Taper in Jan-Feb; Nifty may hit 7000 near term: Geosphere

Despite strong macroeconomic data coming out of the US, there is a sense that the Federal Reserve may not start cutting back on its bond purchases till January-February, says Arvind Sanger, Managing Partner, Geosphere Capital Management. That is because the number of jobs added was not as high as the Street was expecting. 

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Even the nature of the fear of taper has changed since May. Sanger thinks an impending taper will not damage the upmove from the lows of the year.
He further adds the magnitude of victory for the BJP suggests receding fear of the emergence of a third front. He believes it will be more of a buy on the dips market rather than sell in the rally market. He also expects the Nifty to hit 7000 in the near term.
He is positive on oil and gas companies such as RIL, ONGC and Oil India. He also believes the banking sector will benefit in the short-term. Below is the verbatim transcript of Arvind Sanger's interview on CNBC-TV18 Q: One thought that this extraordinary jobs data would bring back tapering fears but we have actually seen a risk-on rally; Asian markets, Asian currencies as well. Explain that to us. Is it just that it is getting postponed and the taper fear comes back or is it that the market is now looking at the positive of a developing US economy?
A: I think it is a little more complicated than that - part of it maybe that better US economy is helpful for global economy and it is not seen as an automatic negative but part of it is that the whisper numbers were looking for an even larger positive surprise on the jobs number than what we got on Friday and therefore there was some sigh of relief that the number didn’t turn out to be even better in terms of jobs creation and therefore there is now a belief that the Fed may hold off in December and will revisit this issue in January-February. So, this is very much partying to the last minute till we get taper.
However, the whole nature of the fear of taper has changed from May - the world syndrome in terms of the economies are going to rollover and all risk assets are for sale and now the market is recognizing that this is part of a more natural taking away some extraordinary benefits but if individual economies and I think it is looking like whether its China or India or the US and even Europe, the economies are showing some signs of life and therefore maybe the market is getting more comfortable that the synchronized moderate recovery from the lows is not that fragile that any tapering – if they are going to start in January. I think consensus still seems to be March, then the market does not have to selloff. It is partying till taper becomes very clear. Q: To get back to the big story in our markets this morning, this better than expected win for the Bharatiya Janata Party (BJP), I want to ask you an extreme question, will India behave like turnaround script now?
A: It has already been behaving that way - if you look at it compared to almost any of the emerging market as turnaround script. I may have said this a few weeks ago that India is in a unique position among almost all the major emerging markets where your potential of a sharp change in economic philosophy of the ruling party in an election happening in the near-term, there is almost no other major emerging market which has this kind of optimism that has been building for few months.
Therefore, today's election result is significant for a couple of reasons. I think people keep talking about the 3.5-0 or 4-0, however, one looks at the election results but I think the more important one is the magnitude of the victory or magnitude of the loss of Congress that suggests some of the fears of a third front in BJP not being strong enough to be able to form a government may start to recede and therefore that helps but having said all that the election is still five-six months away so a lot of stuff can happen between now and then.
So, we will enjoy the rally today and maybe for a couple of days but we have to go back to seeing what comes out, for instance some of your speakers were talking about what happens to some of the electricity promises made in Delhi and these are some of the things that could hurt the power sector, that could hurt banking stocks. So hopefully good economic sense will prevail but it is going to be election season and we will see flow of news over the next few months which suggest that we can take an eye off the ball but it will be buy the dips market rather than sell the rally market. Q: Would you sell into this rally and since you have said that you will not and you will choose to buy into every dip, what are the stocks or what are the sectors that you would look at, at this point?
A: Companies like Larsen and Toubro (L&T) have had huge rallies on the expectation that there is a recovery that is already to some extent maybe starting under the current government and the new government would - if it is a Narendra Modi government, be much focused on infrastructure. So, you already had a big rally and soon stocks like that could continue to rally but I would look at sectors where I continue to remain optimistic whether in the oil and gas sector, public sector undertaking (PSU) like Oil and Natural Gas Corporation (ONGC) or Oil India or it is a company like Reliance Industries.
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The gas price rational decision seems almost certain now that whether the current government, which has been promising to notify on the gas prices or whether it’s new government. I think that one makes too much economic rational for that not to happen. So, that is a sector that has a lot of hidden potential where the stocks have not had a big move.
I think the banking sector could benefit in the short-term but I would like to wait and see to get too excited about how the inflation data over the next few weeks and months plays out and therefore how supported the Reserve Bank of India (RBI) can be, but there is going to be some optimism because financials are one of the ways to express more optimism about the economy and in general domestic oriented stories rather than export oriented stories so that it makes the pharmaceuticals and the IT which have been placed where people have been hiding to be less interesting in terms of relative momentum going forward. Q: Macquarie is looking at 7,200 indexes. Yesterday we had a chartist saying that over one-two years he sees the Nifty at 10,000. I am not looking that far but pre May before the results come in can the ecstasy in the market take it to beyond 7000. What is the number you are looking at?
A: I was being a little more cautious and given that the Fed tapering is ahead of us and given that there is going to be a lot of election related noise, I would suspect that 7,000 is my near term take, some chips off the table level because news flow could on both global basis and on India basis have some near term profit taking at those levels and that would be my level but these are all global factors and domestic factors will drive whether or not we get to that level or exceed that level. I think part of the challenge is going to be what this government does from here to the election.
Do they start spending money and loose budget discipline or do they push forward more aggressively on doing things to help the economy recover and if they do latter then 7,000 may not be a ceiling but if they do a former then we may not even get to 7,000. So, to some extent Congress and this government still have some ability to influence how things go although I assume it’s somewhat limited as we get closer to the election. Q: Is this going to be a secular run on the upside and drag both the fronliner as well as opportunities in the midcaps space as well and if yes then what are the midcap stocks that you would be looking at right now and on the other hand are these stocks that you are recommending a trading view or do you have a shorter term view on them or is it more like an investment opportunity where at every given point in time you buy irrespective of whichever government comes into force? The CNX midcap is down 20 percent from the previous January 2008 high although the Sensex and the Nifty have crossed January 2008 high? Is the rally going to be higher in the midcap space from now till 7000 mark?
A: I think as domestic investors – because foreign investors are not going to drive the midcap rally. So far the reason that you had a largely largecap rally is because it has been dominated by foreign institutional investors (FIIs) and it is time for domestic investors to get their optimism and their mojo back.
If they do get that back which I suspect at this point they will because the domestic sentiment is very much in favour of the BJP government in terms of how domestic investors and I got to view the market and therefore as that confidence of the domestic investors grows, all those who have been sitting out and so far they feel like they have missed the rally are likely to gravitate towards the midcaps and therefore I would say in the midcap there are a number of sectors; there are some companies in the construction space that have been big laggards, there are some leveraged risks there but there are companies in the auto space, whether some of the smaller companies in the auto two wheeler or cement, infrastructure.
I think there are many companies and I would not want to give specific names. I would like to stay away from picking specific names right now but we are looking at a number of midcaps and they are looking interesting.
The bottom line is, the Indian economy has bottomed, it is turning the corner, we are already seeing signs of green shoots in select areas even before the election takes place and if business confidence in India is about as pro cyclical as anywhere in the world that I have seen. So, once you start to get market looking better, businessmen getting confidence about new government, which is seen as more business friendly. I think the whole virtuous cycle can start very meaningfully and if you take medium to long-term view beyond May, the upside is substantial and therefore people who want to make their bets, there are many midcaps that can give doubles and triples if not more over the next three-four years. Q: The US treasury is at 2.83, went up to even 2.92. If it were to go back to 2.92 or 2.93, do you think risk-off is once again there at least briefly?
A: I do not know at what level it would cause it at but as it gets towards 3 percent there is some moderate risk-off that is likely but every country is not getting treated equally and India has a bit of unique story going but that doesn’t mean that there won’t be some profit taking in India. So there is some risk that got towards closer to 3 percent than some risk-off could take place.