Monday blues or 'make money' Monday?

Nilesh Shah of Axis Direct sees attractive opportunities emerging from the current market turbulence. The BSE Sensex dropped more than 1% on Monday, as global risk assets sold off after elections in Greece and France fuelled questions on their austerity policies.

The weaker rupee and uncertainty in a day when the Finance Bill containing the controversial provisions is set to be introduced to the parliament also weighed.

The main BSE index fell 1.5% to 16,588.32 points, while the Nifty fell 1.5% to 5,009.90 points.

"Today, there will be some amount of resolution expected by the market and hopefully that will set the trend for positiveness to emerge over next couple of weeks," Shah told CNBC-TV18.

Meanwhile, the rupee opened lower as global risk off sentiment trumped the central bank's move to ease forex inflows into the country.

The RBI announced late on Friday measures to bolster foreign currency inflows following a sharp fall in the rupee.

According to Shah, currently, it is sentiment driving the rupee rather than the actual outflows. However, he says there are a few things turning positive for the local currency. First of which is the oil price correction. Second, the gold imports have started slowing down.

In the month of April, India imported about 35 tonne of gold compared to last year's about 90 tonnes. "If there is a drop in oil prices and it kind of supports by drop in gold import then certainly the deficit numbers will start looking far better and hopefully that will give respite to rupee," Shah believes.

The other thing which is important is the undervaluation of rupee on a real effective exchange rate basis. Depending upon different models, that ranges from 6-12%, and at such kind of undervaluation chances of rupee appreciating over medium-term is fairly bright, Shah highlights.

Shah sees a phase of risk-off emerging in global markets again.

After April's weak US jobs report, investors will scrutinize each piece of economic data for a read on whether the economy's soft patch is temporary or the start of something more troubling. Shah does not see growth in US and Europe reviving significantly any time soon.

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In an interview with CNBC-TV18, Nilesh Shah of Axis Direct said, "We will have to brace for some amount of turbulence. But, good opportunities will emerge in this turbulence. The markets are facing a lot of problems, but we will wind down over a period of time."

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q: It’s going to be a difficult morning today but what’s the best way to approach the kind of turbulence that we are seeing now?

A: I think we will have to brace for some amount of turbulence. But, good opportunities will emerge in this turbulence. The markets are facing a lot of problems, but we will wind down over a period of time.

The crucial aspect could be related to concerns on the taxation side. Today, there will be some amount of resolution expected by the market and hopefully, that will set the trend for positiveness to emerge over the next couple of weeks.

Q: More than what’s happened with the equity market, people are nervous about the currency market, so much pressure and so little time. What have you read into it and how much is to do with sentiment and how much to do with an outflow situation that the market maybe grappling with?

A: In the currency market it looks more like sentiment rather than the outflow not withstanding all the worries about FIIs withdrawing from the country. In the first three months of the current year, they have brought in the highest amount of money in the last three years.

Of course, in April they withdrew. But, it was a marginal sum of USD 140 million. And in the last seven days, there are net buys including on Friday when markets corrected. Clearly, in the currency market, it is sentiment which is driving rupee rather than the actual outflows. More importantly there are a few things which are happening for currency and it might be turning positive.

The first is the correction in oil prices. We are now trading below USD 115 a barrel. Hopefully, if this trend continues there will be some respite for the rupee. Second, the gold imports have started slowing down. In the month of April we imported about 35 tonnes of gold compared to the last year when we imported about 90 tonnes of gold.

If there is a drop in oil prices and it kind of supports by drop in gold import then certainly the deficit numbers will start looking far better and that will provide some respite to the rupee. The other thing which is important is the undervaluation of rupee on a real effective exchange rate basis. Depending upon different models that range from 6-12%, such undervaluation chances of rupee appreciating over medium-term is fairly bright.

Q: Do you expect to see this volatility continuing because of European cues? Do you think the risk-off kind of environment might be looming upon us once again globally?

A: Definitely. The current political dispensation in Europe will bring European problems back to the center stage of global markets. France has voted for left of the central government.

In Greece, the exit poll suggests that there will be an anti-austerity government. Probably, there are local level elections in Germany and Italy which again could put pressure on the political set, especially towards austerity.

The whole European problem, which was kind of going into backstage, will come to the center stage and this will create confusion or risk-off in the mind of global investors. We could probably see some amount of volatility in the Indian market, courtesy the European problems.

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Q: How do you draw a line between whether these are short-term issues or medium-term issues that the market would have to deal with? Even with respect to Europe, the French PMI number came in at 45 versus 50 which clearly show an extreme decline in the macro conditions as well. Do you think right now is a temporary risk-off phase that we need to live with or has the scenario changed significantly from January for equity markets generally?

A: I think if we see the global markets, in some sense a slightly weaker global market is better for India. In a situation like that, their central banks will have to keep up pumping the liquidity and some of that liquidity will start flowing to India.

If we take lessons from the Indian crisis of 1991 or the Asian crisis of 1997, the solution prescribed to us and Asia was that you raise your interest rates, cut your deficit and devalue your currency. Essentially, you suffer some amount of pain so that you can come up better in future.

If you look at the problems of global crisis in 2008 and the solution offered to them, it's essentially cut interest rate, forget about deficit, print money, let the central bank monetize everything. Clearly the solution which is likely to emerge out of this kind of prescription is going to be different from what was given to us in 1991 and how we recovered.

So, Europe and US will probably continue to get supported by extremely loose monetary and fiscal policy, but their growth is unlikely to recover in a hurry. For us that might be the best scenario because their central banks will pump the liquidity and some of that liquidity can flow to us.

In order to attract that liquidity we have to obviously clarify the situation on the taxation side. I hope, over the next two days, today and tomorrow, we will be able to give some sort of concrete confidence to the global investors that GAAR is not retrospective.

GAAR is meant for catching a down tripping rather than the genuine FII investment and India welcomes FII investment, it's not against FII. If that confidence is given, then certainly the lingering concern which is lying in the minds of global investors will disappear. The second thing is obviously to support growth. Global investors are coming to India because of a long-term growth story.

In the recent times, courtesy certain decisions on the policy side and some tight monetary policy which needed to be followed for controlling inflation, the equation on growth is coming under pressure. If we can convince investors that growth is also equally important to India and going forward, we will do whatever is possible to support that growth then removing the tax concern and giving assurance for growth could bring money into the system from that liquidity.

If we do this, then probably by June-July, if normal monsoon comes as expected by the Meteorological Department then we will create a virtuous cycle. However, it does not mean that all this will be reflected into a zooming market. The markets will continue to be volatile, but at least it will start creating a base where it can probably take off after some time.

Q: Do you think the last time Dr. Subba Rao said take 50 and be happy with that, but has the environment changed for the Reserve Bank to give the market some slack?

A: Definitely. The environment on global side is giving some elbowroom to the RBI to continue pursuing a slightly loose monetary policy. With the correction in oil, probably fear of inflation could subside a little bit.

If the rupee can appreciate from the current level, courtesy RBI intervention, drop in oil price and gold imports, it adds armor to controlling inflation. Some amount of monetary loosening and rate cut could combine together to support the growth.

RBI has many weapons. Policy rate cut is one. Open market operation and intervention in secondary market is another. Third, is also to improve the money multiplier or money supply in order to create liquidity. All these three things combined, RBI can create an environment whereby growth can be supported.

Q: How would you approach banking now? Couple of public sector bank numbers have not looked particularly encouraging. Do you think these asset quality issues will worsen during the course of the year or do you think the markets are getting overly concerned and things will not really worsen to that extent?

A: Let’s keep in mind two things. One, over the last couple of years, fair amount of individual savings has gone to physical assets like real estate and gold. Courtesy last 10-12 years of price appreciation, the attractiveness of these two assets classes, real estate and gold should be on the way down rather than on the way up. There are very few asset classes which have delivered returns positively year after year for 11-12 years and gold is one of them in the recent times.

But, hopefully law of average will catch up with gold. This will shift physical savings into financial savings and banks will be the biggest beneficiary of it. The second thing is related to unavailability of equity capital to small and medium enterprises. If we see over the last three years, virtually there has been no significant equity raising for corporate India. That’s kind of putting some amount of stress on their balance sheet and that’s reflected in the NPA for the banking sector.

If you see corporate India, it’s declaring dividends to the extent of Rs 90,000 crore and against that, the capital raising is just about Rs 25,000-30,000 crore on an average. And last year was even lower than that. In some sense corporate India has been paying about Rs 50,000-60,000 crore every year to the investors rather than receiving anything from them, which is extremely necessary for a growing economy.

My feeling is that at some point of time the law of average will catch up. Pricing will become attractive for IPOs and that will give some pleasant experience to investors. This shift from physical savings to financial savings and law of averaging catching up with corporate India in terms of raising equity capital should be significantly beneficial for the banking sector.

The third concern which has been added on the banking sector is related to Basel III. In our estimation, about Rs 160,000 crore needs to be raised by way of equity capital over the next six-seven years for the banking sector. This massive amount of capital raising is also reflected in the stock prices right now. Again this capital raising is extended over a period of time and probably stock prices today are reflecting as if they are going to be raised tomorrow.

The second thing is that as the capital is being raised and the banking sector is becoming safer, at some point of time that should be reflected into their valuation. From a valuation point of view also banking sector today provides reasonable comfort.

Put all these things together and banking sector today on the way down provides a fairly attractive opportunity. RBI has been fairly proactive in doing financial regulation of the banking sector, so we don’t expect a meltdown similar to what occurred in 2008 in US and Europe.