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Last Updated : Sep 26, 2016 10:08 PM IST | Source: CNBC-TV18

Market stuck at 8900; safe to keep some cash in hand: Mukherjee

“We are overdue a correction, a large one at that,” says Udayan Mukherjee, Consulting Editor at CNBC-TV18 adding that fundamentally, global macros continue to look weak.

Market is showing signs of fatigue with it hovering at 8900 levels despite supporting factors like liquidity, believes Udayan Mukherjee, Consulting Editor at CNBC-TV18.
“Market is stuck in a 200 point range,” he says.

However, the benign last few months could be indicating an impending correction. “We are overdue a correction, a large one at that,” he says, adding that fundamentally, global macros continue to look weak.

Considering the situation, Mukherjee says it is safe for investors to keep some cash in the portfolio. This can be done using systematic liquidation plan (SLP), where investors can get cash at regular levels.

Mukherjee is positive on the consumption sector especially areas like tractors, housing material and spending related areas like aviation and tourism.

On the other hand, he recommends liquidating non-banking finance companies (NBFCs), some private banks that run on significantly, and energy.

Below is the verbatim transcript of Udayan Mukherjee’s interview to Latha Venkatesh, Sonia Shenoy, and Anuj Singhal on CNBC-TV18.

Latha: This constant retracing of the index once it appears to touch 9,000, what do you make of it, will we shy away a goodish bit before we conquer the level?

A: It is difficult to say because the Fed meet is out of the way and along expected lines the Fed didn’t do anything to ruffle the markets feathers and we have come back to that point of 8,900 and seem to be dithering there once again. I think that is a little bit of a worry because we have come back a few times to this level and we have not taken it out very convincingly and that might suggest certain amount of fatigue given that there is such abundant liquidity in the market still.

One would have thought that with the Fed meet out of the way and the market having received about Rs 2,800 crore of foreign institutional investor (FII) money last week, the market might have or the index might have made an attempt to take out that 9,000 level. However, it could not quite convincingly. I think the traders would be noticing all of these things. It is possible that the market is struggling to take out that level, it is difficult to say whether it is about to make a top out here because next week you have events like the monetary policy, you have a very influential listing of a very large IPO, so, we will have to see how the market behaves around this point.

However, it is making heavy weather of taking out that old high of 9,000-9,100 with many supportive factors, many supportive technical factors like liquidity which are playing for it and therefore it might just be signaling some amount of fatigue and maybe flashing a bit of a warning sign for traders as well.

Sonia: The market is seeing some churn as well in terms of leaders. Reliance Industries has once again come back into action, it is at a 52 week high. Pharmaceutical stocks are seeing a lot of buying interest. Once the uptrend resumes, hoping it will, where do you see the next leadership emerge from?

A: I think the constant theme has been anything to do with consumption. One or two good largecap stocks here and there might actually be picking up the slack which has been left by IT particularly and also to a smaller extent banking in recent times and these two constitutes such a large percentage of the index that when they go slack, you need one or two big stocks to bat for the index and that is what has happened over the last few days. So, I am not reading too much into the change of leadership because the market is still stuck in a 200 point kind of a trading range.

I don’t think enough leaders have come to the fore to suggest that they will lead a breakout above 9,000-9,100 immediately but the broader market is doing much better. So, the midcap index continues to outperform the Nifty by quite a healthy margin and keeps on getting more expensive with every passing day. So, it is not like it is a terrible looking screen but at best you can say that there are signs of fatigue which are creeping up and you keep asking yourself, now with all these triggers out of the way what will take it beyond 9,100 and keep it sustainably there because even liquidity is getting priced in now and that too seems to be unable to do the trick.

So, it is not like a bearish looking screen and therefore I don’t think too many traders will be short at this point in time. However, the next big bullish rung for the market, I think that is a little bit of a toss-up and people are not quite sanguine about where it will come from. 

Anuj: One week may be too small a data point to refer to but last week the best performing markets were developed markets and the most underperforming markets were emerging markets. Could we go through a phase where money moves to developed markets and some outflows are reported from emerging markets?

A: It is a tough call. Fundamentally I don’t think there is any great reason to justify that kind of a reversal particularly with the kind of data which is coming out of Europe which is not very encouraging; the last flashed PMI number was quite discouraging. So, I don’t know, I mean it could just be a mean reversion which might have played out in a very small set as you say of four or five days. So, it is difficult to say if that is a trend reversal from emerging markets.

However, one thing is for sure, I think there are many more questions being asked about this whole greater liquidity equals asset prices going higher automatically kind of phenomenon which has played out over the last few months because everybody does not belong to the heard in global capital markets. It was becoming too easy; every week you would say is there another reason for liquidity or this risk-on to stop and we say no, the answer is no because central banks are not doing anything to stem it and therefore why should we worry, we should keep on partying. This was becoming such a given or so easy that I think this trade probably had to wind up at some point.

There is no suggestion that it is winding up but I think some questions are being raised about the sustainability of this very easy trade which has been in play because people have figured out that the Fed will do nothing or central banks will do nothing to ruffle the markets. Central banks basically are in the business of fanning acid bubbles and they really do anything which will roil market sentiment and there is enough evidence of that in the last few great meetings that we have had from central banks. So, I think that traders take as given but whether that one trick pony will continue to work for the markets favour, I don’t know.

It seems to me that that easy trade is not over yet but it is probably slowly on the wane and something will give and that give will probably not be a central bank event or a liquidity event because they cannot afford to surprise the market. It might actually be a back to fundamentals event which changes this theme.

Latha: If you put both these together, these questions being raised in global markets over central bank policies as well as the resistance in India to that 9,000 mark, the repeated resistance, would you advice that traders and investors should look at that point as a point to sell because the market is making such heavy weather of it?

A: No because these things you cannot time or predict and that I have been saying repeatedly for the last many months and that would be a mistake for a trader to say that I am getting wedded to a level and that level is my sell level. This market has not been a market like that. It has basically been conquering levels on the way up, it has been trending very beautifully, the liquidity has been intact and the screen has not flashed a great danger sign yet. So, I don’t think you can -- as a trader at least you can take that call that every time the Nifty goes to 9,000 or close to that, you start selling.

I think the easier call is probably for the investors, that too not very easy, to say that something seems to be suggesting in the environment and sometimes even on the screen that we could be after five or six very benign months, headed into some kind of rough weather. If I were to bet that over the next two or three months, over October-November-December, two or three months, the market will run into rough weather from here, I would say the odds are probably fairly high after such a very purple patch in the market. Therefore for an investor, I think it may not harm his portfolio to create a little bit of cash. Now, how do you do that, do you just take a level and say I will liquidate every time the market goes there? I think that is not a very sensible way because the market can easily surprise by continuing to run on for a few more weeks.

I think as they say in the mutual fund jargon, systematic investment plan (SIP), I think a better way to look at it could be an SLP or a systematic liquidation plan where if the market continues to go up, every couple of 100 points or every 3-4 percent on your portfolio, you start liquidating some point so that by the time the market reverses you would have created about 30 percent cash in your portfolio because I think it would do well for investors to keep some powder dry over the next two or three months by creating some cash and liquidating some assets because a correction is coming. It is difficult to time but I think we are overdue for a correction and a sizeable one at that and the events lined up in October-November-December seem to suggest that over the next three months you will get a very sizeable pullback and you should be able to have cash to deploy them.


Sonia: Where do you see this negative trigger coming from because nothing seems to suggest that, at least on the horizon, do you see it coming from negative earnings, do you see negative global cues?

A: That is the dangerous thing, when people start talking about no negatives on the horizon and that worries me a lot. The way the volatility index (VIX) is behaving and when people like us start talking about the fact that it is completely blue skies and what can surprise the market, because the Fed will not, the central banks will not. So what are we getting so worried about? We have probably forgotten or taken our eye off the fact that fundamentally, things are not great with global macro. That is being swept under the carpet on tide of global liquidity because that is what it has resulted in. The fact that lots of dollars have been printed, that has not helped economies, but it has helped punters to throw money across the world and take advantage of the money which is being printed.

So, there are enough risks, we have just become complacent because of the price action of the last 4-5 months and any one of those risks can come to the fore. It could be China, it could be a sudden shock like an election event in the US, it could be basic fundamentals like maybe something happening in Europe to remind us that things are not hunky-dory. It could be locally, I do not think that risks are local, but I hear more analysts talking about it being about 10-11 percent earnings growth this year and not a 15, 16, 17 percent as they thought earlier.

So, the fundamental backdrop, while not terrible, is not very great and therefore an 8-10 percent correction can happen at any point in time. So, we should not be complacent to think that because liquidity has been good, there are no risks on the horizon.

Anuj: We spoke about Yes Bank’s qualified institutional placement (QIP) last time when we spoke. Were you surprised with the kind of response the SKS Microfinance QIP got and the non-banking financial company (NBFC) space, do you see the kind of money that is chasing these stocks, last time you said about the bubble territory, but do you see that bubble getting bigger before it bursts?

A: It obviously is now, but it has become a bit of a fad investing out there, so it continues to go higher and as with fads, most people have to chase it, they cannot be left out and that is what is playing out. It is not to say that all NBFCs are not worth investing in, but some of them are pushing on bubble territory and much that I have been a fan of midcap investing for some time over some of the largecaps, 50 percent premium over the index for the midcap index is a fairly lofty price given where earnings are at this point in time.

So, in the event of a correction, if it happens for some reason, you will find that some of these NBFCs, some of these midcaps, actually run the risk of a fairly deep correction. Again, most difficult to time, and I would not be in a rush to liquidate immediately or large chunks of it but you should be cognizant that the way valuations are in midcaps, they run the risk of a fairly deep correction whenever that correction happens, more so than some of the index companies.

Sonia: You were making this point about how investors should raise their cash levels currently. Which are the sectors where you would advise profit taking now because so many sectors have done extremely well this year, especially in spaces like consumption? Where would you be a bit wary?

A: Ironically, that remains the fundamentally strong space to be in. So, it is a bit of a conundrum out there or investors should have some dilemma on what to take money out of because consumption actually is the pony which is riding along fairly nicely and after monsoons, it looks like spending power would actually increase during the course of the year. So if there is one space where you would be a bit reluctant despite stressed fundamentals to take money out very significantly, it would still be the consumption space I reckon.

Particularly anything to do with rural consumption, I would be hesitant to liquidate very substantially. So, names like tractors, housing materials, even spending related plays like maybe aviation and tourism. So, all of this, housing finance companies, I think that that is a good space and even if there is a correction in the medium-term, it makes more sense to add to these names rather than liquidate in a very large way.

I would liquidate some of these fads like NBFCs. If you have one in your portfolio, I would take some money out. You could take probably money out of some of the private banks which have run on very significantly over the last few weeks despite poor results in many cases. So, financials in part maybe even public sector banking where rallies have been very significant, partly energy maybe you could take a little bit out and look at your midcap portfolio with a very hard gaze, because in many cases, you will find that midcap price-earnings ratio (P/E) multiples are running at between 25 and 30 times next year’s earnings. Price to book in many relevant cases are probably above three times and it makes sense probably to take some money off the table in these names.

But do not do it in one shot, because this thing is not going to be easy to time. You have seen at least two instances over the last couple of months where the markets threatened to fall sharply. There have been one day scares and it has come right back to that 8,800-8,900 level or 8,900-9,000 level very quickly. So, the bears are very fearful at this point in time; they do not have conviction and they do not have confidence and that you can understand after six months of being out of the game. So, this is not a market where bears on one 400 point down-day on the Sensex will have the gumption to go all guns blazing on the short side and that is also preventing the market from going up very significantly.

So, take money out in your investment portfolio in certain pockets, but take your time doing it otherwise you will just be sitting on 30 percent of cash with a market much higher and you might not be looking very clever.

Anuj: While we keep talking about ICICI Bank and Yes Bank after that failed QIP, the recent move is because of Axis Bank. In fact, that stock has now corrected 14 percent in a matter of a fortnight. Have you followed the news flows surrounding Axis Bank? On Friday, we had delivery selling of about Rs 1,100 crore. There is this fresh overhang of Specified Undertaking of Unit Trust Of India (SUUTI) stake sale which has come back. Do you get a sense that this is due for more correction, especially because in terms of its numbers also, it did not look good, last quarter, while the stock moved on because of liquidity.

A: The latter worries me more than the former because government stake sales are difficult to time. I know there is talk in the market of Axis Bank happening at Rs 530. I have no inside track into whether that is the case or not, but past instances will show you that every time there is a bit of a hangover of a stake sale, the stock tends to underperform over a multi-week period, because it believes that institutions will get to buy the stock at a lower price point. By the way we have already corrected quite a bit from Rs 600 plus to Rs 550. So, much of the damage has been done in Axis Bank but pending clarifications from the government on whether it is happening immediately and at what kind of price level, the stock might get stuck around this level.

However, the bigger problem as you referred to is Axis Bank’s last quarter numbers. They were very disappointing. I was frankly surprised to see the stock race up to Rs 600 after that. I did not think that it was fundamentally deserved and that is the issue with some of these private banking names where if markets were to correct for some reason, they can give up a lot of ground or quite a bit of ground, 15-20 percent quite easily because of the rallies that have happened over the last few months and because they have reached price points where they could take in a 15 percent correction without looking horrendously inexpensive. So there is room for some correction out there and therefore, I would be wary of the financial space in case of a market correction whenever that materialises.
First Published on Sep 26, 2016 09:31 am