The year 2017 seems to have brought cheer in the market with its participants singing what a beautiful world it is, says Gautam Shah of JM Financial. He expects Nifty to scale to about 8500 level this calendar year. The US market has hit the 20,000 mark and global equities are in a sweet spot; European markets have performed well and Financial Times Stock Exchange (FTSE) has hit multi-level high. Recovery in emerging markets tells us that important markets have bottomed out for good, said Shah. Exuding optimism, Shah said Bank Nifty could touch 19500 levels. He said the Budget, third quarter earnings, state elections and Donald Trump are the few factors that one needs to watch out for in 2017. He is bullish on oil and gas and metal stocks and says the leg of leadership will come from these two sectors. Oil and gas is trading at 8-year high and it is leading the market higher. Shah expects oil & gas index to scale up to 14000-14500 level. As for metal stocks he sees a 15 percent upside and also bets on auto stocks. He says banking is an opportunity to buy. The dollar index is gaining momentum and Shah expects it to go towards 110 levels.He maintains caution on IT and healthcare stocks and says that CNX IT is at the 10,000 mark and he doesn't see a substantial upside in either of the sectors. The cement sector saw a decent correction but Shah says it has lost its leadership. Cements did not participate when the markets rebounded. In the medium term there may be an upside but for the near-term he says the sector has taken a back seat.Below is the verbatim transcript of Gautam Shah's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18.Anuj: Has this market made a double bottom at 7,950 and if that is the case, can it now make higher top and move up from here?
A: It looks like. If you look at the way 2017 has begun, it's almost a case wherein market participants are singing what a wonderful world - and I say this because global equities right now are in a pretty sweet spot. US market has been in tearaway mode, trading around 20,000, European markets have been very well after having broken out a couple of weeks back and the case in point is what the FTSE has done having hit multiyear highs and emerging market pack have made a stunning comeback in the last couple of weeks.
In the month of November and December there was a talk that maybe this is a trade wherein buy domestic markets (DMs) and sell emerging markets (EMs), but the kind of recovery some of these emerging markets have seen in the last few weeks, that tells us that some of these important markets have bottomed out for good.
We would like to believe that the market did make a bottom around 7,900, in fact when we were on your channel last time, we said that the market need to make a lower low before they can make a durable bottom and that happened in the last week of December and the kind of rally that we have seen in the last couple of weeks - that has created a lot of evidence on the charts to suggest that yes, that was indeed a durable bottom.
However, if you look at the technical factors, there were a lot of positive divergences on many of the indicators, the Fibonacci ratios were expected, some of the trendline came into play to support the market around 7,900 mark and there were some very important reversal pattern that we spotted and all these factors suggested that the market should move higher, in fact we had a working target of about 8,410 and a possibly 8,500-8,550 for this move and we expect the Nifty to get into that but we wouldn't jump the gun and all is well for good because you are entering 2017 at a time wherein global Volatility Index (VIX) is at a multiyear low, there is a lot of positivity in the system and there are some very important events to look forward to. In the next couple of months you are going to see five major factors being discounted by the market whether it's the Budget, the Q3 earnings, state elections, the Trump factor and these issues to certain expect have been discounted on the positive side. So if there is any disappointment whatsoever from any of them, it could affect the market.
So while from a near term perspective we do expect the Nifty to move towards 8,500-8,550 mark. I think that is the zone which is the wall of resistance and the Nifty need to cross that on a closing basis to open up another 200 points and on the downside 8,150 to 8,200 is now a very strong base. So till that area is safe, we believe that the market can continue to rally at least in the near term.
Latha: What is the corresponding level in the Bank Nifty, the near term resistances as well if you can give us a slightly longer term view?
A: Unfortunately I cannot give a longer term view on the Nifty and the Bank Nifty right now because the rally that we have seen in the last ten days, there is a belief in the market that we will run away to lifetime highs. I do not think that is going to happen in a hurry. As the market gets to 8,500 plus level, I am sure there are going to be hurdles along the way. However, it's important to note that the Nifty recovery of the last two weeks has been backed by the Bank Nifty. I was on your channel in the middle of December wherein you had a similar rally to 8,300 but that move was not backed by the Bank Nifty and that was our concern and in the past we have seen that whenever the Nifty move has been backed by the banking stocks, it's always more reliable, more genuine and yesterday was a spectacular day for that index, so most of the juice is already over but around 19,000-19,100 mark there is some resistance but the Bank Nifty could move to levels of 19,500-19,600 in the near term but I would not talk of levels beyond that at least in the current scheme of things because the rally so far has already been pretty spectacular and therefore it is turning overbought.Sonia: If we talk about individual stocks, from the heavyweight names like Maruti, Reliance, IndusInd Bank are stocks that are less than 5-10 percent away from their 52-week high, just trying to understand from your end, where you see the next leg of leadership come from?A: The leadership has come from oil and gas and metals. I said this last time as well, if you look at the oil and gas index, it is currently trading at eight year high and this has happened after two years of underperformance. In fact, yesterday the oil and gas index made a new higher high and it is interesting that this sector is leading this market higher because it had a very difficult kind of a set up in early 2016 but as we are starting off 2017, I think some of these oil and gas stocks have a very strong set up. The index is currently trading at around 12,500 and we expect the index to move all the way to levels of 14,000-14,300 over the next six to eight months. So that is a good 15 percent upside that we are looking at.Secondly, I have talked about metals on previous occasions as well. Very good set up, the index made a higher high yesterday. It has been stuck in that 9,500-11,000 band for almost a couple of months now. Yesterday it took out 11,000 on a closing basis and that opens up another 1,500 points on the upside. So even on that index, we are looking at another 15-20 percent on the upside. So we do believe that these two would be the sunshine sectors for the markets in the next six-eight months and this would be followed by the autos, which have always done well. The auto stocks saw pretty large correction of about 20 percent in the last couple of months maybe because of the events of November but right now things look pretty strong for that index as well and we expect the index to go back to its recent highs.Apart from these three, banking if at all there is some decline that would be an opportunity to buy there.Latha: I thought you said that you are also seeing some near-term resistances in banking?A: Yes, the move has been so big, it is too far too soon because the Bank Nifty is trading close to 19,000 having hit levels of 17,600 just a month back and around 19,500 mark is where we expect this rally to fizzle out. So, we will have to review the situation once it is around those levels. That is the reason I would be more comfortable with some of the other sectors, which I mentioned, which would be oil and gas and metals.Anuj: What is the chart of dollar index indicating because it may again boil down to that? For now the markets believe that it may have made a lower top and the markets are rallying now, emerging markets but can it break out once again above 104?A: I am pretty clear that the dollar index has already broken out. It has been in that 90-100 kind of a band for the last many months and that breakout above 100-102 suggests that the dollar index is headed towards the level of 110-112. I am not very sure whether this correlation of dollar index moving up will lead to a sell off in the emerging markets, I am not sure of that because these correlations do not work consistently but the point, which I like to make here is that the US markets are looking pretty toppish at this point of time not to say that they are going to collapse immediately but from somewhere around 20,500-20,700 mark, you can see a major top for the US markets and if those markets were to see a correction from those levels then India might be impacted but that is more of a medium-term concern, I think near-term we are still okay there.Sonia: I was going through your note that you sent us and in that you have some strategies for the day as well. Take us through that, names like Punjab National Bank (PNB), LIC Housing Finance is what you are looking at?A: I would not be able to comment on specific stocks.Sonia: You did speak about oil and gas and metals that you like, what about the sector that has moved to the backburner now, the IT space? Today of course we are seeing some level of rebound in names like Infosys, TCS etc but how are you positioned there?A: IT remains an avoid. I said this last time as well. It has not done anything spectacular while the markets are seeing such a strong recovery. The CNX IT index is still stuck to that 10,000 mark, yes there are few good days in between but you want to be in sectors that are free-flowing, that are making higher tops and higher bottoms consistently and that has not happened in the IT space. So we do not expect too much upside.Even if there is positive surprise from some of these results in the next few days, I don’t see substantial upside in the IT index and upside could be capped to about 10,500-10,600. So IT and healthcare are possibly two spaces in the market that you need to avoid right now and stay high beta because these moves are so free-flowing in the market place, opportunity cost is a big cost and you want to be in the right sectors, you want to be in the sectors that are making highs with the market and names which I mentioned earlier are doing that.Anuj: What about something like cement? That had a decent correction, was one of the leadership sectors, do you get a sense that it is rebounding now and could go back towards previous high?A: It has lost its leadership, it is fair to say that because in the last 10-15 days, as the markets have rebounded, cement has not participated substantially. So, I am forced to believe that post that newsflow that you had in November, cement has just taken a back seat. This might be a short-term issue. Over the medium-term, the sector still looks pretty strong but from a near-term perspective, I don’t see it as a trading opportunity.However, yes, investors who are looking to build portfolios for 2017 and beyond, they might use it as an opportunity to buy because a lot of these stocks are now available near support levels and therefore, the risk reward is much better to buy right now than what we saw in the middle of last year.Latha: Since you are so bullish on oil and gas, what is the crude chart telling you?A: It is good to see that crude as a commodity has got into a range. The Nymex crude has been stuck to that USD 50 per barrel mark for the last couple of weeks, we do believe that crude oil is likely to gradually inch towards that level of USD 60 per barrel and it has made a base around USD 44-45 per barrel level. So I don’t see immediate substantial upside or downside and I think ranged activity between USD 45 per barrel and USD 60 per barrel is what I expect over the next four-six weeks but I think the bias is likely to be positive and therefore one could be positioned accordingly.(Disclosure: Network 18, which publishes moneycontrol.com, is a part of the Reliance Group.)
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