CNBC-TV18‘s Consulting Editor Udayan Mukherjee says if the foreign institutional investor (FIIs) inflows continue, Nifty could see 7900-8000 levels from where it had fallen earlier.
Market has been able to sustain the upward move and has remained bullish from a trading perspective, says CNBC-TV18’s Consulting Editor Udayan Mukherjee. The earlier assumption of resistance at the 7550-7600 level, for now, has been quashed, he said.
Global volatility, seen in January and February, has reversed, he added. The market have now reached a stage of compliancy, Mukherjee said.
"It gets trickier from here on because a large part of the rally has played out,"
Mukherjee said, adding that if the foreign institutional investor (FIIs) inflows continue, Nifty could move closer to 8000-8100 levels from where it had fallen earlier.
The upmove in exchange traded funds (ETFs) is more of a tactical reallocation, he said.
On rate cuts, Mukherjee says that a 25 basis points rate cut by the Reserve Bank is already priced in. “This (rate cut) will give Nifty another 100 points on the upside,” he added.
The market is still vulnerable to global risks, he said, adding: “The quality of a rally is suspect.” The rally has been led by sugar and metal names and not any blue-chip names.
Expectations from even the fast-moving consumer goods (FMCG) sector are not great, he said. We might see another 6-7 percent upmove in the sector, he added.
However, he is positive on the cement sector and said that volume growth has improved by over 10 percent in the last few months. The only issue is of valuation, which was pretty high, he said, adding that midcap names like Shree Cements and JK Lakshmi can be looked at.
Below is the transcript of Udayan Mukherjee’s interview with Latha Venkatesh, Reema Tendulkar and Anuj Singhal on CNBC-TV18.
Latha: The rally, the huge Nifty rally, do you think it still has legs to go?
A: My original expectation was honestly, that the Nifty would face a lot of resistance in this 7,550-7,600 zone. But what it has done over the last 7-8 sessions, is actually from a trading perspective, quite impressive and bullish because it paused there, for 5-6 days, we had very ranging kind of movement. It almost seemed to be digesting the rally from 6,800 to 7,500-7,600 and it appears to be making another step forward.
If you are a trader, the screen is still flashing green because there are no signs of the momentum having fizzled out. On the contrary, you have a had a consolidation and then the market trying to march ahead, in step with other emerging markets.
So, what has happened in the last few weeks, frankly not just in India but across global markets, is that volatility has mean reversed, because we had a massive spike in volatility in January and February as the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) went up to 31, the Indian VIX went up to about 25-26 and from there we have seen volatility cool down very substantially – the VIX is down internationally from 31 to 15. That has halved and even the India VIX has lost about 40 percent in the last three weeks or so. These are significant cooling down of volatilities.
So, if the market was absolutely paranoid 3-4 weeks back about what is going to happen globally and talk of 2008 like situations, now we have reached a stage after mean reversing where we are probably bordering on the level of complacency – where everybody is saying things are great, no global recession, let us put money back into some of the hotter areas like emerging markets, riskier areas like emerging markets.
So, I think this risk-on has brought back VIX levels globally and locally to levels where if it fell substantially from here, the risks would start mounting. But that is what has happened, that form utter pessimism 3-4 weeks back, globally and of course locally, we have seen a big mean reversion and everybody in the globe is breathing much more easily.
So, that is pretty much the sum and substance of what has happened. You can point individual factors to each market, but this has been a fairly global phenomenon in which we have played our part.
Reema: That is what has happened up until now, but what will happen next? Up until now, at least last few weeks, a trader could make money by buying on dips. Should that be the strategy we should continue to adopt?
A: It gets trickier from here on because a large part of the rally, as I said last time, has played out. Now, if 7,600 gets taken out, traders will tell you that the next stop is probably 100-125 points higher from here. Now, if this global momentum continues – just to put it in perspective – we have rallied 10-11 percent from the lows.
That is not the biggest rally that has happened globally. I mean, it is not my favourite market and cannot be anybody’s. Brazil is up 30-35 percent from its lows in January and February. So, a market where the economy is shrinking by 3.5 percent, which seems in deep recession and with deep political strife has rallied 30-35 percent.
And Brazil is not a dinky toy market, it is a fairly big market. That should just give you some perspective of how powerful emerging market rallies can be even if you do not believe that they are in bull markets. I do not think anybody, any of us should believe that Brazil is in a bull market with a negative 3 percent print on the gross domestic product (GDP). But, it has rallied 30 percent.
So, if that 7,700-ish gets taken out, it is completely conceivable that the market moves closer to that 8,000 kind of level. It is a round figure. It is also an important level from which the market broke down, that 8,100-8,000 level. It is conceivable that if flows continue like this, we can go up to those kinds of levels.
The bigger picture is, is this still a rally or is something more substantial happening? To that I do not have an answer yet, but if you map the entire fall from 9,000 to 6,800 – we lost about 2,200-2,300 points – if we get back half of that, which is something which traders measure, you could go back to 7,900-8,000 and that would be a 50 percent retracement.
So, this rally could have legs, to answer your question, but would it mean that something has dramatically changed in the structure of the market? I think we will need to see far more fundamental evidence to ascertain that.
Anuj: Just to carry forward that point, this rally has been backed by big foreign institutional investor (FII) buying. We have seen similar money, in fact more, in some of the other emerging markets. Last time I remember, you said that this could be a tactical play. Would you still believe that, that this could be a tactical rally from this FII point of view and this money could reverse very quickly as well?
A: Not just what I think, but if you ask around people, they will tell you that emerging market exchange traded funds (ETF) have got quite a bit of money. And that is not because the tactical hot money is playing for a big pull-back in emerging markets. I think there are a couple of other things that are playing around which is that a lot of money went out of these emerging market ETFs just preceding the start of this rally.
In a sense, if Rs 100 went out, maybe Rs 40-50 has got put back and that is not just an equity call. In a large part, it has been a currency call as well in a lot of the emerging market ETFs because currencies have given you very meaningful bounces from their lows in most emerging markets.
So I would tend to agree that this is still a tactical kind of a reallocation, not just an allocation which has happened into lot of emerging markets including India. Now, in India’s case, a lot of Budget specific selling might have happened before the event because of a lot of talk about long-term capital gains.
So, you would see that the 10 sessions leading up to the Budget saw a few hundred million dollars go out from FIIs and with the Budget which sort of cooled down bond yields and there was no long-term capital gains tax, maybe some of that money went back into play.
I think it is a combination of factors, of currency, the pre-Budget selling unwinding, and generally, people playing for a big relief rally in emerging market which has brought this kind of money back in.
I think you will find, if you speak to a lot of the long-only funds, or the India specific funds that they may not have been a recipient of major inflows over the last 3-4 weeks of the rally.
Latha: In domestic markets, the rate moves, we saw this giant fall in small savings rates over the weekend on Friday, long overdue, some of them, so accumulated cuts in those rates. Plus of course, fiscal discipline adhered to, the Fed is not hiking anytime soon or not hiking as much as was earlier expected. Does all this pave the way for a bigger rate cut from the Reserve Bank and what does all this mean for stocks? Last time around, when there was a giant cut, actually markets peaked off.
A: I remember that, and that is a niggling fear in my mind as well, because we have had a good rally, people are talking about the rate cut. There is a minor sense of déjà-vu from last year, around this time. And there was a big rally up to those 9,000 levels. We got that big rate cut and then market topped out. I am not suggesting, I mean history rhymes but does not repeat itself exactly.
So, maybe it would not happen this time around. A 25 basis point cut as you know is in the price now. From the Budget day, the bond market yields have cooled down 30 basis points, they might cool some more from here on.
So, when market yields have cooled down 30-35 basis points, including this morning’s expected move, then you know that the market is priced in, to a large extent, a 25 basis point cut at least. Is a 50 basis point cut fully priced in? Perhaps not. Maybe some part of it is priced in because people are talking about it. If it comes through, you could get a relief.
But, if we do not get a rate cut, which is unlikely, there is room for a massive disappointment from here. But, once this excitement around the rate cut plays out, we will come back to that square one which led to the topping off of the market last year when the rate cut happened. Will the 25 basis point cut or even a 50 basis point cut dramatically alter the economic landscape?
A lot of people have been on record saying that while interest rate cuts always help on the margin, this time around, it seems like it is not about that and therefore, I would not say that that is the make or break issue for the market at this point in time.
If it happens as it should, it will help the market sentiment a little bit. It also depends on where markets are at that point in time. If global markets are supportive and the emerging market rally is continuing, then this rate cut might mean another 100 points on the Nifty on the way up. If global markets have taken a u-turn by then, it might just get ignored by local markets as well.
More to follow
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