Investors might be caught off-guard as spill-over of liquidity from a rampant bull market overseas could lead to big market move here, feels N Jayakumar of Prime Securities. Patient investors will certainly get good returns, he says.
While the market has been buffeted by many events recently and is probably soaking in negativity, N Jayakumar of Prime Securities expects a counter-intuitive rally soon.
Investors might be caught off guard as spill-over of liquidity from a rampant bull market overseas could lead to a big market move here, he tells CNBC-TV18 in an interview. Patient investors will certainly get good returns, he adds.
After a highly volatile day following the US Fed Reserve's rate hike announcement, key indices today closed with minor losses. Nifty ended sub-8200. Sensex lost roughly 75 points to end around 26520.
Jayakumar is positive on housing finance companies but not on gold and micro-finance. Auto sector could be headed for severe competitive pressures, but information technology could have some surprising winners, he says.
Below is the verbatim transcript of N Jayakumar’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Sonia: Most of the big events now of the year are out of the way. What is the sense you are getting about the New Year?
A: The big takeaway really is that there is very low volumes because most foreign institutional investors (FIIs) I think are now into holiday mood especially post the FOMC. I think local institutions are pretty inactive as well. However, the most important thing is that the importance of physical cash in the system gave I think apart from security, a certain wealth effect as well.
So, when people had cash and they could freely use cash I guess the participation in the market also in a sense I think has something to do with the fact that things were -- and as Ramesh Damani says liquidity is the mother’s milk of all markets. So, once you strike at the basic liquidity and as is now pretty evident that cash is being used as the means of transacting in the trade as it were. So, in the economy when cash is just sucked out with the aggression that it has been and not re-infused into the system, everybody is talking about liquidity but one of the things that it has done is, it has also created a feeling of the equivalent of the anti-wealth effect if you will.
So, people are in a sense holding back which is what you are seeing in terms of orders getting cancelled, delayed or whatever. However, I think the other side of it is that I think that liquidity is hit even at the market. So, if you look at it right now, the market has been buffeted by many events, whether it is lack of liquidity, whether it is year end, whether it is the -- now the Trump impact is out of the way and all kinds of growth is coming through, people talking about bringing growth rates projections down next year, etc so I think to my mind counter intuitive as it might be, I think it is the perfect recipe for a sharp counter intuitive rally in the markets early January because the participation is so low, the impact cost of entry and exit is becoming much higher.
So, you have these while 100 point Nifty moves up, down in a day when ostensibly nothing has happened. However, what is happening is the impact cost in idle markets is becoming much bigger. So, moves are getting amplified and really what has happened is a whole bunch of HNIs have just pulled out from the market over the last two months and whether it is self preservation and feeling of empowerment or whatever but the reality is that your portfolios have been hit and whatever. However, if you see the hard reality, there are no yields coming through in the debt markets, gold is actually a declining asset class, real estate is under bit of a cloud. So, given all this, where do people put money? To my mind it is obvious that stock markets will be the recipient of big money but it is in this moment where everything seems clouded but what we can’t run away from is the fact that there is a rampant bull market in the rest of the world.
So, it is like saying the A group is moving but there will be no demand for B group; it never happens. So, I think the spillover of that liquidity I expect will happen in these markets very soon. It may happen end of the year, early into next year and not withstanding any fundamental factors. Ultimately it is liquidity. So, the day liquidity comes back into these markets, I think the move will actually surprise all of us. So, I kind of hold my view notwithstanding the multiple and myriad factors that have emerged over this period over the last two months to actually say that when there is highest amount of self doubt, highest amount of questioning the fundamentals but the reality is you can’t put money anywhere except the markets for yields, I think the market will give returns which could surprise us. So, a patient investor may well be the order of the day for the moment.
Anuj: We were discussing this point earlier as well. This market went through some bad news. The policy day today as well has not broken some key level, 18,200 say on the Bank Nifty, say 8,050 on the Nifty. Do you think the floor for the market has moved up and when you were talking about big rally in January pre-Budget rally, are you putting any numbers where we could be headed in the month of January-February?
A: One of the things that I have learnt over a period of time is that if there is a bull market that emerges don\\'t call the tops and if there is a bear market the only bottoms somebody tug and put it is not in the markets but elsewhere. So, you need to be very clear about that. So, what could take this market up 10 percent, what is it 10-12 percent from here would be new high. If you have seen those kind of moves happen literally at the heart beat as it were.
So, if for instance the US and the developed markets continue doing what they are I think you may well have a situation where some money comes off from there and a couple of billion dollar in early January in our markets where they come from? I don\\'t know. Is it on the horizon? I don\\'t know. I am not a speculative person in the sense of saying when it will come. But something tells me that we could be sitting on a very big move when that money comes in because really the markets factored every negativity there is including the most basic things that consumption and that is the biggest truth by the way that consumption and most of us never regress in consumption.
I was having dinner with one of the people who is considered a father figure in the marketing profession in India, been in the place for 30 years etc and he was saying if you look at it people tend to progress. So, what you did in terms of 15 years ago is a memory for you but you don\\'t regress into that in terms of consumption habits. So, there could be delays, there could be hiccups and even by his own measure as it were there are many product categories where the consumption has actually gone back which means demand has gone back to pre-demonetisation levels and in other categories it has taken a big hit.
So, the ultra-luxury category may have taken a hit but there are many categories not the least of them being the essentials where demand is back to those levels. So, given all this I am not one to say that a large middle class base growing as it were is going to regress and say we are not going to consume just because there is less cash in the system is the basic underpinnings of my belief and we could be in for much better times and who is to say whether it will happen one month from today or 3 months from today.
Sonia: Investors like phrases like Santa Claus rally, pre-Budget rally. Everyone hopes that things like this play out. But the reality is we haven\\'t seen anything up until now. Do you get a sense that we could see a pre-Budget rally this time around and if yes, what is your optimism based on? Is it based on improvement in earnings, a big Budget blow out surprise, something like that?
A: If you knew the reasons it won\\'t happen and because we know all these phrases I believe that the rally for any of these reasons may not happen. So, we may well be sitting here in February and saying for want of a better expression a counterintuitive rally because intuition or logic right now tells you that things must go in a particular way, we must wait for liquidity come back, demand to come back etc. So, that is what I call it, a counterintuitive rally based on simple spill over of liquidity from a rampant bull market overseas into these markets.
Sonia: How should the investors approach it now in terms of sectors? We have seen this year has been full of consumption plays, of course fag end we saw big sell off, consumption plays, Non-Banking Financial Companies (NBFCs) doing well, autos doing well you see the same themes play out next year?
A: One of the things that will happen when this kind of - should I say - attack on the cash economy comes in which is a lot of small players will get consolidated which means entrepreneurship at the lowest levels will start getting consolidated into employment for bigger corporations. So, from that perspective the way I see it is maybe the entire NBFC space which is the spill over of the PSU banking space would be the biggest beneficiaries but within it I like housing finance companies. I am little more sceptical on gold finance companies because I am actually bearish on gold. In fact I have been bearish on gold for a while now and even more bearish on microfinance where people are lending at 26-28 percent largely on a clean basis. So, you need to actually start segmenting. It is not going to be one size fits all kind of rally but it is going to be one where that is going to come in.
Again consumption for certain sectors you will find a huge pick up. For a lot of other sectors it may be delayed. So, the auto space is going to be in for major competition. But maybe a space like the IT space for instance you could have surprising winners and a lot of the erstwhile giants just lumbering along. Because there are issues galore in that space.
Anuj: You may not want to talk individual stocks but this is just an example. One of your favourite stocks has been Aurobindo Pharma. That space is going through a bit of a problem. Aurobindo itself is going through a bit of a problem. How are you looking at this, as another buying opportunity or something which has gone wrong in investment thesis?
A: For starters I am not aware what problems Aurobindo is going through because I have heard a little bit and I am not sure if anything is Aurobindo specific but that is neither here nor there. I am talking about specific companies. That space is going through problems because there are discreet events around pricing, collusion and stuff like that which have come out in recent times and those are serious allegations but the fact that generics is the way forward I have no doubt about.
So, I would largely avoid purely research based companies because I am not sure if that 01 event will happen, I am not sure of the outcome of clinical trials etc but a large generic based company to my mind which is what some of the companies in this space are not forgetting individual names is very similar to the growth story of the tax space which was the labour cost arbitrage through the 90s. So, the generics space is still pretty active and you see actually a number of smaller pharma companies having made great headway by being in the generic space having not been there for a while. So, what specifically has happened to individual companies we can debate separately but it is all to do with things like collusion etc or more importantly the 483 issues around Food and Drug Administration (FDA) audits which is company specific.
Anuj: Since you spoke about liquidity, it looks like we have to deal with maybe some more FII outflows. I think you were saying that one large part of market which is HNI in retail is also out now. So, what will bring back liquidity to the market?
A: It could be anything. If nothing else, just an overheated international, global equity market could itself be the cause for money to move out. ETF at the end of the day move across markets, so, there is big play of developed markets versus emerging markets that has been playing out and the movements in for instance the dollar index, the movement in the dollar-yen have been nothing short of a bubble. When was the last time that you had an emerging market currency moving 15 percent and the company, country virtually not going bust?
Dollar yen has moved from 101-102 around the Trump election time to 117. You are talking about a 15 percent move in an emerged or a developed market currency. Now, if that happened and the rupee went from let us say 68 god forbid to 80 which is your 15 percent move, can you imagine the chaos that could be there. Remember we are talking about moves that are bubble like. So I think the dollar index itself to my mind -- of course bubbles can become bigger, the world is grappling with bigger and bigger bubbles so I am not here to say that you can’t have a move beyond and I am sure chartist are best positioned there. However, a move from 101-102 to close to 118 on dollar-yen is nothing short of bubble move.
Yes markets can take benefit of that, there could be individual players but broadly I think if you look at the Indian markets, it is a stable currency, the macros are stable. Yes there has been a one-off introduction of a very material event if you will whose outcome is not entirely enshrined in history -- means you can’t go back to empirical evidence to say this is the way it will play out. However, I have great faith and belief in the fact that the Indian ability to be flexible which has been -- several words have been coined around that but the Indian ability to be flexible, entrepreneurship to flourish at the lowest levels I think will make this hopefully nothing more than a passing 60 days in history.
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