Here's why market may not immediately resume its bull run

Going ahead, if the market was to remain supportive and as is supported strongly over the next week, Bhatnagar advises investors to buy into PSU banks, private banks for the long haul.

Below is the verbatim transcript of Nirmal Jain and Vineet Bhatnagar’s interview with CNBC-TV18’s Sonia Shenoy and Udayan Mukherjee:

Sonia: Do you think that the minor correction that we started in December has come to an end or do you see more hurdles in the month of January?

Jain: Market will remain volatile and consolidated in the month of January although medium to long-term trend is becoming even better but in the short-term few factors will weigh heavily on the market – (1) global environment is extremely choppy and volatile (2) earnings will be a mixed bag because energy companies or commodity companies will not report good numbers (3) upgrades and downgrades also have been mixed. So, one has to pass-through this earning season and also people will wait for Budget and people will wait for interest rate cut to happen but if you look at longer term perspective, next year, FY16, then outlook is becoming extremely positive because supposing dollar remains at 50/USD, people are talking about 30-35, keep that aside but even if 60/USD on an average, India is a net importer of 900 million barrel a year – that would mean we saw something like USD 40-50 billion as a nation because we import petroleum products or oil, we have to pay that much lesser – we are talking about 3 lakh crore, which is not a small money – that is what will drive either savings or growth in investment. All these factors will lead to earnings up cycle happening from second half of next year.

So there are two sets of investors; there are investors who will look at longer term, long-only foreign institutional investors (FIIs), they look at this opportunity, so whenever market corrects, they will look at opportunities to buy and there will be hedge funds, traders kind of people who will look at the volatility, they will be cautious and they will be more driven by the events that happen globally or maybe in India also.

Therefore, market in this month will remain volatile; I do not expect it to resume its bull run immediately maybe nearer Budget or after the Budget it will be a clearer trend.

Udayan: In this kind of volatile range, do you see the Nifty breaking below 8,000 or do you see 8,000 as some kind of psychological floor which the index would not violate?

Jain: Unless some catastrophic event happens in the financial markets globally. I do not think Nifty will break 8,000 or 7,950. Nifty will not break this because as I said there are set of people who are looking at every correction or every fall as an opportunity to buy, so I would say that under circumstances which are known or predictable or whatever we can foresee with some degree of probability, Nifty is unlikely to go below this level but if something happens which you and I cannot forecast today or cannot visualise today - you know how equity markets are.

Udayan: The other factor which has caused the market some discomfort of late is the fact that for about five-six weeks on the trot now FIIs have been on the sell side, December included. From the sales desk, what kind of inputs are you getting, what would you put this down to and what could reverse this kind of selling which has come in, which is unusual compared to the experience of 2014?

Jain: In fact, what has happened is that the emerging markets -- there are couple of things that have happened. One is that US has strengthened, the dollar has strengthened, so the allocation of the emerging markets might have been reduced. That is one.

Two Indian markets have pursued to be in high altitude or had run up very swiftly and most of the fund managers are also investing and if they look forward, they expect a correction then they will wait but I think another important trend that we should not miss is the domestic investment because we are seeing money coming through mutual fund and will see that coming through insurance as well as direct equity also. If you look at the numbers from FY10 to FY14, our household savings -- I am not talking about total savings -- has come down from 25 percent to 22 percent and within that financial saving has come down almost from close to 50 percent to 35 percent and if this trend reverses then in last six years, household savings into financial markets has been something like USD 25-30 billion. In next three years alone, it can be close to USD 75 billion. So I think as we have seen in the earlier bull market, the domestic money can play as a huge cushion against the volatile FII flow of money but FIIs also -- I am not bearish, this is just a phase and as we see Budget, probably this will be -- we will talk about dream budget but from the finance minister’s point of view, it is the dream situation or dream circumstances to present the budget in. He has got a stable government for the next five years, he has got the crude oil, the macro things are heading his way, inflation is down, so I think we can expect a lot from the Budget I think there can be a trigger point for FIIs to come back in a big way.

Sonia: The stock of last week clearly was Hindustan Unilever Ltd (HUL). It went up 15 percent last week, completely unfazed by the market volatility, do you continue to see outperformance there?

Jain: In case of HUL, it is the company that I have worked with in five years. So I maybe a little biased on this but it is a great company but more importantly 50 percent of their sales are raw material, raw material prices have been falling particularly oil and also the petroleum based prices they have been the packaging material which is also significant part of cost -- so I think company like HUL can retain this raw material price benefit because they are strong brands because they don’t have to pass back so the market maybe expecting that margins will expand, the demand growth hasn’t been very strong in last quarter but people are expecting that demand will become stronger going forward so these are the factors that must be driving demand for HUL stock.

Udayan: What is the sense you are getting from the foreign investors’ side first, from the kind of positions that they have been taking on Nifty Futures, does it appear that the correction which started last week or this week has come to an end or is it inconclusive?

Bhatnagar: What we saw at the time of December rollover, where most of the long positions were rolled over by the FIIs and since then what we have seen is that on the Nifty index Futures side they have reduced their long positions by as much as 1/3rd in the last seven trading sessions alone, so something which was about USD 1.8 billion is now standing at about USD 1.2 billion in notional value as of end of today. Similarly, what we have also seen is that the protection that they have taken by way of Nifty Options, has increased to about USD 2 billion and it is distributed over 8,000-8,100 Nifty strikes ,combine it with the fact that the underlying cash market behaviour for these FIIs have been one where they have liquidated their positions, they have taken out as much as about USD 250 million in the last few trading sessions, is indicative of the fact that not only have they reduced the position but more importantly in the last two trading sessions, whatever recovery that we saw in the market on Thursday and a bit of it on Friday, has only been a point where they have gotten out of their some of long positions, so that’s the trend that we are seeing in the market right now.

Sonia: In the week gone by the Bank Nifty fell 2 percent and lot of heavyweights like Punjab National Bank (PNB), ICICI Bank, State Bank of India (SBI) were all down 5-7 percent. Is this is a good buying opportunity or do you think you will get better levels in the near future?

Bhatnagar: It is related to how the overall market behaves over the next two weeks, so I would not like to carve out only a strategy for the bank stocks, it needs to be seen in totality whether there will be an overall pressure on the market or not. Having said that if the market was to remain supportive and as Nirmal was saying 8,000 or 8,100 is supported strongly over the next week or so then there maybe some selective opportunities to pickup few PSU banks and more importantly some of the private banks as well more again from the point of long-term investors as against positional traders.

Sonia: What sense you are getting about how one should approach Infosys post numbers?

Jain: Infosys has maintained the guidance at 7.9 percent which is better than street expectation but in IT sector I would think that there are better values in stocks like Mindtree and Tech Mahindra from a medium-term perspective but if you have to have a larger basket then include Infosys as well.

Udayan: Do you sense that there will be a pre-Budget rally this time around in February or does it depend on the global event, more importantly, do you think these local events like Budget and the interest rate cut are probably February or even March phenomenon from a market trigger point of view?

Jain: I think there will be pre-budget rally because what government will do is they seem determined. There have been quite a few ordinances and if they are able to do coal block options and like spectrum auction which is planned before the Budget, I think that people’s expectations from Budget will be higher and there can be pre-Budget rally. I would very strongly expect that there should be one.

Udayan: What did you see for the two big stocks of this week, HUL and Infosys in the kind of position building that happened towards the end of the week and where it has left these two stocks going into next week?

Bhatnagar: I think from the point of view of the way the positions for Infosys were, a lot of pop trading houses as also positional traders were taking position in the Infosys options, the price movement on Infosys today came as a surprise. I think I was looking at the few of the pay-offs based on the strategies that people were putting in the market over the last two days and the general consensus was that the price should not move beyond 2.5 percent up or down and therefore what we saw at the time of closing today for Infosys to have closed 5 percent above yesterday’s close has definitely been a surprise and I do not think that many of the option positions that were opened ahead of the Infosys results could have yielded any handsome profits at all. Going forward, I think there will be some assessment of how Infosys will behave in terms of the next two quarters and I subscribe to the fact that there are other stocks in the IT sector pack, which perhaps will stand out more strongly than Infosys and Tech Mahindra in that respect is one of our top picks.

Sonia: How does a retail investor approach this market now? If it is still a buy on dips market then what should you be looking at buying now?

Jain: I think retail investors should approach this market with buying and increasing their asset allocation by equities. A typical retail investor will be better-off buying mutual funds but in case you want to build a portfolio of direct equities then I would say you should have private banks; they have room for further improvement and given the fact that interest rate should go down by at least 100 bps this year. Therefore, private banks will be top pick followed by pharmaceutical, IT, cement and select industrials also. I must say auto sector as well because auto also is looking good.

Sonia: Need your views on oil and gas space because there was news on Friday that Oil and Natural Gas Corporation (ONGC) maybe exempt from subsidy payment for the rest of the fiscal and the stock has been spiking up. What would you do with the sector now?

Jain: Oil and gas is not an easy call but if crude oil prices remain low for some time then companies like ONGC do not benefit but in India, the conditions are different because of subsidy burden and delayed payments and the interest cost and things like that but still I would say in this quarter most of the companies will have very heavy inventory losses even oil marketing companies (OMCs) like Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), so I would say that wait for results for this quarter and also wait for oil prices globally to stabilise and find some level which can sustain but if one has to buy then I would prefer oil marketing companies and not ONGC as such.

Udayan: What is the data suggesting in terms of the range for the January series for the index now?

Bhatnagar: If we look at the Call distribution as far as Nifty is concerned, there is highest concentration at 8,400 Call strike for Nifty. Therefore, our estimate is that there is a resistance that is visible at about 8,360, which is something that will result in the entire decline that we saw this particular week. This is where the Nifty was on Monday when we started off.

Separately, the other resistance that we are quite interestingly looking at is 8,600. Of course for that to come about, it is important that the global events or the turn of global events that are expected to happen in the last week and the third week of this month are supportive. Our present estimate is that the January expiry should be a strong expiry as far as Nifty is concerned.

Udayan: You spoke about skewing asset allocation towards equity, how about fixed income investing in 2015? If interest rates were to come down then some of the longer duration government security fund should also be able to generate some capital appreciation, is that not?

Jain: It will depend on the size of the portfolio and fixed income should do well. So this is one year where your allocation to physical assets like real estate and gold should go down to minimum and incrementally all your money should go into equities followed by fixed income. So in fixed income, if interest rates go down by 100 bps then you may have capital gains of around 5 percent and on top of that, you have 8-9 percent of interest yield but the advantage in equity is that your tax structure is very benign because if you hold it for one year, it becomes almost tax free so post tax your returns in equities will still be much better even adjusting for risk. But having said this, if you are an HNI investor then of course fixed income and equities both should give very good returns and you can allocate assets to both these asset classes.

Sonia: Even amidst this volatility, bulls are finding a lot of value in individual stocks. You can see it in names like Maruti Suzuki, Kotak, Asian Paints, HUL, all these stocks are hitting fresh highs everyday, you spoke about Tech Mahindra that you like. Any other stock that you would recommend a buy into either from the Nifty or from the broader markets now?

Bhatnagar: I think if we were to start looking at which are the sectors that will continue to look strong, if the global cues are not damaging or at best supportive of the domestic situation then names do crop up in sectors like autos and that is where we will pick up Maruti and Mahindra and Mahindra (M&M), names do look good in cement, which is where we will pick up UltraTech and also smallcaps like Prism. We will be interested in fast moving consumer goods (FMCG) and that is where we will pick up names like even Emami or we will pick up Pidilite. So there are host of names, a combination of both the largecap as well as midcap stocks that are looking quite attractive. The moment we start factoring in the fact that the domestic story is going to play out if not for the whole quarter but at least pre-Budget.