? Don't you fear this is just performance chasing money because India is relatively out performing and is led by tehcnicals rather than the fundamentals much that we would like to believe that?

A: I think there is risk of that, there is some of that because most of the people or other fund managers that I speak to have not really seen massive inflows commensurate the type of money we have seen come into the secondary market.

It doesn't seem to be money coming in there. It could be asset allocation changes among global funds, it could be regional funds. But even if you read the Merrill Lynch Fund Managers Survey you don't get a sense that fund managers even regionally are very overweight on India. So it looks like it's a lot of asset allocation money, global funds allocating into emerging markets in India or macro hedge funds allocating into India through ETFs and other liquid products.

There is some type of momentum performance chasing type of tone to the money that is clearly there. So that is a valid concern that. It could reverse very easily or it could take it up to a new level. Just the problem is that it's very difficult right now to say which dimension or direction this will go. I agree that there is definitely performance chasing going on because India is standing out within both the emerging market universe, as well as Asia.

Q: So what do you do now, do you draw the line saying this is valuations and global cues or do you say just tag along because if we get another USD 2-3 billion over the next month and half we could be up another 400-500 points?

A: I agree, so firstly while we do believe the valuation is full, I don't think it's absurdly overvalued like in hindsight what was in beginning of 2008. Its difficult to find new ideas especially the largecap universe but they are not absurd yet. Unfortunately even though we would like to believe market is moving entirely on valuation, at least in the short term it is not a very good timing indicator. We are buying, the cost of protection in Indian in terms of hedging options while futures is amongst the lowest in the world.

We are very stock specific, so where we see our company still having reasonable growth horizon over the next 2-3 years, reasonable upside we are maintaining our investments in those stocks and buying cheap protection because the cost of protection is amongst the lowest in the world.

I think investors are getting their positions ride where they are comfortable fundamentally and buying cheap protection to protect against something, a short-term reversal which could be caused by global factors.

Q: Have you started seeing bubbles forming in specific pockets though while overall the market might be trading at say 18 times? In specific pockets though do you think valuations have gone back to those peak 2007 end kind of levels?

A: Difficult to say because if you look at the sectors the market has been quite rational in its move in a sense that you look at real estate or infrastructure developers or very capital intensive sectors which constantly need capital to grow and keep diluting. They have really underperformed the market significantly over the last 12 months.

The sectors that have gone up are banks. You have the beginnings of a hopefully strong economic cycle and the other stocks that have done well are high quality companies or consumer discretionary sectors because consumption in India has really stood out. It has been very strong and sustained.

So autos have done well- two wheelers have done well. High quality companies which do not need to dilute have done well. The market actually has been quite rational. I do not think it is a bubble in this sense that the market is pricing stocks far more rationally than you would see in 2007-08 for example.