Long EM equities vs DM; see 9300 on Nifty by year-end: CLSA

Market expert Laurence Balanco of CLSA is of the clear view that the Indian benchmark index Nifty would see an upside to 9300 levels by year-end or first quarter of 2017. However, it could face resistance around the 8750 mark and trade in a range of 8300-8750 in the short-term.The house is long emerging market equities as against developed markets, said Balanco. India specific, he said although the long-term outperformance remains intact, near-term it could underperform China. According to him, China has a weightage of around 20 percent by most funds and going forward that market would see major chunk of the inflows.Globally, he said market may see volatility and correct to the tune of 2-5 percent. Month of September for most western markets have been a worst performing month and could be so this time as well. S&P could correct but unlikely that it would go below 2100, said Balanco.Bank Nifty which has rallied through the year has been the key component driving the Nifty’s outperformance, said Balanco, adding that banks would continue to hold the leadership position and support Nifty’s outperformance. And sectors like IT and pharma which have been a laggard would continue underperforming.Below is the transcript of Laurence Balanco’s interview to Sonia Shenoy and Reema Tendulkar on CNBC-TV18.Sonia: The Nifty has outperformed most emerging and developed markets this year. It is a gain of almost 8 percent that we have seen on the Nifty so far. What are the long-term charts suggesting? Do you still see a clear uptrend?A: The longer-term outlook for the Nifty is still constructive and as you say, the relative charts versus the region and versus the globe, we are still in a trend of relative outperformance. In the very short-term we have been pausing in a minor trading range, but the longer-term outlook still remains positive.Sonia: What about the supports for this market then? We did see a bottom form around the 6,800-7,000 mark. Do you think those supports have moved up higher and what do you see the range for the Nifty as over the next 6-12 months?A: We are looking at the longer-term trend, we are still looking at upside targets of around 9,300 area. But if you are coming into the shorter-term price action that we have seen that in the past two months, you have got shorter-term supports coming through at the 8,300 area and then resistance at 8,750 mark. So, that is the shorter-term trading range that we see. But ultimately, we should break out of that and look at 9,300 targets at year-end.Reema: That is the long-term upside for the Nifty at 9,300 in the near-term. It is a range of 8,300 to 8,750. Let me get your views on two sectors. First let me start with the Bank Nifty because that has outperformed. This year, the Nifty has seen a rally of about 9 percent while the Bank Nifty has gained close to about 15 percent. What are the key levels that you see on the Bank Nifty? Will it continue to outperform?A: It has been the key component in driving the Nifty’s outperformance versus the region, the breakout and the resumption of the longer-term uptrend in the banks. That is a key sector and again, the leadership qualities remain intact with some of the key components and even the laggards coming through within that sector. So, we think that is a sector that retains the uptrend and should continue to be leadership group for the market going forward.Reema: And what about IT on the flipside because the CNX IT has underperformed the benchmark indices by close to about 15 percent since the start of the year and most of the IT heavy weights are at their 52-week lows. What are the charts suggesting from here on? Is there more downside?A: There are two key sectors that have been weak year-to-date and from a charts side have broken down from topping patterns. So, one is pharmaceuticals sector and the other is the IT sector as you mentioned. If you look at that chart over the past 18 months, you have already been trading in a range, which followed a period of two and a half years of an uptrend, so now we are breaking down from that at least in relative terms. That sector should continue to underperform. So that will remain intact with banks being in a leadership and pharmaceutical and technology being the underperformers.Sonia: In fact, you cautioned us about this in the month of February itself. So you have got that trend right about the fall that we have seen in technology stocks. I want to ask you about more sectors but before that, also wanted your view on the complacency that global markets have been seeing. This Chicago Board Options Exchange (CBOE) volatility index has hit the lowest level in almost a year. Would you be worried about how overtly complacent this market has become?A: There are a few factors around the low volatility. One of it is the summer seasonal factors that we see typically in the northern hemisphere summer where volumes dry up and we see lower volatility. One of the key concerns we can have in the very short-term going into September, for majority of the western markets September is the worst performing single month. So, there is definitely a risk that we see, a pickup in volatility through September. But what I would caution again is extrapolating a reversing of the larger trend. So, the larger trends are still bullish, but from a seasonal aspect, we could see an increase in volatility, which would suggest a bit of a correction in global equities through September, but that should not alter the longer-term roadmap. So, the level of low volatility is a concern, particularly moving into September, which has historically been the worst performing month for the likes of the Standard and Poor (S&P) and a number of the other western markets.Sonia: So, if history does repeat itself and we do get another minor correction in the month of September, what do you think the extent of that correction could be? The S&P 500 is sitting pretty at around that 2,100 level. How much of a correction are you expecting in global equity markets if at all?A: To me, 2-5 percent wouldn’t be a surprise and I would not alter the uptrend that we have seen in global markets. That, to me, would be the extent of the decline would be at 2-5 percent correction.Reema: We started off by talking about India’s relative outperformance, vis-à-vis the other emerging markets as well as the Asian markets. Will that continue according to you or is there any reason to believe that that trend might reverse?A: In the short-term we are starting to see fund flows back into China, so if I look at the Morgan Stanley Capital International (MSCI) India in dollar terms versus MSCI China, we have started to underperform China. That is more the tactical trade and opportunity for the global emerging market fund managers for new money to find its way to China at this stage on that mean reversion trade that we have seen particularly in the China banks and the likes. But from a longer-term side, the relative trend for India outperforming is still intact. But if you are talking about a tactical three month view is that we can see India stabilise and still perform, but underperform China because China goes up more. So, that is a short-term risk, but it is about going up less than China on its mean reversion trade.Reema: What about this Nifty target of 9,300? Have you put any time to it? When do you expect the markets could hit those levels?A: With the uptrend intact and into year-end and the start of 2017, that will be our year-end target and Q1 of 2017 trading up to that 9,300 area.Sonia: I want to come back to that point you were making also about the Bank Nifty, where you expect leadership to come in from there. The Bank Nifty is already at closer to that 20,000 level, about 19,500. Do you have any medium to long-term targets that you are seeing on the charts for the Bank Nifty?A: Yes, I just do not have that chart in front of me, so I cannot give you a decisive level right now.Sonia: Do you have any kind of view on whether the private sector banks would do well or PSU Banks. Now the reason I asked is because there is some sort of bottom formation in many of these beaten down PSU banking stocks, the likes of State Bank of India (SBI), Punjab National Bank (PNB), etc. would you notice that on the charts as well?A: Yes, we have obviously had the likes of YES Bank, Axis Bank all moving up quite nicely and leading the banks’ recovery a quite right on the public banks, we are starting to see bases form in SBI and even ICICI Bank is a standout from the charts as a laggard trade. So, within the banking side, we obviously have the leaders but even some of the lagging public banks and ICICI are forming basing patterns here and look like they are playing catch up with the leading private banks.Sonia: You made a very interesting point about how the emerging market money could be moving back to China versus other markets. So, what does that say about the texture of the market over the next 3-6 months for India particularly? If we do see a correction, will India see a larger impact compared to other markets like China?A: The issue is more gain up than less because it is a relative ratio. In the correction all emerging markets and typically the betas will underperform the likes of the developed markets through the declines because when you get the uptrend resuming again, the risk to India is that it goes up less than China. You have got remember that China is still over 20 percent weighting in most emerging market indices. So, if we continue to see flows into emerging markets after underperforming for six years by sheer weight of money coming back into emerging markets, China gets a bigger portion of that and that is what can still drive China up playing catch up versus India which has been an overweight position for a number of emerging market managers for some time. So it is really a fund flows argument rather than a fundamental argument or even a chart set up argument. It is purely the mechanics of fund flows coming back into emerging markets and how that then is allocated through the emerging markets.Reema: On the subject of global markets, once again the markets have started pricing in a possibility of a Fed rate hike sometime this year. That is a fundamental factor. Technically, how are the US indices looking the DOW Jones? What would be your year-end target on that, the extent of upside from here on?A: I will focus on the S&P, that is the one we use as a proxy. If you look at the breakout that we saw in July, we finally emerged from a two-year trading range where the S&P had essentially ranged between 1,880 and 2,100. So, the break above 2,100 was key suggesting a longer term uptrend resuming. Now that breakout gets you at roughly at 2,400 upside target. Now that is not a year-end target for this year. That is a target for a breakout from that trading range. So, again if we do see short-term pullbacks, it should be limited to the 2,100 area. That is the previous breakout point. The chart set up on the US 10-year yield does suggest that we seen a 10-year yield rebound back to 1.8 percent. That is essentially a trade back to the longer-term downtrend, which is the 200-day moving average. So, it is not a trend reversal yield, it is more mean reversion trade back to the 200-day.Sonia: I know you get asked this question a lot, but I am going to ask you nevertheless. If you had the chance to execute just one trade for the rest of 2016, whether it is go long on India or the dollar index on crude, what would be your highest conviction trade now for the rest of the year?A: In the equity markets, just the broad breakout that we have seen in the emerging market index, that would still be my top trade being long emerging markets versus developed markets.