Mkt volatility an opportunity to buy; like pvt banks: Pros

Talking stock/sector specific, Bala is bullish on private banking space, the FMCG space, within those spaces on ICICI Bank, Axis Bank and HUL. He also likes the auto space and thinks Bajaj Auto may have bottomed out and could see revival.

According to Bala ITC and HUL are set to turnaround and head towards record highs. Bala believes if 9000 levels on the BSE oil and gas space holds then there is high degree of probability that the sector will see a turnaround.

Shah says the fund is overweight on technology and private banks. A strong dollar and the fact that western world is doing well is likely to benefit technology. However, he is bearish and underweight on consumption stocks.

Infra a good bet from a three-year time frame because it is dependent on government spending, says Shah. He is not expecting great numbers from the infra space for the current quarter.

From the midcap space, Bala is upbeat on Aban Offshore and Bombay Burmah Trading Corporation.

Below is the transcript of Nimesh Shah and Jai Bala’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.

Anuj: What do you make of the recent volatility and as someone who heads a large domestic mutual fund how do you view the current situation where foreign institutional investors (FIIs) are selling and domestic institutional investors (DIIs) are buying on a daily basis?

Shah: We are quite happy with the volatility. If you ask me, we always look at volatility as an opportunity. In fact we have got set of funds which only work on the benefit of volatility.

In India, historically if you see, whenever FIIs have sold for some technical reasons or problems in the West, when they have to sell India that is the best time to buy India. That is what we have always felt and it is proved historically that whenever FIIs sold if one buys there is a good chance of making money. So, this technical correction was very good. It will remind investors also that there is risk in the market. They need to be careful when they are investing. They did need to get their asset allocation right.

As a fund house we have always had this view that 2015 we expect lots of volatility to come because of international factors. If volatility is because of international factors, invest throughout 2015 to make money in 2018. That has been our stand even four months backand that is what we have been saying even today. So, this correction to 27,000 looks very healthy to me.

Ekta: You benefitted from a lot of opportunities this week in terms of a lot of stocks looking quite valuable in terms of valuations. Which were the sectors that you possibly nibbled into?

Shah: We have been or are going overweight in technology. We are overweight on private banks. So, those are the sectors that we like. Technology we have given a big call to our investors that invest in technology. Technology has corrected around 10 percent in the last one month and so with a stronger dollar and western world also doing well, technology companies are set to gain.

We believe this correction in technology companies since last one week is good. We have always been bullish on private banks. The nature of our funds are such that since we take cash position, whenever the price to book ratio of the market goes down, we go out and buy. Some of our funds are structured that way. So, technology and banking are the sectors that we are overweight on.

Anuj: What do you make of the Friday pullback and is that indicating a bit of near-term bottom formation or you won’t be that sanguine on the market?

Bala: When we spoke about the markets in February and March, we were talking about raising cash and the markets were approaching 9000 levels. On the day of Raghuram Rajan (RBI) cut rates we were saying that the market is starting a big correction and a 10 percent correction has come through. We were one of the very few guests on your channel who said that the market will break 8000.

The move to 7997 in fact works very perfectly with the technical structure and very likely that it has put in a durable bottom and this bottom is very likely to hold from a technical point. However, we have other factors too to reiterate this view. Whenever there is bearish move on the market and fundamental analysts come up and are able to spell out A,B and C reasons, it is very high probability that since it is a bearish move, they are able to spell out reason why the market could go down. We have even heard analysts say 7500-7000.

So, it is very high probability that they are talking about the move that is happened in the past. So, I am of the view that the markets are heading for fresh record highs. 9100 will go and there is a very high degree of probability that we adopt the adage buy in May and go away.

Ekta: If you are envisaging 9100 or maybe even surpassing that level on the Nifty, give us a sense in terms of a timeline that you would be working with and which would be sectors or the stocks that would lead it higher?

Bala: I think the Bank Nifty is going to lead the way once again. That is one sector I am positive on. Within the banks I am positive on the private banking space. If you look at the BSE oil and gas space, the 9000 level on the BSE oil and gas space is a very important support. I think that is going to hold. If we had to see a follow through on Monday, there is a very high degree of probability that this sector is turning around.

Also, if you look at the BSE FMCG index, 7500 is a very significant support. If you look at individual stocks within that space like ITC and HUL they are also looking like they are set to turnaround and head towards record highs. So, these are the sectors and individual stocks I am positive on.

Anuj: Let us talk about the consumption space. We will not get into individual stocks but we saw HULs numbers, they looked quite good and the market rewarded that. However, overall consumption pattern has been showing slowdown whether it was reflected in Titan’s numbers or whether it was reflected in Hero MotoCorp’s numbers. What is that telling you about the overall consumption growth and overall earnings growth going forward?

Shah: We have been always bearish and underweight on consumption stocks. So, when somebody asks me, whether one year back or even today that what are we underweight on, we have always said that consumption we are bearish on. What we are seeing today is a transition that is happening in the economy where essentially a consumption led economy has to at some point of time migrate into an investment led economy. Overall we have always been underweight consumption in the last two or three years because we believe they are expensive stocks. Most of them are 40 or around 40 PE and we find them expensive.

Ekta: I just wanted to concentrate a little on the earnings picture which Anuj alluded to. We heard the Punjab National Bank (PNB) management talk about how majority of their restructured portfolio, in fact 40 percent, came from the infrastructure space and we have all the infra companies to still report numbers. How bad do you think it could look?

Shah: Since we are a mutual fund we would be on a three-year call. Three years we believe, if somewhere we are getting stuck or our call is going wrong it is on the infrastructure space because we had given the calls six months back also, nothing has happened. Till now also we believe the economy has bottomed out, nothing can get worse than what is happening right now. However, the good thing is financial macro economic factors are good. So at some point of time huge government spending has to come. The private sector is not investing, the government has to invest and bring the cheer back or bring the economy back on rails. So, we are waiting for the government to invest. I think that we should see it buy the end of year that government has to invest big time because private sector is not investing.

So if you have got a three-year paradigm, the infrastructure sector is good. Having said that the challenge is in the infrastructure sector has not gone and we are not very bullish about the results that are going to come in this quarter.

Anuj: That is a big call that you are taking that the market would now go back to all time highs. What are the three largecap stocks that you think one can buy now?

Bala: As I said, I am positive on the banking space and FMCG space. I think straight out of it I can say ICICI Bank, Axis Bank and HUL you can be positive for the medium to long-term. When Ekta asked me what is the timeframe I am looking at, this move could be slower than the decline from March to May, so it is not going to happen before say July or August. So, we have got to be a bit more patient because the rise takes a bit longer than the destruction phase.

Ekta: Do you see any value in a couple of these auto stocks, for example, we had Tata Motors which was up around 5 percent on the last trading session along with Eicher Motors which reacted positively to its number but Hero MotoCorp was lower?

Bala: I think there is a very good probability that Bajaj Auto which was an underdog for so many weeks in the past, has bottomed out. We are going to see a revival in that particular stock. Tata Motors too looks positive but I think it might be a disproportionately low amount of risk that you need to take for being long on Bajaj Auto when compared to other auto names. It is a low risk disproportionate amount of reward ratio kind of trade for as long as Bajaj Auto is concerned but I am positive on auto sector as such.

Anuj: A word on asset allocation now because till about four months back everything was making money. You were making money in debt markets; you were making money in equity markets. Over the last one month you would have lost in both equities and even the bond yields have gone back to 8 percent when the consensus was a move towards 7.5 percent or so. Going forward what would be the best asset allocation in case the market has to bottom out now?

Shah: Since we are a mutual fund, what we believe in is in asset allocation products. I think in a volatile market in India especially a volatile 2015, especially when we are looking at retail customers, there has to be a mix of equity and debt and that in equity most of the mutual funds are always invested. That is what our mandates are.

However, increasingly asset allocation products within and it is most tax efficient if it is done within the fund itself because today it is not possible to invest in debt and say nine months down the line if the interest rates come down it is not possible to get out because you have to pay full tax on it.

If you get into debt funds, you have to be there for three years. However, a better idea would be to put in something which is an asset allocation product where the Fund Manager himself allocates between equity and debt based on the levels of the market. So, we have created strategies which are more of absolute return strategies like ICICI Prudential Balance Advantage Fund which keeps on allocating continuously between equity and debt. Since it is equity fund, your debt components also get the taxation advantage. So, I would strongly recommend people to look at asset allocation strategies which would make more sense in a volatile year that we expect like 2015.

Ekta: We have the Index of Industrial Production (IIP) data which is going to be coming out for the month of March along with the consumer price index (CPI) data for the month of April. How much of a cue do you think that say the CPI data would be for the markets?

Shah: I think both these figures are absolutely important and that is where I would see the pain of India also especially the IIP numbers. One number that we would want the government to focus on is in this IIP number. When we say India has bottomed out, when IIP is around zero, how worse can we get? That is why I started from that that this is the worst that we can have as far as the industrial production is concerned. There is no point in looking at the gross domestic production (GDP) number if your IIP is going to be zero. So, this is absolutely essential and the only way to do it is as I said earlier is that government has to spend more money.

If government spends more money then the private sector will come and invest and then we will see some action on the IIP. Otherwise, if the country faces one serious issue today is the single point IIP number. CPI we have done a brilliant job. Right from P Chidambaram days, last two years, we have done a brilliant job of managing inflation well. Reserve Bank of India (RBI) and both the government have done a good job in managing inflation. We have smoothly moved away from wholesale price index (WPI) to CPI. Even with the crude getting into USD 60/bbl mark, I am not worried about the CPI number as much.

Anuj: I want to discuss crude and what is happening with the currency because these are the two other important variables that our market tracks. What are charts indicating on Brent crude and USD INR? Bala: Brent’s high of USD 69/bbl that it made on Thursday is a very important high to me. It completed a counter trend rally from the low it made in 2015. I think we are looking at record lows for Brent for 2015. It will be something like mid USD 36/bbl, close to USD 37-38/bbl when it makes a new low. However, this is not going to happen in a very swift fashion. It is going to play out over the next couple of months. However, the continued rally from USD 43/bbl to USD 69/bbl is done. The broad trend is taking hold; I think we have to look at fresh record lows for Brent. As far as USD-INR goes, the last week’s price action was very significant. The high it made above 64.5/USD is pointing to a five leg move from the 58/USD odd lows. So, this in the longer term is the beginning of a very large depreciation phase. However, in the short-term, say in the next three to six weeks timeframe, you will see the rupee strengthen somewhere close to 61.561/USD. Once it has done that, we are going to see a very large depreciation phase set in for the rupee and we are going to see record lows for the rupee.

Ekta: Give us some of your midcap picks.

Bala: I am positive on something like an Aban Offhsore. As I said, I am positive on the oil & gas space. It is very neatly coming into the Rs 380-390 support area. If it were to reverse from the current levels, it is looking very positive for the next 8-12 weeks. We are looking at something like Rs 500 plus for Aban.

Likewise if you look at something like Bombay Burmah Trading Corporation, it is shaping up very nicely. It could rise around 25 percent from current levels; that is a minimum rise I am anticipating.

If you look at something like IDFC, even that is looking positive as long as Rs 150 level holds on IDFC. As long as Rs 150 level holds, the correction would be complete around these levels. I think it will start turning around and we are looking at something like Rs 180 for IDFC.