Dec 07, 2017 06:26 PM IST | Source: CNBC-TV18

Ramesh Damani wants you to not panic over this correction. Here's why

BSE member sees the correction to be largely on the back of Gujarat elections and a possible year-end profit booking.

Barring Thursday’s movements, the Indian equity market has been going through a consolidation phase with indices shedding around 300-350 points from their highs in the recent past.

But Ramesh Damani, member of BSE, is not worried. “2017 has been a vintage year for India and global equity markets. You have not had a better year than this one. This is just end of the year profit booking happening and I don’t see a reason to panic,” Damani told CNBC-TV18 in an interview.

There could also be some nervousness due to Gujarat elections as well. But if you think this is a correction, there have been people who have sold the correction and have lived to regret it, he said. Going forward, a good mix of global economic activity and in India will propel the market.

So, which sectors become a good bet going forward? Damani is very bullish on quick service restaurants (QSR) space, along with cyber security and property. “Tech changes will help QSRs, while you will find cyber security firms having decent numbers in their results as well. When growth comes back, the stocks could be re-rated,” he added. Meanwhile, he is upbeat on property theme on the back of the government’s affordable housing theme.

Among other sectors, he likes large, well-capitalised PSU banks. “With NCLT auction coming up, some of the provisions could be written back. The market could re-rate the stocks too,” he added.

Below is the verbatim transcript of the interview.

Latha: The markets are not in the greenest of shades as we celebrate our 18th birthday. Is that an opportunity to buy?

A: First of all, to the whole gang at CNBC-TV18, many hearty congratulations on your 18th birthday. Someone said, the story of your channel is the history of modern business in India. So you have documented it, covered it so meticulously so a big congratulations to you and your team out there. It has been a pleasure to be associated with this channel for so many years. In fact I have grown up with your channel, so thank you so much for that opportunity.

In terms of the market not being healthy, I take exception to that because if you are oenophile, the one who likes wine, the best year was 2000-2001 when the Bordeaux collection was at its best. The markets have still been extremely, 2017 has been a vintage year for global equity markets across emerging markets, across emerged markets. You have not had a better year than 2017 in a long time. So, if there was a bit of correction because of the end of the year, profit-taking or because of some nervousness, I do not see any reason to panic about that.

Sonia: You have been catching trends for so many years now, what is your crystal ball telling you with respect to what 2018 could look like?

A: You were not on the Diwali show, but I was sitting with Latha and Anuj on the Diwali show and I mentioned the themes that looked, to me, good from a longish perspective, not necessarily from a couple of quarters but over the next few years or the next five years. I had mentioned quick service restaurants and I think that is a good example of how we play informal economy to formal economy. Any technology changes will help that sector.

I have been very bullish on cyber security over the last year or so. To be honest, the stock has not performed. When you start looking at the results that came out in quarter two, you will find companies in there that have, in a decent quarter, after paying 30 percent tax, produced 40 percent net margins. So when growth comes into these sectors, these stocks will get rerated. Currently, they are available at fairly cheap price-earnings ratios (P/E). so cyber security will be the other one that I am looking at.

Some other themes that I mentioned is property because the affordable housing theme of the Prime Minister catches the eye. That will do well. So those themes that we suggested in 2017 Diwali, probably will continue for the next few years and beyond.

Anuj: On Diwali day, you also told us that you are enjoying, as a grandfather now. How has the last 4-5 months been as a grandfather?

A: I think Sonia will understand it. It is a new baby, it is a miracle of life and we have really enjoyed. It has been a pleasure to have him at home and every day, you look forward to not the markets, but his musings also.

Anuj: You also told us that it is a good time to start investing of course, for you grandchild. You told us about a couple of themes. Any interesting stock idea that has cropped up in your mind over the last six months, if you want to reveal?

A: As you know, unfortunately due to SEBI regulations, I cannot discuss individual stocks ideas. But we had suggested quick service restaurants (QSR), services industry, good packaging, cyber security and I tend to remain bullish on all of those. The question investors need to ask themselves, there is some nervousness on the street. It may be due to Gujarat elections due in mid-December, it may be due to year-end profit taking, but there is some nervousness. But here is question you ask yourself: Do you feel that we are at a bull market top? In which case, of course, you need to be selling and raising cash. But if you feel it is a correction, I think people who have sold the correction have lived to regret it.

What has happened is that the first time global markets are firing on all, global economic growth has come back in the world and you will have China, US and Japan in different stages. While the US might be at the point of raising interest rates, in Europe and Japan and China, interest rates are going to remain low for the next 2-3 years. So a good cocktail mix of global economic activity also in India will propel markets higher in 2018. We always are cautious, but I have no reason to be scared because this bull market is ending.

Latha: What about the smokestack sectors – we should not call IT smokestack, it is not smoke – but, nevertheless, do you think some of them have been able to reinvent themselves as well PSU banks?

A: I think they have. Like I told you, there are sectors in the technology space, whether it is Aadhaar linked or whether it is service bureau linked or whether it is cyber security, they are producing phenomenal results. So I think you need to sift through the sands and see where the opportunity set lies.

In terms of smokestack industries, I think I have not been very bullish on banks, either public or private for a long period of time. But I would suggest the large well-capitalised PSU banks should be looked at, at this point, particularly the largest because I think, now with this National Company Law Tribunal (NCLT) auction going to happen in February and March, I think there is a serious possibility that some of it would be written back, some of the auctions, the provisions that are already made will be written back.

So there is a good chance that the market will rerate the stocks fundamentally. And also if you look technically, these are making 10-12 year break outs which tend to be very bullish for the stocks. So, particularly among the very largest of the PSU banks, I would tend to put some money in there.

Sonia: We were speaking with Sunil Singhania yesterday and he was telling us how there is so much money that has come into this market through the mutual fund route, especially in the month of November, he was talking about figures like Rs 24,000-25,000 crore. What is the sense you are getting about the local money now because at 32,000 on the Sensex, there is definitely some amount of jitters with respect to the domestic fraternity. Do you still expect volumes of money to come in?

A: It might be slowing a little bit, but I expect it to continue because domestic investors have discovered a new bromance, if you will, with equity markets. These things move the pendulum from one extreme to the other extreme. And that will provide liquidity. Finally they have discovered a good thing. Let me just make the point I made repeatedly on your channel is that if there is a basketball game going on and people with five foot or people with seven foot on the opposite team, which would you bet on? Obviously we would bet on the seven footers.

With equity investing, because long term capital gains are tax free, it is such a huge advantage that the Indian public is now realising that rather than 30 percent tax on poor or mediocre returns, why not take the 25 percent we got last year and pay no taxes on that? That is just such a powerful theme resonating through equity markets and unless it is changed in the Budget, I think it would continue to resonate.

Anuj: The global picture has turned a bit murky. We may want to blame our current weakness on Gujarat uncertainty, but we have performed in line with what the MSCI Emerging Market Index has done. Your thoughts on the global picture.

A: We have performed, there is nothing wrong with that. Any year, you take a 20 percent gain, I will take it because that is hugely powerful wealth creation. There is some thought that the US market could be topping out because the kind of moves that Google or Facebook or Amazon have had, but I do not see any euphoria yet there. Bull markets peak out when there is huge euphoria and there is huge amount of debt leveraged in the system to buy shares and a lot of nonsense takes place.

I do not see any of that right now in America. I have been circumspect on the American market from time to time, but it seems like economic growth is good, corporate profits are at historical highs, so they will not go higher, but interest rates will remain – let me take you back when we had this monetary stimulus package going on with the Fed and everyone, including me, assumed that the minute the Fed withdrew the package, the markets and all asset classes will go in a tailspin. The Fed stopped stimulating in 2014 and started buying back, as a matter of fact, and yet employment has increased, earnings have increased and markets have increased.

So, there is reason to believe that the Fed may be administered the right medicine this time and the markets have graduated to an era of low interest rate, benign economic activity and this will continue for the next few years. I do not see any reason to say let us sell and get out. You could have said that in 2010, 2012, 2014. The only solid reason is the economic expansion in America has gone on since 2008. Ten years into a bull market, that is pretty long legs, but we are probably seeing a record being made out there.

Latha: Bitcoin is not the froth that might bring in, that might pull down, that might become a domino at some point?

A: I have no doubt it is. I just cannot imagine the value. But put it in perspective. Bitcoin, even at these very lofty valuations, the entire Bitcoin industry is worth USD 225-250 billion. Equity markets, globally worth maybe USD 45-50 trillion. So it is a drop in the bucket. The market corrects itself. All the sectors are correcting itself, whether it is pharmaceuticals in India, tech in India or globally metals, they correct themselves and they move on. So, while Bitcoin is clearly an example of excess that is going on in the marketplace, it is not enough to derail valuations in equity markets.

Sonia: Since your grandson is going to be 18 one day and we are 18 today, if you had to buy one stock for him now and keep it for his 18th birthday, which one would it be? Let me make it easier for you. Between Reliance, Larson and Toubro, Asian Paints, Maruti, what would you pick?

A: I would buy something in the quick service place because once you go from informal to formal, urbanisation, woman working out of the home and basic food consumption patterns are not going to change in the next decade or so. A lot of other industries will be threatened technologically. So I would look at particularly in the restaurant dining type of concepts because I think this business is still nascent in India and probably have a long runway. So if you asked me to put my money where my mouth is, I would probably put it in that sector.
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