2016 may see high volatility but no case for bear market: Udayan

After a year of consolidation, Indian equities are likely to continue to stay in a trading range, albeit with high volatility, believes CNBC-TV18 Consulting Editor Udayan Mukherjee.In an interview, Mukherjee said investors' "confidence in equities" was getting eroded and added that there was no reason to believe the Indian market will stand out in 2016 amid weak cues globally.

"The upside for the Indian market is capped but there is no strong case for a bear market right now," Mukherjee told CNBC-TV18's Latha Venkatesh and Sonia Shenoy.Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: It has not been a very happy new year for the stock markets, what did you make of what took place yesterday and is that a sign of the trend to come?A: My sense is that this kind of volatility will be a fairly recurring theme in 2016. So more than 500 point rallies or 500 point falls on the Sensex, I think the key takeaway is that maybe 2016 turns out to be a year of high volatility and volatility shakes confidence in the market.Just look at the trend of the last few weeks. You had a rally from 7,600-7,700 all the way almost up to 8,000 and in one day about a couple of hundred points gets taken away on the Nifty with an attendant spike in the volatility index (VIX). You will probably see much more of this as the year progresses because I don’t think the world has confidence in trading equities at this point in time. There are hope rallies, which are panning out and then you get some data, which is like a jolt and the market quickly gives up its gains.My sense is that this is probably something which will happen again and again, which is why the market might remain trapped in a bit of a trading range and within that you will have to be extremely nimble to protect the trading profits that you will be making this year.So far there is no evidence suggesting that this will be a great year for equities, at best the middling kind of a year. However, for now as the view has been that the Nifty continues to remain trapped in a 7,700-8,100 kind of trading range, it makes these sporadic attempts to get to the top of the range but gets knocked back.So I am not reading too much into yesterday's fall other than the fact that the volumes were quite high yesterday. So it is one more of those China led falls that we have seen so many of in the last few months. So not reading too much into it but I think to deal with this kind of volatility on a week-to-week basis, will test traders this year.Latha: The bunch of macro data we got was also a bit debilitating, India's purchasing managers' index (PMI) number probably one of because of the Chennai rains but still a contraction, the US PMI data also indicated contraction, as well you had previous core sector numbers which showed minus 1.3, a lot of macro data have been looking much worse than probably we were prepared for?A: That is what we have been discussing over the last many months. All debates come around to finally 'but Indian macro is good' and I always put that question on the table on whether Indian macro is indeed that good and whether what is good is not priced into valuations already because you won't find too many markets in the world today, which are trading at 16 kind of price to earnings (P/E) multiples. So I think the little that is good about Indian macro particularly, the commodity side of it, is adequately reflected in valuations.We keep talking about how China is a black box and we don’t understand the data, we look at it with suspicion. How are we much better than China? Look at our data. We are going at 6 percent, one fine morning, we change some of the metrics and suddenly we are growing at 8 percent. I overheard somebody saying yesterday our fiscal deficit problem is resolved. You add all the pieces, which we don’t declare, our fiscal deficit picture is a monster. So we are behaving like China, we are changing our gross domestic product (GDP) growth data to make us look good. We are altering our fiscal deficit data dramatically and ridiculously to make it look good. Our banks don’t report half of our asset problems till the Reserve Bank of India (RBI) wraps them on the knuckles. Is it not China like behaviour in data declaration that we are doing?We should call a spade, a spade and say India's macro is probably better than most other countries, accepted, in the price but I don’t think it is something to shout from the rooftops about saying our macro is so glorious that our markets cannot fall._PAGEBREAK_Latha: Therefore what kind of a trading range? After all in January we begin to start expecting this moon from the Budget, do you think that will once again work its way or should we get used to a lower trading range?A: I am not a big believer of Budgets doing a whole lot for the market and the last Union Budget would have told you that you should not expect great things. Of course the media will build it up as it always does as a make or break event for the markets and the economy but it rarely turns out to be that big thing.I was looking at January and February performance for the stock market over the last 10 years. I think the average return in the two months period, January and February, is probably 1.5 percent or something like that. That does tell you that markets bet big time on the Budget if history is to be believed. There have been up years and the down years but the average is 1.5 percent or something in that vicinity.So January-February, contrary to all that talk about massive pre-budget rallies, is very lukewarm kind of period for the stock market. I have no great expectations from the Budget, I am sure there will be a little bit of tinkering on the margin but I don’t think it is a defining event for the market at all.Therefore now, this 7,700-8,100 range prognosis is not based on any great technical knowledge. It is just that there is no compelling reason for the market to move above 8,100 right now or 8,000 right now and 7,700 seems to be supporting the market. So it might have some relevance for traders. The domestic money has still not deserted the market. So there is a little bit of a technical cushion out there in terms of a buy. The market might just remain trapped in that.January would be an important month in the sense that we would go through another earning season. Last earning season was not great so if this turns out to be as lacklustre an earning season as the last one and on top of that you have bad news from China then I think there is a possibility, not a certainty, that the market might even go back and retest 7,500 kind of levels once again.So I am not a big believer of levels but restricted upsides for the market right now and the downside is open but that is a global question.Sonia: Is this still a bull market that we are in or is the theory completely out of the window and 2015 was perhaps the start of a prolong bear phase for equities?A: I don’t think so but these are semantic. One bad year and you start talking about a bear market, one good year and we talk about six year long bull market. Hindsight will tell us what market it was.2015 not looked like a great bull market, it could be just a year of consolidation or correction. It is very difficult to make the case for an Indian bear market right now because as lot of people keep telling you, there is something going for our market and our economy, which is not the case for a lot of other markets. My problem is that there is rarely a case in history that the world has gone into a bear phase and India has been in a bull phase.I cannot remember in my memory when something like that has happened. So I am not in that group, which believes that India will be that jewel, which will stand out even if the global markets go into a bearish phase. So the call for 2016 has to be is China going to tip global economies into a recession kind of a phase? I don’t know the answer to that. I fear that most people do not but that is the risk that everybody should be sleepless at night about.If the answer to that is no, then I think we will at some point in the year resume our uptrend that we were seeing in 2014. If the answer to that is, yes, I would bet my bottom dollar that India does not stand out and we go down with the rest of the pack maybe less than them. However, in a global recession situation all markets will fall, India included, regardless of its shining macro that we have been tom-tomming about.Just to repeat, there is no strong case for an Indian bear market and equities right now but there is some suspicion and fear of a global recession, which we will know the outcome of in the next few weeks and months. So you need to be vigilant about that risk while you bask in your own macro.Latha: Where does one hide, in the likes of Bajaj Finance, Ashok Leyland, those that have proved their mettle?A: People like us always have an asset allocation call. We are not fund managers. We don’t need to own 100 percent in our cash in equity. So when the going is murky, you can just take a call -- I don’t have to be in equities right now, much that fund managers will always tell you, you must keep upping your weightage in equity in every fall. It is a very volatile and flux filled kind of a global world right now. We don’t know what the outcome will be and I think right now we stay quiet and do not take very large outsized bet on equities and see how the situation pans out.Worst case, you will probably have to buy it 3-4 percent higher later on in the year and I think that might just be the place to do but more importantly you must do some stock selection and just identify the sectors, which you should not be in at this point in time because some sectors seem more vulnerable to these global risks as we keep seeing in stock price reactions.Sonia: What are those sectors that one should not be in right now?A: We have spoken about Tata Motors last time around. It is a stock, which will be very volatile this year. It is not the kind of story that you should be owning unless the China verdict is quite clear. I am not a big fan of oil upstream though it might go up a little bit this morning.The big sector, which worries me quite a lot, is infrastructure because I was hoping a few months back that that sector starts to outperform, some small midcaps might do well there but the vanilla large companies in the infrastructure sector will struggle because private capex is still struggling and all the metrics are telling you that it is not recovering in the kind of hurry that we would have liked it to recover.I wouldn’t rush to buy banks right now because the bad news is probably still not out and pharmaceuticals look shaky to me because these US food and drug administration (FDA) bombs are repeatedly coming, Cadila being the latest one. So I would stay a little underweight on that sector as well.So we keep that out and we begin to look at the portfolio which looks increasingly defensive in nature.