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Last Updated : Feb 12, 2016 06:19 PM IST | Source: CNBC-TV18

Sensex 22K risk on; 3 factors key for bottom: Ambit Cap

With the Sensex breaking below 23,000, Saurabh Mukherjea of Ambit Capital is continuing to stick with his 22,000 call but says the occurrence of three events will make him call a likely bottom to the market.


Back in September 2015, Saurabh Mukherjea made a forecast for the Sensex falling to 22,000 -- a call that made him somewhat unpopular among investors but which he reiterated several times since.


With the Sensex breaking below 23,000, he is continuing to stick with his 22,000 call but says the occurrence of three events will make him call a likely bottom to the market.


"I want to see more liquidity in the banking system, a higher recapitalization figure for banks and strength in consumer inflation in developed economies such as US, Eurozone and Japan," Mukherjea, CEO - Institutional Equities, Ambit Capital told CNBC-TV18.

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He said that investors must focus on capital preservation and added that there was no great profit to be made in the near term investing in stocks. "There is no point in jumping in the market with both feet."

He, however, said he wouldn't bet on gilts as the haven to rush to, and pointed out that a migration to gold was under way.

Below is the verbatim transcript of Saurabh Mukherjea’s interview with Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Latha: You had called 22,000 before anyone else I think. At this point will you say there is value here or does it look like it is going to get much worse?

A: I will stick to 22,000 for now, partly because it has not been hit as yet; we are still at 23,000. However, the thing to look at I don’t think is the index levels any more. I think there are three broad sets of factors which I think will help us over the next 60-90 days figure out whether there is actually a rally here. My fear actually is not a drop into the abyss, although that might happen, my fear is we will bump along at this sort of miserable level for some time to come.

Now, whether there is actually a rally there or whether we will be bumping along at this level for a good year or so, I think three set of factors will determine that. Firstly, liquidity in the banking system; in the last month or so, three month commercial paper (CP) rates have rocketed in India from roughly 7 percent to 9 percent. If you look at the CP chart, it is actually quite frightening suggesting a fairly meaningful drying up of system liquidity.

Now, I am not a money market expert and I don’t fully understand why liquidity has dried up so quickly, is it because banks are cutting back on working capital finance is the question that is on my mind almost every morning now but we will be looking at system liquidity very carefully and using the three months CP rate as a guide.

If liquidity continues to dry up, it is almost futile for people like me to then worry about earnings because system liquidity drying up, banking system liquidity drying up will become a sort of a self reinforcing spiral. So, let us hope for the best there but it is worth tracking three month CP rate.

The second is the banking recapitalisation by the government. We all know that the USD 10 billion recapitalisation announced back in August didn’t seem enough then, it seems even more inadequate now.

Either in the Budget or ideally before that, we need an announcement from the government on what the new recapitalisation number is. I am not even sure that the amount that they committed to for recapitalising banks this year, in the current fiscal, has actually been pumped in.

So, a reassuring announcement from the government of India saying that, yes Governor Rajan and us are on the same page, here is more money for the banks, will be good to hear. Again, if we don’t hear that, I think my worry levels will increase.

The third is the CPI numbers in the western context. So, for the three big western economic zones for US, for eurozone and for Japan, if those CPI prints go into the red, we have price deflation in the western hemisphere then I think the banking system in the west plus Japan clearly will be in a lot of trouble. Rarely do you find deflation and a banking system health being correlated. Remember, all the great bear markets historically have come in deflationary circumstances. So, leaving aside whatever happens in India, we have to keep a close eye on CPI in the west.

So, system liquidity, watch that, track that using three month CP. Banking recapitalistion by the government -- the sooner the better, the more the better -- and CPI prints in the west. These are the three big things to focus on, to get a grip on. Are we going to go fall into the abyss or are we bumping along the bottom or is there actually a recovery that will happen this year but my focus has perpetually been capital preservation.

Our view to our clients is you are better off being conservative with your money rather than speculating. My view certainly remains no point jumping into the market with all your feed, there is no great reason for me to believe that there is near-term profit to be made in this market.

Latha: I just want to ask you are we once again going to see, we have already seen a goodish bit of it, this migration to gilt and gold.

A: The migration to gold, my sense is already happening. So, as you mentioned, the mutual fund inflows, the mutual fund equity inflows have been drying up. So, December was weak and January clearly is very weak. Since it is unlikely that people are jumping into real estate with their two feet, it is almost a dead cert that the migration to gold will be happening.

It is hard to make a call on gilts just yet. There typically is whole flurry of these PSU related issuances in December and January so clearly those have happened. It is too early for me to make a call on that but I think the migration to gold looks pretty certain to me, not just in India, I think across the world.

Anuj: The other question that a lot of people ask us is that okay this is fine, right now we preserve capital but at some stage we have to participate, whenever the dust settles down and you will never catch the bottom. So, when you have to start buying what would be the first set of stocks that you would recommend buying?

A: As I said, once the three things I look for, the second thing I mentioned was the bank recapitalisation. I think Governor Rajan gave a fine speech yesterday and he is saying very clearly that there is more pain for the banks to come.

If you join the dots, from that speech it suggests that if there is more pain for the banks to come then the government needs to announce a bigger recapitalisation program. They need to be not just beyond the numbers, the government needs to be seen as being alive to the situation cognizant of the danger that the economy is facing.

The best way I think to time the bottom if there is one in the next few months is, see how the government responds to the banking recapitalisation issue. If we get a credible announcement from the government as to how they plan to recapitalise the banking system then naturally speaking that would be the time this market bottoms out and banks, BFSI will be the sector to began buying naturally into a recovery.

I have my reservations as to what the government can do about the banking situation but we are all open to being surprised positively; we need positive surprises. Governor Rajan’s speech yesterday suggested that the banking system might get a fix hopefully over the few months; Budget might bring that, perhaps even before the Budget.

However, we need a credible resolution to the banking system; that I think is the most likely bottom for the market. BFSI around that, after that announcement, BFSI becomes a sector which will look very tasty if the government is standing foursquare behind the banking sector.

Latha: What is the sense you are getting therefore of the time correction? Is this like 2016 written off for equities?

A: One way to gauge the situation is, I asked my foreign clients about their flows, the flows that they are getting from pension funds and endowment funds in the western hemisphere. For the last year or so I have not heard anything which suggests that investors in the west actually want to put money in emerging market (EM) equities.

So, whether it is Indian equities or EM equities in totality, I think this whole asset class of global emerging market equities has a serious challenge. Indeed as we can see in the Japanese market and the western hemisphere, equities as an asset class, is a challenge.

So, if you were to take foreign institutional investors (FII) flows as a trigger for a rally, clearly there is not any rescue there on its way to India. We are largely going to be driven by domestic circumstances now, domestic policy and domestic inflows and hence is a good chance that we will be at sluggish levels, weak levels with the index for some time to come.

Sonia: I wanted one comment on one piece of the puzzle which is working for the market which is the improvement in the consumption space that we have seen. FMCG names like Marico, Whirlpool, some of the paint companies like Asian Paints, Berger Paints have done well. Do you think this is a space that one can hide in purely because we are seeing some signs of growth in this particular sector?

A: You mentioned some, there will be selectively good stories there but I am not so sure that there is a blanket play on urban consumption. So, there is this kind of view out there at the moment that urban consumption is the last refuge that you can find shelter in. I am not so sure that is going to hold true.

My fear arises from the fact that, my reckoning is that the USD 20-25 billion of foreign money that came into ecommerce through foreign direct investment (FDI) and through private equity last year, I reckon those flows are drying up. I think the drying up of flows into the ecommerce sector, the flows which helped the airline sector, the hotel sector, commercial office sector, I think those flows as the flows from America and China into our ecommerce sector dry up, we will see pain coming even in urban India.

So, there will be selective plays in urban India which will work out but I am not sure that there is a blanket theme there for us to seek refuge in.



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First Published on Feb 12, 2016 09:55 am
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