The Fed meet slated for Wednesday may not ruffle up market as talks are of a small taper, which has broadly been factored in. Markets are more interested on Fed's stance on long-term interest rates; if anything negative is hinted it may harm sentiment, says Saurabh Mukherjea of Ambit Capital.
Speaking of the impending monetary policy meet tomorrow, Mukherjea said a 25 bps rate hike is highly likely given the disappointment seen in CPI and WPI data. If the inflation data stays as stubborn, then another 25 bps rate hike cannot be ruled out in January, as it is the only tool left with the RBI to tackle price rise.
Ambit has been underweight on banks and circumspect of cycylicals. He advises investors to own only those cyclicals that have credible balance sheets.
Talking about the Apollo Tyre -Cooper ruling at Delaware Court, he says unless the deal is called off totally, it will be difficult to take a stance on Apollo Tyres. From a fundamental point of view, Mukherjea believes the Apollo stock is worth Rs 130/share.
Whether one should have Coal India in his portfolio in view of the special dividend that the company is expected to announce, Mukherjea said PSU companies, in general, struggle to be value-generating investments in the near term. They are run with a different objective and interest of minority shareholders is not on top of government agenda, he said.
Below is the verbatim transcript of Saurabh Mukherjea's interview on CNBC-TV18
Q: Will taper pass on just like the inflation numbers, won't harm or ruffle our markets much even if it were to come after the Federal Open Market Committee (FOMC) meet?
A: It does look like we are heading for a tiny taper, whether it happens in December or January is hard to predict. But by and large markets have factored in a small taper, the beginnings of taper are factored in. The markets are now more interested in Federal Reserve’s (Fed) long-term guidance on interest rates.
At the moment, the base case expectation is that for the next couple of years Fed won't touch interest rates, it won't hike interest rates. If anything negative is said on that front, that is a more likely risk to the markets. By and large a small taper of USD 4-5 billion is already expected by the market.
Q: A couple of months ago you said you wouldn’t be surprised if the RBI throws up a 50 bps rate hike in this policy. Are you still expecting that?
A: In the last couple of weeks it has become pretty clear that 25 bps is highly likely given the consumer price index (CPI) and wholesale price index (WPI) data. There is very little alternative for the RBI other than hiking the key rate by 25 bps. Will they do another 25 bps before the financial year ends? I think the odds are in favour.
If the inflation data stays as punchy as it has stayed for the last few months, 25 bps this week and another 25 bps in January-February should be the base case scenario. I don't really see how we can resolve food inflation, there is some seasonal downtrend coming but structurally we have a problem with food inflation because there is demand-supply mismatch. And policy is not the ideal way to deal with it but it is the only tool, the RBI has to go after inflation. So, 25 bps this week and another 25 bps in a couple of months is the base case scenario.
Q: If this is your estimate, does that disturb your stock picking at all?
A: We have been underweight on banks for the last year and half and we remain of that view. We are overweight on cyclicals of almost every shape and colour barring banks and that point of view continues going forward. The main area where I think other than banks we need to take a more circumspect view of cyclicals is wherever balance sheet burdens are high.
The cost of debt in India will stay high for at least a year and half, even after these rate hikes it will be a slow unwind of the monetary policy cycle. So wherever investors are seeing companies with heavy debt loads, it is best to stay clear. Do focus on cyclicals, go for cyclicals that have strong balance sheets, good cash flows, good management teams because the broken balance sheet cyclicals will take a long time to recover.
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