See strong momentum going into FY18 but expect volatility too: Udayan Mukherjee

The ferocity of rally seen in the Indian equity market over the last three months has surprised most people, says Udayan Mukherjee, Consulting Editor, CNBC-TV18, adding that the momentum going into FY18 remains strong.

The rally, he says has not been only India specific, globally too markets have been up 15-20 percent and some even more.

“The way risk-appetite has come back is spectacular,” he says.

According to him, the USD 5 billion that has come into the country over the last 4-5 weeks has not been through traditional long-only funds, hedge funds and the traditional country-specific funds but 80 percent of that may have come in through ETFs and index-like passive vehicles.

The market could very well blow out on the way up going forward but one should be prepared for some volatility in both global and local markets in April-May and there is also likelihood of a correction since we have gone up for three months on a trot. It is always difficult to time the market, he adds.

One of the biggest stability for the Indian market has been the stability of domestic flows, particularly in bad times, says Mukherjee.

A: Last three months have been quite spectacular. I don’t think anybody would have thought in the early part of January that we would have such a spectacular running coming on the back of the depression of November and December particularly in India. So, I think it would be fair to say that most people are surprised. Hindsight is another thing, but I think most people I speak to are quite surprised by the ferocity of this rally and it is not an India specific rally, it is a global rally and most markets are up between 15 and 20 percent, some even more in dollar terms. So, it has been a completely global kind of rally, the way risk appetite has come back, is spectacular.

So, I think momentum is still with the market going into the new financial year and the people I speak to here, out of Asia, portfolio managers, one thing is quite clear that the traditional long-only funds, the traditional country-specific funds not just in India, but elsewhere, are not getting bulk of the money. So, this USD 5 billion in four-five weeks that we have seen in India, I would say that 80 percent of that would have been channelised through ETFs and index like passive investment vehicles and not active vehicles like long-only funds or even hedge funds or country-specific funds. That tells you that there is a bit of momentum chasing which is going on and particularly India.

Four weeks back, I think a lot of people were very hesitant among the global fraternity to put in money in India. However, a couple of events have got out of the way and people have been left out of the India rally and therefore we have seen this USD 4-5 billion come in pretty quickly but, it has not come through most of the fund managers that I met on this trip.

A: That may happen also because there is a lot of cry for correction that one hears continuously after the market has gone up and while this time is a little different, in that the domestic investors have participated, in fact in many cases, domestic investors in this rally have participated more than foreign portfolio investors in the last few months of the rally. However, having said that, I still hear a lot of cries of correction at every level. So, that tells me that a lot of people are still not into the market and in terms of valuation levels and absolute levels, we may be at higher levels and maybe even slightly ahead of fundamentals. However, in terms of everybody being in, in the market, and that kind of euphoria which comes with it, I don’t think that kind of a market usually comes with so many calls of correction.

So, you are right in pointing out that this market could actually blow out on the way up despite the fact that everybody keeps fretting about valuations and other concerns ahead of us and that possibility certainly exists. However, these are very difficult things to time. I don’t think in January if you asked people, they could have predicted a 20 percent move in three months. Right now again these predictions are all frothed with great amount of danger because we are sitting on the back of three months of momentum and everybody’s inclination is to extrapolate on the same trend forward.

So, I think the next couple of months could be interesting because we have earnings. The global trend, we have been on back of a very powerful global trend and some of the recent noises may be putting this global trend to a little bit of risk. So, I would not be surprised if in April and May there is some volatility in global and local markets. However, it is difficult to say whether the markets will go up before it corrects.

I was of the view when the market was at 8,900-9,000 and I told you that I expect 8,600 to happen first before 9,300 and we are already at 9,200. So, we could easily go beyond 9,300 now before going to 8,600. So, this will be difficult to time, and there is a chance of the blowout that you are referring to, but I think it will be prudent to keep the possibility of some kind of volatility and a near term correction in mind because we have gone up three-four months on the trot continuously.

A: I think everybody spoke about that. I think there is a lot of expectations that there will be some kind of a policy fix. Of course the PSU banks are running ahead of that kind of policy announcement. Now, what it will be is going to be very critical because there could be one of maybe four or five kind of solutions which the government might come up with and I think you cannot conclude ahead of that solution coming out that whatever the fix is, is actually going to be a permanent fix and put a line under the public sector banking NPL problem.

So, I think there is clear visibility of that rally happening ahead of such an announcement, but I hope it is a carefully calibrated one and not a temporary band-aid kind of a solution once again because that will lead to immediate disappointment. This is not just important for the public sector banking space, because if we can get a credible solution on the NPL cycle, I think that actually is as big an event which can lead to some kind of an even rerating for the overall market because the sigh of relief will be so immense because of this NPL problem being addressed in a credible way that I think it is bigger than the public sector banking universe per se.

So, I am keeping my fingers crossed, everybody is, that this time the announcement is a really well thought-out one because that I think can even end up justifying a fair amount of the valuation premium that we have begun to enjoy off late.

A: I am very leery of talking about goldilocks scenario because these usually come on the back of strong market movements and then we begin to think that all the risks have vanished and only good triggers exist for the market. So, in the past, every time I have thought this way, the market has given me one tight slap in the face and something has happened to go wrong. So, I won’t stick my neck out and say that now we have entered a virtuous cycle and nothing can go wrong.

However, you are right, of course one of the biggest triggers for the Indian market clearly has been the stability of the domestic investment flows particularly in bad times for the market which clearly is a departure from earlier trends. I hope that continues. However, I was talking to one of the fund managers out here and I got an interesting spin on it, it is of course a truism that domestic money flowing into the market is good for the overall technical health of the market, but I think it may also be creating interesting opportunities for many of these financial sector plays and I am not talking about private banks here.

So, many of these wealth managers, asset management companies, even insurance companies will be massive beneficiaries of this shift towards financial savings. I think a part of that might have been priced into some of these stocks, but the next big NBFC rally might actually belong here and not to the microfinance or some of the lending type of NBFCs that we have seen in the past.

I think the financial space is opening for massive opportunities going forward as this financial savings and shift in financial savings story plays out in India. So, there is an overall huge technical opportunity for the market overall but there is a sector specific opportunity underlying it as well.