'Property, gold weakness will drive stock prices higher'

On the technical front, Dr CK Narayan of Growth Avenues said the Nifty crossing 8500 last week on volumes indicates that the intermediate trend is positive.

Below is the transcript of the interview on CNBC-TV18. 

Sonia: This week was a good one for the bulls. India climbed the wall of worry and the Nifty is now back above 8500. Has the uptrend in the market resumed?

Raychaudhuri: It is very difficult to take a call right now because if you look at the entire region, the situation has been quite uncertain. For example, you rightly point out that India has been moving upwards, it has climbed the wall of worry and partly the reason is that the recent results have been slightly better than expected.

If you look at the most recent examples, even some of the public sector banks like bank of Baroda despite the small increase in non-performing loans (NPLs), it delivered slightly better than expected numbers. So even hitherto unloved sectors, unappreciated stocks etc, they have been giving some small positive surprises. 

So, that has been the story for India but if you look at the rest of the region, things have been quite volatile particularly in China. In case of China the expectation was that the government would act as a backstop for their equities and that has happened only to very limited extent and so I would think the sentiment across Asia until and unless it improves sustainably, it would be difficult to conclude that India would possibly "resume the uptrend" to borrow your phrase.

Having said that, in the near-term and in the medium term India would continue to outperform the rest of the region because investors appreciate that it is still one of the better markets with a good choice of stocks available even though the valuations may seem clearly on the more expensive side at this point of time.

Latha: What according to you are the pockets that offer an upside potential now? PSU banks came out of the woodwork this week despite stocks like Punjab National Bank (PNB), Bank of Baroda delivering fairly weak numbers, would you recommend investors buy PSU bank stocks now that the capital seems to have been arranged?

Raychaudhuri: Not really. We have always liked the private sector banks and we think that basic concerns for PSU banks, which are capital raising and asset quality, they are still very much alive. Therefore even though we have seen a significant degree of outperformance by the PSU banks over the last couple of trading sessions, it is partly due to prior short positions built in which are getting covered and also some news flow of late which has been favorable like the news about bank recapitalization and where the government may actively participate a lot more than what it planned to earlier.

But I would think that, one, we need to wait and watch as to what extent that recapitalization actually happens and secondly one would have to watch for the bigger, more fundamental variables like asset quality and the capital adequacy ratios for the PSU banks and how that problem gets addressed. So our preference even now remains clearly tilted towards the private banks side.

Sonia: I will come back to sectors in a bit but before that, we were speaking to Nilesh Shah of Kotak Mutual Fund earlier this week and he spoke about Rs 3.5 lakh crore of investment into the mutual funds over the next five years. Are you advising both your retail and institutional clients to increase allocation to this market now?

Raychaudhuri: I am not exactly permitted to advise retail clients as we deal more and almost exclusively with institutional clients but the point that you made earlier, which is the fact that there is a lot of allocation going into mutual funds, equity mutual funds, that is clearly correct and the background reason behind that is not only the likely recovery in equity as a whole but also the fact that alternative asset classes are no longer that attractive. 

Take for instance gold and property, which used to occupy the lion’s share of asset allocation of an average household saver. So, close to half his savings used to go in these real assets and many of these particularly property in the large top tier urban cities and even gold is significantly less attractive than it used to be earlier.

So it is the lack of alternative asset classes which is also contributing to this massive deluge of flows into equity funds and we think that a combination of this relative attractiveness of equities and the unattractiveness of the alternative asset classes is likely to make this switch continue for a while. So, I personally think that since the quantum of money that can potentially come into equity mutual funds is huge.

You think about it simply this way that India’s savings rate is about 34-35 percent, it is a USD 2 trillion economy, approximately half comes in to financial assets, that is close to about USD 350 billion, just if 10 percent of that gets allocated to equities, that is about USD 30-35 billion per year. That is larger than the highest yearly foreign institutional investors (FII) inflow that India has received ever. So, the potential for domestic money to go into equities and to support equity markets is massive and we haven’t even scratched the surface on this front.

Sonia: So what do you do then with some of these stocks which have strong managements - the likes of Tata Motors, ICICI Bank and Tech Mahindra that have gotten de-rated due to external environment. In fact in some cases like ICICI Bank you have seen a good recovery in earnings as well, would you advise investors to increase allocation and keep the faith there?

Raychaudhuri: For a majority of them, at least the stocks that you talked about, we have a positive view. So, some of these have lost out or have been de-rated because of concerns that are not really connected with India. So, for example if the Chinese auto market is slowing down, then that has a collateral impact on certain stocks but at the same time we think that the impact of these external factors have possibly been too strong for some of these stocks.

Even some of the banks that you talked about, the private sector banks, the original concern was the pressure of NPLs over the last two quarters where the asset quality had visibly worsened but if one looks at the most recent quarter’s results, many of those concerns are getting addressed. So, I would think that the negative influence or the negative impact that we had seen over the past couple of quarters are possibly temporary and therefore for many of the stocks that you talked about, I would rather be still a buyer at these reduced valuation levels and they are possibly providing a buying opportunity.

Latha: A couple of months ago everyone feared that China would get more flows than India but since then China has fallen off a cliff-I think it is 20 percent loss in a quarter, where does India feature in your pecking order and what is the upside potential for Indian markets over say the next one year?

Raychaudhuri: First of all I think yes in this whole collateral damage that rest of Asia particularly China has gone through, Indian equities have possibly -I wouldn’t exactly say emerged stronger but at least some of the fundamental factors are therefore playing in favor of India. So, if China continues to slow down, it obviously has a negative impact on commodity prices which we are already seeing. Oil prices again down to about USD 52-53 on Brent and therefore the fundamentals of India both on the economic side, the macroeconomic perspective and for corporate earnings tends to be slightly better. We are already seeing some companies, particularly in the manufacturing space being able to pass on the commodity price benefits to their bottom lines. We have seen that for some of the auto companies, some of the consumer staples companies and we think that over the next two quarters this so called wealth transfer from the commodity producers to the commodity user is likely to accelerate.  So, to cut a long story short, we remain positive on India as a consequence of what is happening in the outside world and we remain overweight in our Asian model portfolio on India. Now, to share the target with you, we have a Sensex target of 30,300 by the end of this calendar year which is end of 2015 which is approximately about 8-10 percent from the present levels over a span of about five months.  So, if you extrapolate that, I would think over a one year timeframe the Indian market should easily give about 15-20 percent return to their investors and that is pretty much in line with the earnings growth or maybe slightly higher than the forecast earnings growth over the next couple of years. 

Sonia: Since you are expecting a 15-20 percent return over the next 12 months, what should the right sectoral bias be now?

Raychaudhuri: Absolutely, first of all I talked about private sector banks, we still remain positive on that front. I would also talk about IT services despite the fact that in the first half this sector gave some negative surprises, we think that we have crossed that hurdle and the worst is behind us. The US dollar appreciation would obviously be another tailwind for this sector. 

I would also talk about select autos - this sector has actually underperformed but now we are beginning to see the impact of lower commodity prices on higher margins. So particularly in four wheelers, we remain positive on that side. Also select few commodities particularly in the oil and gas or energy, there both on the refining margins, we are seeing positive momentum.

So, that would basically be the main asset allocation. Apart from that there are certain pockets in industrials that we like particularly the large companies which are benefitting from any area which have expertise in any area of infrastructure and which have deleveraged balance sheet. 

In fact, I would think that this aspect of tracking leverage on balance sheets is going to be critical not just for Indian equities but also the regional equities because leverage on balance sheets is going to be painful particularly if the company has a foreign exchange leverage US dollar denominated, so that is one area that we would remain cautious about, that is we would like to avoid companies which have a highly leveraged balance sheet.

Latha: What is the take on the Nifty? We have managed to end somewhere near the upper side of the band above 8500 mark. Do you think now there is less reward and more risk to go long?

Narayan: If you look at the way the Nifty behaved on Friday, I think that was something which was very necessary for the market to pull itself out of the slightly rangebound area that it had got into in the week that has just transpired. Even though we had 600 point rise from 8000-8600 on Nifty, what was surprising was that this entire rise was little short on volume support as well as momentum support. So what we needed was one strong week which would put the stamp of approval on the trend and its attempt to go higher and that is what we have got on Friday.

If you look at it up to the end of July, we have not moved up for about seven weeks that puts trend into intermediate uptrend status. That is very critical because the market is, as per technicals, is divided into three trends through the time classification. The long-term trend which was up and the shorter term trend which was also up whereas the intermediate trend was the one which was down.

So with the market going higher and very decisively crossing the 8,500 levels on the Nifty and closing above that in a rather decisive manner, we now have all the three trends up and that is the most positive development that we have for August and we can certainly look forward to August and the rest of the year as something fairly positive.

Sonia: Can you give us two or three trading ideas for next week either largecaps or in midcaps?

Narayan: In the largecap area I was looking at Coal India which ran up towards the later part of Friday and it has moved up to a level where it is about to challenge the former highs and it is doing so with renewed vigour and momentum and I do believe Coal India could be one of the good performer in the week ahead. It is priced at about Rs 440. It would not surprise me to see it move up by at least 20-30 points during week.

On the largecap space maybe one should also look at Wockhardt which is another stock which has revived from the levels of support. It had been consolidating for quite some time and the strong upward move which was also part of the overall upmove among various pharma stocks during the week. I think Wockhardt is another one to look at. These two I would definitely look in the largecap space. 

In the smaller midcaps space the stocks from the midcap area dominate the scenario right now, each of them is flying through the roof. So there I would look into something like textiles area where lots of action is seen. I quite like the layup in stock like Nitin Spinners. I saw the results declared for Suryalakshmi Cotton Mills, which were robust. I think these are couple of stocks which are not really caught the fancy of the public but then I do believe they do have the merit and the pedigree to move up.

So Nitin Spinners at about Rs 80-85 is a buy. Suryalakshmi Cotton Mills at about Rs 115-120 is a buy, SML Isuzu is another one which is raving up after decent correction. There are scores of them which are there on a run and I am not talking about those. I am talking about the ones which have not yet participated and maybe that is the one I would look to be part in the next week.