Not ruling out Nifty revisiting 7500 in 3 months: Mizuho Bank

The Indian market fell on the back of the weakness in China. The Sensex is down nearly 500 points, while Nifty broke 7800 intraday. Tirthankar Patnaik of Mizuho Bank says while the slowdown in China is known, the pace is still unknown. He says the Chinese PMI was expected to come in below 50, but no one expected it to come in as low as 48.2 for the month of December.

He further adds that even the Indian PMI has come in at a 26-month low. However, Patnaik believes India will be one of the fastest growing economies in 2016, though earnings are not likely to improve anytime soon. He also doesn't expect portfolio positioning to change anytime soon — it will continue to be local over global. Despite this, he does not rule out Nifty revisiting 7500 levels in the next three months, but the probability of it going below that is quite low.Below is the transcript of the interview. Sonia: It has been quite a rough start to the year. How have you read into the news from China and how should an equity market investors sitting in India react to it?A: We started the year on a fairly low footing which should ensure that the final numbers come out quite well. So, the point is the slowdown in China is something known. What is not known is what is the pace of the slowdown going to be and while the Purchase Managers Index (PMI) number that was expected to be below 50 this time, 49 or so came out slightly lower than expectation. Markets are still not agreeable with the fact that Chinese economy may be majorly slowing down in 2016 as well and as you noticed our own manufacturing PMI did slip down to the lowest figure in 26 odd months, since October 2013 and that also kind of weighed on our market this time. So, for the Indian markets the Indian economy remains quite strong, it will remain the world's fastest growing major economy in 2016, there is no doubt about that. However, since global headwinds are quite strong at the moment. We will likely see the markets remain quite weak in the first quarter and second quarter of the year. Anuj: So, how should one approach this market. Still look at this market as being a bottom up stock picking market and look at all these corrections to buy or would it be prudent now to just wait in the sidelines, see where things go in as you said in one or two quarters as you take a fresh call?A: My sense is that the portfolio positioning would not have changed much since the third quarter of the year. In terms of earnings our earnings are not going to recover any time soon. Our Gross Domestic Product (GDP) growth is likely to remain in around the 7.3 to 7.5 kind of range in 2016 as well but given that the overall macro global scenario remains quite weak India's portfolio positioning would remain local over global kind of sector positioning and that portfolio positioning would not change and my sense is that at this point it will not make sense to really look for bottom right now, wait for the markets to recover, wait for the volatility to stabilise. Today VIX has gone up some 16-17 percent, this is not a point that you actually buy into the markets. We are likely to see our own earnings season start in two weeks time and not too many positive surprises are there at the point as well. So, wait for the earnings season to give some more clarity on how the overall earnings growth trajectory is going to be over the next two-three quarters and then take a portfolio positioning change.Sonia: Do you get a sense that we could revisit the 2015 lows of 7500 in the first quartile of 2016 itself?A: I would not rule that out. To be honest our markets have been fairly resilient given that the domestic investor interest remains fairly strong but from what we have seen happening in the third quarter and the fourth quarter with foreign investors and now the cost of funds globally slated to go up one would probably wait out at this point and not actually rule out a 7500 kind of scenario as well in the first quarter.Anuj: 7500 is still okay, at least we have seen that in the past in 2015. The worry is are we in a bit of bear phase which takes the Nifty much lower than that. Maybe we complete a 30 percent correction and then Nifty goes sub 7000. How high would be the probability of an event like this taking place in 2016?A: To be honest my sense is that one would ascribe a fairly low probably to that. The Fed rate hike in 2015 fag end did came in after a fairly long period of deliberation by the Fed as to their sense of how the global economy is going, as to their sense of how the US economy itself is going to recover. My sense is that if the Fed does air on the side of optimism we might see slightly much fewer hikes than the Fed is pointing out and from that standpoint I would not see a 20-25 percent fall in our markets, China slump notwithstanding. We have seen the trading halt for today's markets have gone down fairly sharply because we had a trading halt in China for a couple of minutes and then the market actually did go down fairly sharply and European markets have also taken front. That should not be our view to look at 20-30 percent drop in the markets this year.Sonia: In 2015 although the headline index fell the midcap index did quite well. So, if you had found individual stocks you would have made a lot of money in quality names. Do you think 2016 even that opportunity might not hold and maybe we could even see further pressure in the midcap and the smaller names?A: I have always maintained that if the broader economy is doing below par then stock picks are good but for a period of time, the broader midcap index is definitely going to start trailing the large cap index, trailing the narrow market. This is not a market where one can actually keep making money in the broader midcap index. Of course there might be picks which will do continuously well. We have had a couple of good Initial Public Offerings (IPO) also in the fag end of the year that shows that the recovery in India is well and true but remember if the narrow market does not do well then one would not expect the midcaps to keep outperforming.