Nifty may slip to 7800; avoid commodities, cement: Mizuho

Anuj: What is your call - good buying opportunity or a bit of a falling knife right now?

A: We maintain that market haven’t priced in the interim volatility that one is seeing from the Chinese market. People have been focused very hard on Greece over the last few weeks even as China collapsed in their own neighbourhood, We believe that Chinese markets could go down further despite measures announced by the China Securities Regulatory Commission (CSRC) frequently. Therefore downside risk remains for the Nifty. Therefore downside risk remains for the Nifty. We maintain that Nifty could go down to 7,900 levels if this volatility continues.

Reema: Today the troubles in China have hit all the commodity linked stocks as well as the base prices of commodity. How do you differentiate now in the metal complex, are any of the commodity linked names looking attractive to you or will look attractive to you if the markets fall say to levels of 7,900?

A: I would not like to comment on specific stocks but commodity stocks do have meaningful downside and this corporate earnings season is unlikely to provide any kind of positive surprises on the commodity side. So, commodity stocks will provide further downside, will provide better attractive levels. At the moment it is as you rightly pointed out like catching a falling knife. One would wait it out, one would wait out the impact on Chinese markets to subside before looking at commodity names.

Anuj: Earning season starts tomorrow, do you have a sense that maybe the worst of downgrades may not be over and after this earnings season maybe that would be catalyst for further correction in the market?

A: We always have this habit of hoping that the next quarter or the quarter after that would be some place where we will improve. This quarter is unlikely to be the one where we would see meaningful surprises; expect negative numbers for public sector banks anything in the commodity space, anything to do with the domestic economy. Anywhere one is likely to see some kind of stability would be probably the consumption space probably consumer staples or anything to do with the government where government spending in the first quarter could have had a fairly positive impact. Otherwise this quarterly season is unlikely to provide you positive surprise which might lead to a stall in the current downgrade cycle. We believe that the current downgrade cycle is likely to continue and even for second quarter.

Reema: Considering a correction is likely in the market what would be the tactical shifts that you would recommend in the portfolio, which sector would you recommend trimming your exposure to and which sectors look relatively better placed?

A: My call would be that stay away from the commodity space. Commodity numbers are unlikely to be good in any sense. Cement is again one more space where one would stay away from at this point. I guess if you want to look at portfolio positioning one has to time it in the near-term, one would stay away from the domestics, one would go a little bit more on the global side. Anything which is to do with commodities has to be straight out. Banks also one would stay away. One must be very clear about private banks over public sector banks at this point and this has to be a fairly cautious portfolio at this point. We would be buyers in the market probably at 7,900-7,800 levels where one would be seeing commodities and public sector banks at reasonably lower levels.

Anuj: From the slightly medium-term to long-term perspective do you think we might be entering a goldilocks kind of scenario with a lower commodity prices, in turn lower inflation and maybe our growth numbers also bottoming out in picking up and in that case do you think there is a case for the market to outperform over the next one year or so?

A: There is no doubt in my mind that we will enter a goldilocks scenario where I am looking at lower fiscal deficit, I am looking at a lower current account deficit, I am looking at our commodity bills significantly slashed. I am looking at commodities inflation, food inflation likely to be much lower going forward despite a deficient monsoon so India will definitely standout. Indian macro is not going to surprise you with accelerated growth, the growth is going to be gradual and therefore it is becoming a long call. Therefore from a 1-1.5 year point of view Indian equities are definitely going to outperform any other major asset class.

Reema: What is the call on the banks now in particular because of the fall in commodity prices, the recent financial stability report indicated that five out of the 10 private sector steel producing companies are under stress. With this big decline that we have seen across commodity prices, do you think metal companies as you pointed out are going to be in a worst shape and therefore will the asset quality of banks be weaker than what we have been anticipating?

A: We saw the financial stability report telling us that a significant decline in asset quality has happened between September 2014 and March 2015, that number was fairly clear. The differentiation between private banks and public sector banks also became fairly clear during the latest financial stability report. My understanding is that with sharp drop in commodities earnings for the commodity complex are likely to get worst. So, we might not see any kind of improvement in the September number, when we will see the next version of the financial stability report. So for public sector banks things aren’t improving. The governments comments about putting capital USD 3 billion this year, USD 6 billion next year are contingent on the fiscal ceiling improving so one would hope that these kind of supportive measures are coming up for the public sector banks.