Buy shares in hoards if Nifty tests 7,500 next year: Madhu Kela

There is a lot of uncertainty for global markets going into next year, with the biggest being how the Chinese slowdown plays out, but former star fund manager Madhu Kela says he would "thump the table" and buy Indian equities should the Nifty were to fall to 7,500 or below.

In an interview with CNBC-TV18, Kela, Chief Investment Strategist with Reliance Capital, said that Indian investors will have nowhere but equities to plow their savings in, given the lack of returns from traditional asset classes such as real estate or gold. Further, the India story is "well-discovered" now among global investors, which will provide some cushion to shares in the event they turn lower due to global turbulence, he added.Below is the transcript of the interview on CNBC-TV18.Q: How worried are you about this China phenomenon and how much of a downside could it trigger because you have read reports suggesting that global growth is such that if there is a China shock for some reason it could tip the global economy into recession even. So, are you saying this will be just a short term correction which should be seen as an opportunity or could it be a long drawn out affair in the global space which has the potential to roil markets beyond the short term correction?A: It is very possible - so many people have tried to predict China and by no means I am an expert on China but what I read and hear that if there is a hard landing in China essentially because if you see the Chinese policies have been very stubborn, they have held on to growth of eight percent. Even every incremental dollar they invest has not yielded the results what they wanted but they still held on to growth. For the first time they have given up on growth. They held on to stable currency regime that there should not be any default of any meaningful default disclosure. Now they are finally protecting the stock markets. So, all this cannot co-exist together. How they deal with an issue. They have to give up on one or two things which will be very bad from a market perspective in China.I don't know whether there is going to be a very soft landing of the affairs of China or this could be a shock. If it is a shock then what you are saying could be correct because then we are in for a serious issue. I am not on the camp who believes that the Chinese currency given what is happening out there can remain here and it has the potential to devalue we have already seen a three percent devaluation in the Chinese currency in the last 3-4 months, what happens if it devalues 10 percent. What is the implication on the global market as well as for India. So, this will be a thing which we will have to watch. We cannot predict and we have to be with the market. But if you ask me what is my concern today about the market this is my number one to number five concern and I would be watching it personally very closely of the events which shape up in China over the next three to six months.Q: Earlier there was a lot of optimism when this government came into power and that has turned to cynicism now but the money is still in the market, the domestic flows have not ebbed. In fact in the second half of 2015 despite this cynicism that you speak about it is not like they have been domestic outflows. However do you see having gone through a fairly pedestrian year of returns from equities and if there is some global turbulence in 2016, is the market vulnerable to any kind of  withdrawals of this domestic money which has held it up so far in the last 12 months?A: If you look at what has happened in the markets, the flows have been absolutely negligible if I take a 5 years perspective.On a 5 year basis Indian investors have actually withdrawn money rather than put in money while the size of the economy and the size of the absolute saving has gone up a lot in last 5 years. Even in the midst of whatever corrections which you have talked about in economy and sentiment being bad but net-net people have not put money. Now this has to be looked in relative forms that people traditionally have been putting money into real estate, gold and not being putting money in financial savings and equities.The important point to note is that in real estate, gold you have made a lot of money but it has been very tepid and negative for the last 3-4 years. I don't know of too many places where real estate prices actually have gone up in last 3-4 years, gold has obviously been negative return. Now compare that to 7 percent return on fixed deposits adjusted for inflation and taxation, you virtually get nothing.So, still in an economy size which is USD 2 trillion and you are still saving 25-30 percent, so you are still talking of USD 400-500 billion of saving here. However the money which has come in India is USD 10 billion in last 12 months after being very tepid and negative for preceding 4 years.So, if there is a global shock can the domestic investor slowdown or can there be little bit of withdrawal? That is possible. However if you take a real medium to long term perspective I cannot envisage where this saving is going to go but it has to increase in equity allocations because in the last 25 year period also people have made 15 percent post tax return which is the best performing asset class and within that last 5 years have been very tough for equity from an index perspective.So, I am not worried as to what happens to local money even if there is a global shock in the next 3-6 months. However I would say that a lot of investors will latch on because on a medium term perspective, on a long term perspective, India story to my mind is only getting better.Q: One disappointment of 2015 is that all emerging markets including India have seen outflows from foreign institutional investors. Do you see that trend accelerating in 2016? It is one thing to say India is better than other emerging markets but we have seen outflows as well from debt and equity like other emerging markets. Do you see that trend continuing?A: That is entirely possible. What is impacting flows especially, we got a lot of flows from these sovereign funds globally and that was essentially the oil money. If oil prices remain here, we saw yesterday Saudi Arabia announced highest ever deficit of their life. So, in that situation we can't be expecting the sovereign funds to increase allocation to any market including India. So, if the oil prices and the commodity prices remain where they are it is entirely possible that we may see continuation of this outflow from the FII perspective. So, that is entirely possible.Q: What is your best guess about when this global turbulence could possibly hit us? If you had to guess, would you say that whatever had to happen or has to happen in the global space will play out in the next 6 months, the first half of 2016 - if we have to form a fresh bottom or go and retest the lows that we made in 2015, do you think these are first half events in 2016?A: The China event, the whole world is trying to guess only that. My guess is as good as many people's guess in that perspective. However the China event to my mind is under appreciated by the markets. I don't know whether it plays out in the first half or whether it plays out in the second half but in 2016 if we have to watch for one biggest event it is the China event and I would be watching it very carefully. We saw what happened in smaller countries like Greece and Portugal last year played havoc in the markets and volatility definitely had increased a lot at that time. Even a mild hard landing were to happen in China I would think it will be a major event to watch in 2016.Q: Do you think we still have a low in place around that 7500 Nifty where we have bounced off a couple of times or is your expectation that in 2016 we might make a lower low? A: If this question is from a perspective of local investor, I am saying if we had to make 7500 or even go 100-200 points lower than that, India is a well discovered story, everyone knows that we are going to go to USD 4-6 trillion of economy, these are the sectors, India is well poised, well positioned. The point which I am trying to make is correction is your only hope to enter this markets because 3 out of 100 have only entered capital market, 97 people are still waiting. So, the point is if the market were to correct how do you respond to them. So, my suggestion is that you have to increase your equity allocation because the point which is missed out that whatever this government has done in the last two years lot of it is under appreciated. Let me make a few points. The transparency and the compliance is definitely increasing today morning I was reading because of the rationalisation of the Public Distribution System (PDS) and digitisation the food ministry have declared that they have saved Rs 4,600 crore off bogus ration cards which were issued to people. So, this will have an impact and it will improve the overall prospect of the country in the medium and long term. So, I feel what the government has done, let us say for Jan Dhan Yojana, we have not actually able to comprehend and understand what it means for 10-15 crore new accounts to open. You go and try with bank to open one account they will ask you 72 things and it is so difficult to open a bank account. They have opened at one shot 10 crore accounts. Now this will have a far reaching impact on the way subsidy is distributed, the way subsidy is rationalised. So, a lot of these things which are initiated by this government it was not even thought about in India for last 50-60 years. In the short term it is having its own pain point because whenever you want to correct something it will never be painless and that is why the markets are getting disappointed. But if you take your eye off the short term pain which all of this is causing and that short term pain is very clearly visible in real estate prices because clearly the amount of black money or cash money which is available in the system is sneaking and that is clearly reflected in the real estate prices. But if you take off the view from a short term in medium to long term these are very good things from India perspective and India story to mind is only getting better. So, coming to your point if what you are saying is right and if markets were to correct 7500 or even below that, I will thump the table and say buy India, buy equities. Q: You spoke about banks and that is one pocket which has been the big source of disappointment in 2015 because that was the leader sector for the last couple of years. So, many questions have cropped up, big banks like ICICI have corrected so much from their peaks. How confident are you that this can continue to lead the markets or do you think that will be the source of correction going forward as well?A: Over the next 2-4 quarters what you are saying could be right because with improved regulations for the first time you are seeing the Reserve Bank of India (RBI) governor being so vocal about this very critical subject. We have not seen any RBI governor in last 15 years who has been so vocal about non-performing assets, about provisioning of banks. So, in general transparency I would say that the banks will be compelled to provide much more than what they have been providing for. What you are saying could be true for the next 2-4 quarters, the banks earnings could get impacted because of the incremental provisions which they have to make. Again are they getting more healthier than what they were ever before? The answer is yes because whatever you have been hiding  in terms of provision it is all coming to fore now. Once all the provisions are made, clearly with this low base there can be lot of positive surprise in earnings. Let us not undermine the correction we just had. Lot of private sector banks have had lot of time correction and lot of public sector banks have had lot of price correction. Lot of these banks are now trading at 0.3-0.5 times book value. When we look at the provisions we are only looking at absolute number. Whatever hidden assets which they have, let us say someone like State Bank of India, it will be hard to calculate how much real estate they have and how that will get factored into their balance sheets. So, I think they are getting ready for a takeoff over the next 2-4 quarters.Q: The other big leader space which has shown disappointment is pharmaceuticals. Private banks and pharma were the two big pillars of this market in 2014 and they have lost their way. Are you alarmed at the way some of these big pharmaceutical names like Sun Pharma, Dr Reddy's have collapsed this year or do you think that has the potential to lead the market again?A: If you look at what has happened to these companies on the valuation, that itself in first place was hype because people were changing the name of their companies to add pharmaceutical just 6-9 months back and the sector has done exceedingly well. In 2008 the market cap of the entire pharmaceutical sector was less than Rs 1 lakh crore and it went to roughly Rs 9-10 lakh crore. So, you have had a 10 fold increase in the market cap in the overall pharmaceutical industry and they have corrected 20-30 percent, I am talking about the overall sector.So, I would not be worried selectively. I am not saying to buy the entire sector because one should be very watchful and very mindful that USFDA approvals are coming more quickly than what they were coming, that may lead to products getting more competitive especially in the US markets. The margins which lot of these companies have enjoyed to the extent of 35-40 percent, some amount of that margin could come under pressure because of US FDA approvals coming quicker than what they have been coming.However selectively the companies which are able to migrate from this general generics to complex generics and to bio-similars these are the companies which will continue to command high valuation and high RoC. So, sector as a whole you cannot take a view but select companies I am still very positive on the pharmaceutical side.Q: Let me ask the contrarian in you. Whether you would buy the two sectors which people hate the most right now, metals and real estate?A: I would say I am really looking at these companies even especially in the power sector which has not done anything in the last 5-6 years whether it is relating to distribution, whether it is relating to capex in the overall public sector capex which is happening or capex which is happening in defence. These are companies, this is where the next leg of good midcap or large cap companies will come up because these are as you rightly said, hated sectors.So, if you have to look at the history of returns being made in the capital markets, when the news gets really bad, that is when the prices gets attractive and I will be looking at - including something like tourism, hotels which are completely in a way forgotten by investors and they have not been in limelight for the last five-seven years. So, these will be the sectors to look for opportunities in 2016 and beyond.Q: What is your call on 2016? Will it be another year where headline indices remain range bound but you still can make money out of stock selection or do you see a secular re-emergence of the uptrend that we saw in 2014?A: Again I don't want to evade the question. As I said globally I am a worried man as far as China is concerned. If that happens then you might see headline indices correct in 2016 and volatility will increase definitely. The only point which I am trying to make again and again, if that happens it is a great news for Indian investors who have not allocated money to equities properly and a lot of them who have completely missed out participating in equity, if that happens it will be a great time to invest. Keep in mind that even in the last 25 years while you have made 15 percent Compound Annual Growth Rate (CAGR) return out of 25 years 12 years were negative or virtually no return years but the people who remained invested they are the people who made money.So, history tells us that we always try to underestimate what is possible in the long term and we always try to overestimate what is possible in the short term. So, everyone is trying to pin point what can happen in 2016, my point is that if there is a correction in 2016 please buy keeping 5-10 year perspective in mind, increase your allocation into equities and if you are someone who are waiting for correction, so I said that in my Diwali time the most important question from a retail investor perspective is not when to buy and what to buy. It is to ask how much to buy and for what time duration to buy.