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Last Updated : Mar 04, 2016 07:13 PM IST | Source: CNBC-TV18

Much of the bounceback rally has played out: Udayan

From an intra-day low of nearly 22,500 on Budget day, the Sensex has risen to about 24,600 in a three-day rally, but much of the bounceback rally has likely petered out, says CNBC-TV18 Consulting Editor Udayan Mukherjee.

From an intra-day low of nearly 22,500 on Budget day, the Sensex has risen to about 24,600 in a three-day rally, but much of the bounceback rally has likely petered out, says CNBC-TV18 Consulting Editor Udayan Mukherjee.

"There was the expectation in the market that with the Budget out of the way, a relief rally will emerge. The extent of it has surprised and the Nifty could go up till 7,700-7,750," Mukherjee told CNBC-TV18 in an interview.

But the bounceback is based on technicals rather than fundamentals, he said, adding that it would prudent for investors to raise cash levels a little instead of deploying more cash.

"You have to realize that even despite the 10 percent bounceback, we are back only at the levels at which we started February," he said.

At a fundamental level, the veteran financial commentator said he does not see major changes happening and said fourth quarter earnings will also likely be muted.

Below is the verbatim transcript of the interview..

Sonia: The Budget seems like a really long time back because we have covered so much ground since then but it seems to be the real thing because we have large foreign institutional investor (FII) figures, there is no signs of any intra-day profit taking that we have seen in the last three days. What is the sense you are getting, is this genuine buying or is this just a short covering pull back rally?

A: Of course there has to be some genuine buying because I don't think just short covering would have carried the market 10 percent. Also the data is suggesting that there has been some buying FIIs have put in about Rs 5000 crore net in the cash market after a long time over the last three days. So, a lot of the foreign funds might have taken tactical long positions in India on maybe both counts, one that they had watered down their holdings in India considerably before the Budget and the Budget seems to have given some kind of a sentimental fillip. India was underperforming all other emerging markets going into the event and post that because of the relief rally some tactical reallocation of positions might have happened which is why you have seen the FII money coming in.

So, to answer your question it is not just short covering, yes, it is short covering as well. But most of the short covering might be done right now and given the fact that India has played catch up in the sense that India is up nine percent over the last week or so while the other markets like Hong Kong and German market are up about four to five percent. So, the underperformance which preceded the Budget has been unwound in a short term timeframe and we have caught up with other markets and played along with this global mood over the last few days. So, much of this rally which people were talking about before the Budget has played out.

Latha: Should one dissect why this rally came because no one saw it coming, is it what the deficit number. I find it very inexplicable, this rally. Need we understand it at all or should one - whether one is a trader or an investor, just look at the screen and enjoy it while it lasts?

A: The latter because post facto analysis is never very useful thing in the life of the stock market. I would disagree a little bit that this rally was entirely unexpected. If you go back and hear what a lot of people were telling us on the eve of the Budget the common refrain was that with the Budget out of the way unless long term capital gains tax (LTCG) comes in you will probably see a relief rally. The extent of the rally might have been more than what people were expecting.

So, you could have thought before the Budget that once it is out of the way you would see a 7300 kind of rally and that has turned out to be a 7500 rally. But these kind of exact mapping of a rally or a fall can never be done with any kind of accuracy. So, you would have to give that a little bit of an elbow room to people who are predicting a rally but probably did not predict as much of a rally. This is a rally born of pessimism, not of optimism.

To go back to your first point you will have to go back. If you want to analyse why the market is 10 percent higher the questions you should not be asking for fear of disappointment is whether anything has changed in the earnings picture over the last three or four days including the Budget you will find that the answer is no. Has anything changed in India's capex picture over the last few days the bank recapitalisation not withstanding you find that the answer is probably still no. So, I don't think the Budget did a whole lot for changing the consumption picture also in a dramatic fashion.

So, if you talk to brokerages and ask them in the light of the fact that stock prices have gone up or the index have gone up 10 percent have they been able to increase the earnings of the index even one percent you will find that the answer will come back as a no. Therefore this rally is not one which is born of optimism about fundamentals, it is born of pessimism, everybody was so pessimistic at 6800 Nifty that the market had to do this kind of snap and it does that with regularity. When everybody goes on one side the market will do something else and that is exactly what it has done. Everybody was bearish on India and we have had 10 percent rally.

The only thing which has changed is after a series of FII sell figures you have had three days of strong FII buying. So, my sense is this rally is based on technicals, not fundamentals and it has come out because of the extreme pessimism we saw and not out of any change in the expectation of fundamentals for the future.

Sonia: There is this term that a lot of the millennials use called FOMO which is the fear of missing out and that buyers panic seems to have played out at least in the last one day. Purely because of that do you see that perhaps there could be some more legs to this rally, technical or not?

A: I am not scoffing at the fact that it is technical. Just to labour that point, I think a rally is a rally; it doesn’t matter whether it is fundamental or technical. I am not saying it is insignificant, I am only saying that it may not be as sustainable or as durable because the well from which it is rising is not fundamental in nature. You can’t dismiss a rally of 10 percent in the market at all.

Would you want to participate here? I go back to the same question, has anything changed to make an investor far more optimistic than he was to begin with a few days back and I don’t find the answer to that extremely convincing. My view was that the market, I have expressed it a couple of times in the month of February as well that the market could go up to about 7,550-7,600 which was the high even four weeks back and at a stretch if it crossed that, though that was not my base case, it could go on to 7,700-7,750.

So, my expectation would still be that we are in the last quartile of this pullback rally. It could extend to 7,600, it could extend a bit longer, these levels are not so important to me as the reasons behind these kind of rallies particularly if the global markets extend themselves there is no reason the market cannot go higher but whether it will sustain at higher levels is a question mark in my eyes because I don’t think any of the fundamentals are changing.

Also, just to put this rally into perspective, while it looks like a whole lot has changed, I will remind you that on the February 1 which is just a month back, the Nifty was at 7,600. All that we have done, despite all the song and dance is that we have come back to 100 points below the February 1 level. So, it is not like we have made a new top or anything like that, we have just wound back four weeks of underperformance in our market and we are just about getting to where the month started four weeks back.

Latha: But is another 10 percent extremely unlikely?

A: It would surprise me. Nothing is unlikely or impossible. One gets surprised in the market all the time. If this global rally persists who is to say that we go back to that level of 8000-8100. It is possible. You have rallied 700-800 points in the last four days. Can you rally 400-500 points more, sure you could if global markets permit. Would it be warranted by fundamentals, on that I am clear the answer is no.

I don't think that the Bank Nifty should go up significantly from here, I don't think L&T should be trading anything significantly higher than where it is right now or for that matter the whole lot of large cap names which have carried this market higher. So, it can happen but will it stay there, I have my doubts. I also have my doubts whether it will get there but these things can happen in the market. Nobody can tell you with any kind of certitude or certainty that the market can only go here and no further. That is fool's wisdom.

Sonia: So, cash preservation was the best strategy to adopt in the first three months of the year? That worked well. Should that still be the strategy now, for an investor?

A: I know what you are asking. My sense is that cash preservation becomes even more important right now because prices are higher and prices are not lower. If your view was that this is going to be a challenging year because of the global backdrop all that has changed is that prices are 10 percent higher.

I don't think anything has changed in the fundamental spectrum. We are yet to hear anything which is a game changer in terms of the fundamental outlook for the market and prices are up in many cases 15-20 percent. Now for me that would mean that this might be for a lot of people who are in stocks which they do not want to own perhaps even an exit opportunity.

So, frankly rather than chasing this rally from here on there could be a couple of 100 points more or 300 points more on the Nifty but I would be considering raising cash as well from my portfolio rather than putting fresh money to work at this point in time. You should keep in mind the evidence of January. We had a terrible start to the year, the market went down a lot, then we pulled back to 7600 kind of levels.

Typically when these pullbacks happen, particularly one as strong as this you hear a cacophony of voices saying things have changed, US is looking better, markets have mended themselves and this is the time to go out and buy these stocks. I would advice a lot of caution. I know there is only buy calls on your screen this morning and that inevitably happens at a time like this.

Sonia: The PSU banks were the big gainers this week. So, if you have made money on this pocket as a trader since the start of the week, do you recommend exiting all your trades now?

A: It is difficult to say. You remember on the Budget day I was talking about State Bank of India (SBI) working its way back to Rs 175. It has overshot that, it has gone to Rs 180 plus, Rs 182-183. So, a large part of the rally has played out in the public sector banks. Now the next couple of days there is more coming out of the consultations with the government right now because it is coming after so many months of pessimism these stocks can rally on a bit more. Would I overstay my welcome to use your phrase I would probably not out here because the rallies have been significant and if people are sitting on trading profits I would not want to stay on.

Again the same thing, nothing has changed. All that has happened is that materially is their bond profits will go up, so, they will have a little bit more cash and because of the equity capital classification and the recapitalisation they will have a little bit more money to play around with. My view has been consistent that this is not a capitalisation issue. If capitalisation helps to tide over the current problems, to a small extent but I don't think it addresses the core problem. Unless we address the core problem many of these public sector and we will speak, I am sure, in three to four years many of them 80 percent of the public sector banking universe will not have a business case to exist and it seems like a strange thing to say that how can you say that a Bank of India or a Punjab National Bank (PNB) will wither to nothing but there are so many instances of large sectors and companies also in the public sector space. I don't want to mention MTNL because it is an oft repeated example but there are so many cases of companies which seemed very prominent at one point but because the business dynamics change within four or five years they were reduced to being penny stocks.

So, I fully expect that in the next three to four years many of these public sector banks will probably become penny stocks. Their business cases is not strong, their asset quality issues are not going away. We have not treated the cancer at its roots, we have probably just done a cosmetic surgery to remove the visible part of it. So, I would not buy public sector banks at all from an investment point of view. Select private banks is a different case in point.

Sonia: One of the root causes of the problem and maybe the largest one last year was the way the Chinese markets roiled. Do you think that will come back to haunt us once again and how have you read into the developments that you have seen in the global markets in the last couple of weeks?

A: I am not expert on China. So, don't take my advice too seriously on this one. But my sense is that we are going through a period of respite in global markets. We had a terrible start to the year. All global markets have perked up. Now there is some positive talk and optimistic talk. Now if this is a downtrend then this is what you need to be wary of because downtrends typically are larger periods of lot of distress and followed or punctuated by periods of lot of hope, optimism and technical rallies and if you hear a lot of talk just picking out one data point from US the ISM data is suggesting that maybe things are stabilising in the US etc. These are classic signs of respite in global market.

The one thing that you should be careful about even if you believe that this is just a temporary respite phase is that you don't want to be on the wrong side of the trade by saying I am going to bet against it because you might be cleaned out. So, how long will this respite phase be. It is conceivable that the whole month of March is a good period for global markets. India rallies along in sympathy with other global market as well. Admittedly we haven't had a four week respite phase in global market for a long time but what if it turns out to be the case.

So, I am saying you should trade with a lot of caution if you are betting against this pullback, momentum that we are witnessing at this point. I will not be terribly disappointed as a trader if the Nifty were to give back 70-100 points because it has had such a spectacular rally and I wouldn't conclude that the rally has come to an end. You would want to be vigilant and not just at the first sign of crack in the Nifty dismiss this rally and say it is over and from today we go short because the market is going back to 7000.

It is quite conceivable that 6800 for the near term holds as the bottom and the market tries to consolidate, for a lack of better level, 7200-7600 kind of a zone. That would be good outcome in the near term I would think. So, there are many possibilities from a trading perspective.

From a fundamental perspective my belief right now still remains the same that we are essentially in a fundamental downtrend and it wouldn't surprise me even if the market were to go on to rally in the next few weeks to levels which are surprising. Eventually, again this is a guess, before the month of May would 6800 be retested once again and it is not an easy call to make on mornings like this after a 10 percent rally. I would think that the chances of the market retesting 6800 or even going lower than that by the end of May still remains a distinct possibility.

Latha: You don't think this quarter looks better than the quarter that went by?

A: In terms of earnings I am quite certain it will not be. It will start off like the quarter which went by and the first 15 days you will have a lot of analysts come and talk about green shoots and those green would have turned brown by the time the quarter ends or all the results star coming out. So, I don't expect earnings to improve this quarter at all.     I will be very surprised if that were to happen.

I want to believe as much as you guys do that we are in the middle of a recovery. It is just that I have to say it like it is and as I see it I could be wrong. I have been wrong in the past. Everybody is wrong all the time in the stock market. But at this point in time after the 10 percent rally in stock prices to suggest that all that you thought one week back has suddenly turned because the price has changed, you are chasing the markets there.

Latha: I am not taking it there at all. All I am saying is that probably 6800 will hold. I am not betting at all on a 10 percent rally. All I am saying is that are there enough green shoots to believe that 6800 may hold?

A: I hope it holds and there is certainly an even chance of it holding because we have created a 7-8 percent buffer on top of that and that is not insignificant. And time is passing. You are waiting through a lot of pain. So, you are doing a lot of hard work and heavy lifting as you go along closer to that elusive recovery. So, it is completely conceivable that the two times you went and tested 6800 and bounced back that holds as a level and it is not an intermediary bottom but a final bottom. But certainly there is a probability to that. I just think it is a smaller probability than a larger one. But probably today I am in the minority. More people think that 6800 will certainly hold after the kind of pull back and the technical shape that they have seen. But I would want to see a lot more improvement before jumping to conclusion that we have made the final bottom.

Also, the more you hear this kind of talk that the market has bottomed out it is time to go out and buy and things have finally changed. That would not make me optimistic. That would actually on the contrary make me far more sceptical about the market. I liked it at 6800 but everybody was bearish and was talking about 5500. Now this talk of a permanent bottom and great recovery globally and time to go out and buy stocks is worrying me because even in the futures and options market you have got more longs than shorts at this point in time. So, you have created a power cake once again of a small accident in the market. If something were to turn globally once again because right now you don't have a buffer of extreme pessimism and shorts which is always a handy thing to have into he markets rather than consensus optimism.

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First Published on Mar 4, 2016 10:30 am
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