CNBC-TV18‘s Consulting Editor Udayan Mukherjee said that the market got too complacent globally which lead to a jolt last week.
CNBC-TV18’s Consulting Editor Udayan Mukherjee said that the market got too complacent globally which lead to a jolt last week.
“Because yields were hardening, markets got a jolt,” he said, adding that it was overdue.
He sees one of two scenarios playing out in the next one or two months. Very soon, in the next few days leading up to the US Fed meet, one can expect soothing comments, and there could be a short correction lasting 5-7 days, he said.
The second scenario or Plan B is there could be some dislocation in the markets and it in turn could lead to a more savage selloff in emerging markets of which one saw the first signs on Friday, he said. “In that case, we are looking at lower levels of 7900.”
Udayan said instead of getting into a predictive scenario, one should try and follow the liquidity. “Volatility index becomes a key thing right now.”
If scenario B plays out, according to Udayan, it will be a deeper buying opportunity. “About 200 points on the Nifty doesn’t make it more attractive, you need a deeper pullback for valuations.”
About 10-12 percent correction precipitated by financial market dislocation will be a buying opportunity in India, he contends.
Historical evidence suggests that domestic investors sit on their hands when they are rattled by volatility, he said. “Ordinarily, you would think domestic investors who had been left out of the rally, they would latch on to a buying opportunity, but January and February instances tell you if prices become volatile, domestic investors don’t buy.”
Udayan also spoke of the Yes Bank QIP fiasco and the IT sector and the upcoming US presidential elections.
Below is the verbatim transcript of Udayan Mukherjee’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: Quite a bit of jolt for the market on Friday. Some people saw it coming, the market did give a bit of toppish indicator on Friday but what is your sense of whether we have made a bit of an intermediate top now?
A: I am not qualified to comment on intermediate tops; I think that question is better put to your technical friends out there. However, I think there are two scenarios right now; one of course is that the market got too complacent globally and because of the prospect now of yields hardening a little bit, markets have got a bit of a jolt. Maybe it was overdue and it is a simple process of mean reversion for the CBOE VIX which was indicating too much of complacency out there.
Now, this may last for just a few days, that is scenario one and very soon maybe in the next few days and leading up to the Fed meeting you will get soothing comments from the Fed and certainly if the markets go into a bit of a volatile mode leading up to the next Fed meeting, you can rest assure that the Fed will not do anything to r oil market sentiment further on the 21st. So, this could be a short sharp kind of a correction, maybe lasting five to seven days and then the Fed comes out and cools down yields in the market and therefore all is well finally. In that case the Nifty may not correct too much more than where it found support last time which was 8,500-8,600; that is still a couple of 100 points away from here and that could spread out over the next four to five days. That is one scenario which is a fairly shallow correction despite the mayhem that we saw on Friday.
Option B is that this is not just a very small shallow correction, there is some kind of financial dislocation in the markets led by the bond markets overseas, yields do spike up a bit, the dollar changes course and that leads to a slightly more savage sell-off in emerging markets across the world of which we saw the first sign on Friday, in that case I don’t think 8,500-8,600 holds, then we are looking at lower levels. Maybe a 10-12 percent kind of correction way down to maybe the Brexit day lows of 7,900-8,000, I think that would be par for the course if we do get some kind of financial dislocation. So, my best bet is one of these two scenarios will play out over the next one month.
The outlier scenario which nobody is talking about at this point in time is that growth fears come back. All we are talking right now is financial markets, what bond markets are doing, what yields are doing, we are not talking about the fairly poor economic data which has come out in the US over the last one week or 10 days which the markets took a lot of heart from ironically. However, if those January-February growth fears come back to the table then these scenarios that we are talking about go out of the window but for now that is an outlier scenario, we are not talking about data points which are indicating that just immediately.
Latha: What according to you is the more likely scenario?
A: It is a difficult one and my confidence in these scenarios, in predicating these scenarios is a bit low because now a days you do get bouts of correction in the market and then liquidity comes right back. So, I don't know whether this is going to be scenario B or scenario A so that everybody starts panicking because we have not got used to corrections over the last many months and then the correction lasts for three or four days and we are back off to the races once again.
I think right now instead of getting into predictive scenarios, follow the liquidity trail because this rally was about liquidity and all of us need to watch instead of valuations and fundamentals and price to equity (P/E) ratios, we just need to track liquidity meters. I think the volatility index becomes a key thing to track right now because the more it spikes, I think more difficult it will be for some of those traders to hold on to their long positions and it might force a lot of unwinding in the market globally.
So, I think it is liquidity which will finally tell which of these scenarios play out. Remember that since the March 1st, the Budget day out here, we have received some Rs 47,000 crore of foreign institutional investor (FII) inflows till Friday. I think at least half of that is exchange traded fund (ETF) money which is quite sensitive. So, you are talking Rs 24,000 crore which can move very quickly in and out of the market or from what has come in, in the last four months or so. So, there is a technical risk or hangover to this market because of positioning, there is no doubt about that, but whether it will play out because of how bond markets move globally, that is impossible to predict. So, take one day at a time but keep following the liquidity matrix now most closely.
Sonia: Till now every global sell-off has been a great buying opportunity especially for long-term retail investors. Do you think this time things will be the same?
A: If it is scenario A or B I think it will be a buying opportunity in India at least. B will be a deeper buying opportunity and option A is a very shallow buying opportunity. The problem is that that the market is trading at 19-20 P/E. 200 points on the Nifty does not make it necessarily far more attractive. You are still buying at 18-18.5 P/E so you need a deeper pullback for valuations to emerge as slightly more attractive.
Now, whether you will get that scenario in the next few days and weeks, we will have to find out but I think a 10-12 percent kind of correction which is precipitated by some kind of financial market dislocation and a liquidity dry up will be a buying opportunity in India because that will not change the fundamental metric or assumptions of why India is in a bullish kind of trajectory.
However, the outlier scenario which I mentioned which is that the data keeps worsening in the US, in Europe it is already not good and then China comes out with fairly poor data and once again people start fretting about the fact that monetary policy is failing and we are lurching towards recessionary conditions once again. If that happens, then I think it is not so easy to go out and say that every dip is a buying opportunity because then you will have to sit back and reassess growth prospects for every part of the world.
Anuj: We discussed this last time as well, what about domestic liquidity because last few months have been good for domestic investors, the mutual fund AUM is at all time highs, you have seen some of the highest every inflows into domestic equity mutual funds?
A: It is a tricky call because ordinarily you would think that if domestic investors -- actually a lot of them would have been left out of this rally because it has been far too swift in the last few months, they would latch on to a buying opportunity of 5 percent plus in this market. However, the January and February instance tells you that if prices become very volatile, then domestic investors actually don’t buy; they are rattled by volatility. So, right now they will tell you that if we get 8,000 on the Nifty, we will go out and sell our house and buy equities. However, if we do get there, historical evidence tells you that they don’t have the gumption to go out and buy, they actually sit on their hands because they are frazzled by the uncertainty and the volatility.
So, I won’t hold my breath for seeing support from domestic investors in the event of the second scenario playing out which is a lot of volatility in global markets which spooks people and we see a lot of FII outflows coming about. If that happens, domestic investors will be more inclined to wait rather than go out and put serious amounts of money to work; that is what history tells you. You look at the last two periods of volatility over the last couple of years, in very bad months domestic investors have not been big buyers.
Sonia: The stock of the moment today and on Friday is Yes Bank, now 8 percent gone in just two trading sessions. What did you make of the QIP fiasco?
A: The one issue is of course is technical’s, what positions were taken, the issue that you guys were talking about, whether Yes Bank can in the foreseeable future do an placement at anything close to Rs 1,400, I think the answer probably is no. However, that aside, what I think would have gone down fairly poorly with a lot of investors is a) the management communication post the QIP getting pulled out, you have to be candid. The management should have come out and said we waited, the price did not come, the stock price went down and a lot of investors backed out so we will try again; candor goes down very well with the market.
If you come up with disingenuous explanations like some problem with Sebi rules which is why they had to back out, that has left a very bad taste in the mouth. So, I think it now becomes a little bit of a corporate governance hangover as well on the stock because at the end of the day you know that something like this would never have happened with a Kotak Bank or an HDFC Bank and that is where you draw the line saying these managements are not going to do this kind of funny stuff with us and that is what has happened and I think it will take a little bit of undoing.
This does not affect the earnings potential of Yes Bank or its fundamentals beyond its ability to raise capital at a particular price very significantly but I think it has tarnished its image and its corporate governance structure and framework quite significantly and I see that being a bit of a hangover on the stock. Sometimes all of these things go into that valuation which the market accords you because valuation is a bit of an art and there is no precise science to it. So, when you say the stock is trading at 3-4 times book, then a lot of these small ingredients go into arriving at that kind of a lofty valuation and I think some of that sheen might have come off with last week’s episode.
Latha: IT today is not tumbling like the others, what did you make of the Tata Consultancy Services (TCS) warning and the future of these stocks?
A: A lot of price damage has happened already as I said last time. That is the reason why Infosys despite a string of bad news, even from the sector leader now, is holding on to that Rs 1,000 mark; it has not collapsed. The cuts nowadays are 0.5-1 percent; it is almost like reluctant selling. So, I think a large part of the selling might actually be over and from here very significant downside, I don’t know whether we will still see in IT.
You can get down to Rs 2,100-2,150 on TCS for sure given that Q2 is going to be quite pedestrian, you could go down to Rs 970-975 on Infosys but these are not very significant downsides from where we are right now because the moment you get to these 15-16 kind of P/E multiples one year forward or current year P/E multiples on some of these bluechip IT names, I think people generally hold on to these names because there is such a track record and confidence in holding onto them as businesses that longer term investors actually don’t sell out below these 15-16 kind of P/E multiples.
However, there is a bigger worry in what is happening with some of these sectors because if you now look at it, from the start of FY17 which is just a few months back and where we are today, IT sectors earnings expectations have been scaled down by anything between 5-8 percent. The telecom sectors earnings from the start of FY17 has been scaled down by 25-30 percent. You are seeing earnings downgrades in ICICI Bank, Hindustan Unilever (HUL), some of the larger companies.
So, I was just totaling up, it looks like companies with about 50-60 percent weightage in the Nifty have actually seen significant earnings downgrades in the last three or four months. So, I think it is good to go back to the table and see are we still on track for that 15-17 percent earnings growth that people we were talking about for the Nifty at the start of FY17 or are those numbers more realistically now 10-11 percent or at best 11-12 percent after these earnings downgrades. I think we need to do the math out here because that is a very important fundamental thing to consider.
Sonia: I also wanted to ask you about the other big trigger that everyone is talking about which is the US Presidential election on the November 8. This morning there are a lot of reports and videos about some health scares of Hillary Clinton doing the rounds, it could just be Trump’s campaign working but is the market starting to price in even a possibility of a Donald Trump victory?
A: No, I think that would be a fairly sharp reaction if the market started pricing that in. I doubt that, I think the market is still very much in the mode that Hilary Clinton will be the next President. I don’t think any sort of pricing in has happened yet, at least in the stock market about that kind of Presidential election possibility but these days you never know. The issue is that the more you look at global market performance these days it seems like some kind of a surreal game going on. There is such little talk of earnings, fundamentals, valuations, the old things which guided stock markets.
Nowadays it is so much about second guessing what a central banker is saying, what algorithms are at work, what quantitative funds are doing; it seems like it is a poker game, it is not a financial asset class which is based on fundamentals and that worries me quite a bit because the old rules of the game had something solid about them. Right now it seems like you have walked into a casino and it is a game of make-believe which is going on with us focusing on all the wrong things which keep changing every week and that disturbs me a little bit.
Latha: What is the place to hide, what is the strategy for retail investor?
A: I am not a big believer that when markets turn very volatile you should buy a set of stocks and try and ride out that phase. I don't think that is very sound strategy. Right now nothing has happened. You have had a great run in the market and all that we are discussing is a two percent correction or a three percent correction in global market including ours. That is not enough to panic on at all.
Now, we are discussing a possibility of this turning more pernicious because of the liquidity tide turning. Have global investors including quantitative funds etc been rattled enough after a long time and were they significantly leveraged and long up to their gills so that now they have to backtrack and readjust their positions and that might have a cascading effect which can lead the market significantly lower.
Now, let us wait for a couple of days and see which way the cookie is crumbling. All of us remember what happened on Brexit day. I certainly thought that there was a significant breakdown and look at what happened subsequently. So, one day's panic is not enough for you to take a big reallocation call on your portfolio, it is an evolving situation, it could turn out to be bad and if it turns out to be bad then certainly you will have to readjust your portfolio and most certainly your trading portfolio but we are not quite there yet. So, let us see over the next couple of days whether this is indeed a 10-12 percent kind of correction or nothing more than another 3-5 percent correction which the market brushes of and moves on.
Sonia: One piece of the market which has been working very well is the consumption piece, especially sectors like auto etc and they have nothing to do with the global volatility. So, if we do see a dip do you suggest that perhaps people continue accumulating some of these well performing sectors?
A: For long term investors that is what they should be doing because as I said earlier at the start of our chat that if this is a correction however significant and it can be significant lead by a financial dislocation in the bond market in the west which is where it seems to be heading that yields will spike, the dollar will rise and emerging markets will sell off. That is the possibility. If that scenario plays out it will be a technical blow to all emerging markets including India and that on hindsight will be a buying opportunity and what do you buy then, you buy strong India franchises if you believe that India is structurally in a bull market and you are getting an opportunity because of global mayhem in global financial markets.
Now, that may last for 5-6 weeks and cause intense pain, but on hindsight it will turn out to be a good buying opportunity for strong India franchises of the kind that you have mentioned. But do keep a 10 percent window open for something more dangerous happening which is the January-February fears coming back and I don't like the look of the US data which is coming out of late. That is something which the market - stupidly in my sense, in my book - is celebrating because they are so focussed on liquidity but that is the one which gives me sleepless nights the fact that despite so much monetary policy accommodation we are still getting fairly insipid data from most parts of the world and as a long term investor that should worry one most and not this small tinkering in bond yields up and down which is painful or maybe a short term phenomenon.
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