Udayan: Two reasons why market bounced back from lows

Equity markets, both locally and globally, have witnessed a bounceback over the past few months. CNBC-TV18 Consulting Editor Udayan Mukherjee, who has been circumspect for a while now, says he is surprised by the momentum."There are two reasons for the global bounceback. Till a few months ago, investors were starting to price in a doomsday scenario [which hasn't played out]. Further, central bank actions seem to have unleashed carry trades," he told CNBC-TV18.On the domestic front, he said there have indeed been green shoots that point to improvement in the economy going forward: auto and cement sales, macro data, monetary policy moves and prospects of an above-average monsoon. But he said investors should not attribute the Indian market rally to these factors as virtually all markets have rallied globally. "The one thing you do is you do not stand in the way of momentum," Mukherjee said, maintaining that the Nifty could well rise to 8,200-8,300 even as he cautioned that there was an "element of recklessness creeping in".Below is the verbatim transcript of Udayan Mukherjee’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: It seems like the Budget was a long time back but it was less than three months ago the market has covered 15 percent from the Budget lows of 6,800 do you get a sense that perhaps there could be more on the upside?A: It is possible because frankly I am also quite surprised at this global momentum because I thought that the market might have worked its way up to 7,600-7,700 kind of levels but the break after that is a bit of a stretch. It is not just India, I mean you spoke about a 50 percent rally, I think from the February lows the Dow is up 15 percent as well and just a whisker away from all time highs, we are nowhere close to all time highs here but the Dow was very close to an all time high and that I think is the core of what has happened over the last few weeks in global financial markets.What happened in January and February is that people were starting to price in a doomsday scenario for global markets which is that the world is heading into a recession, China’s yuan is going to depreciate alarmingly and those factors got priced into the commodities and equity markets. However, I think what has happened over the last one month or so or last six weeks or so is that markets moved to an absolute opposite. The sigh of relief has been so huge that markets now almost seem to be saying that we made a mistake in January and February in pricing these kind of dire scenarios. Now the world is not heading into recession, China is not going to have a hard landing. It may have a slowdown but will manage it between 6.5-6.6 percent and the yuan might drop but will not drop as alarmingly and as fastest as we had thought earlier. Those scenarios have got priced into this 15 percent rally that we have seen in most global markets.Latha: Has it swung the other way, I mean we have seen some very sharp increases not just in our markets as you said but also in say the Russian market, the Mexican markets, a lot of emerging markets have put on a lot of weight. Oil for instance, it rose yesterday when the news was adverse and it rose today when the news is positive. Either ways risk assets are rising so are we heading to a point of euphoria? A: We may not be there already but I think we might be on our way there because if you see the price action in some of the midcaps over the last couple of days, I think many of them are hitting all time highs again. I think there is an element of recklessness in the market which is beginning to creep in. However, the one thing which I have learnt from the market over the years is that you do not question momentum. Whatever your thoughts are about valuations or whether this rally is fundamentally based or not, you do not want to stand in the way of market momentum. I think there are a couple of things which are driving this momentum. One, of course is the fact that in January and February the positioning was extremely short and that has unwound and at every dip you are seeing further unwinding of that very short and bearish positioning which has given this rally a lot of legs. Also, the central bank action over the last few weeks probably has unleashed the kind of carry trades that we were not seeing at the start of the year. This is a beast that probably most of us do not understand very well but these are very powerful impulses, these carry trades that tend to have the genesis in central bank action and in of course in currency movements, the yen and the weakness in the dollar. So, I think that probably is also unleashing a lot of impulse momentum in the market at this point in time. However, I will give you one statistic and that does worry me a little bit because when the Nifty was at 9,100, the Chicago Board Options Exchange (CBOE) VIX, which is the measure of global volatility in the market, was at 14.7. Today we are at 7,900 Nifty, good bit lower than 9,100 where you would have expected much more euphoria but now the CBOE VIX is 13.3 which tells you that when our market was at all time high, the VIX was actually 10 percent higher which means the VIX is 10 percent lower today than when we were at 9,100. So, what I cannot bring myself to wrap my head around is whether the world is looking so rosy at this point in time, sure there is a sigh of relief, some of the pointers are looking a bit better than what they were looking like in February but is it looking like the world has everything going for it and the financial markets have terrific tailwinds globally at this point in time. I don’t think that is the case but the VIX is telling you that there is a lot of complacency which is getting built in because it is actually a lot lower than when it was when the market was pushing all time highs last year and that worries me a little bit. Sonia:  What about the local triggers, do you think there is any fundamentally domestic growth pickup enough to substantiate the rally because at the end of the day that is what leads to an earnings up move and that is what is the genesis of a durable long-term rally. Are you seeing any fundamental pickup at all? A: Since the last time we spoke, I think there have been some green shoots; there is no question about that. If you talk about data points, we spoke about the auto and cement numbers last time around, some of the macro data is also looking positive, slowly but surely monetary policy is on the helpful side for the market. I don’t know about earnings, we will see what happens at the end of this quarter but there is a chance that monsoons will also pickup. So, I think all of this might lead you to believe that there is some improvement and there is some improvement in the data points in India. However, you look at some of the markets, in emerging markets where there have been no improvements in their macro data but markets have gone up much more than India has and that tells you that to see this rally through the lens of improving Indian macro data might actually be a fallacy because bad markets are also going up and sometimes going up more than our market. So, it is good to say that some things are improving in India and they are and we should be encouraged by that but we should not fool ourselves to believe that this is an India specific rally. It still remains very much a global rally. However, I take your point about the improving fundamental data which is come in on India and I think that will be very germane when you look at India stocks because at the end of the day you buy stocks in India. If you think certain high speed data is pointing in the green direction then you probably realign your portfolio to factor that in but don’t get into that groove where you say markets have gone up from their lows by 12-15 percent because of cement numbers, auto numbers or IIP numbers or because the RBI cut rates; I think this is still very much a global blip. _PAGEBREAK_Latha: First tell me how you have read the IT results? Is there more space, now do you see Infosys stealing a march over Tata Consultancy Services (TCS), do you see Wipro getting left way behind?A: The Infosys numbers were good, no question about that. The only argument is that how much of it is in the price already. Infosys has outperformed TCS for quite a while now, so it is not a fresh trade. I think since the last six months this Infosys trade is becoming, or on the verge of becoming a slightly crowded trade. Now everybody knows that Infosys is doing better. It has bounced back and is exuding confidence with its guidance for next year as well.TCS is struggling a little bit with volume growth and probably will make some margin sacrifices. However is that in the price? At a Rs 1,000 is was a cleaner call for Infosys but now at Rs 1,250 to say that we have just realised that Infosys is better and therefore we should be getting in and buy truckloads of that stock I think might be getting into that trade a little late, because Infosys will probably beat the street and record may be Rs 70 a earnings next year.Even if you give it 20 times you are talking Rs 1,400, so Rs 1,350-1,400 I think is probably the roof for Infosys right now which means it is a Rs 100 upside from here on. It is not bad, I am saying there is no downside in Infosys but the upside is probably not more than Rs 100-125 from here on because valuations will probably get capped at this point in time.What has also happened is that in the last one year we have moved on the opposite side with Infosys in building in all these positives into the stock price leaving very little room for error in the event of any kind of courtly slip during the course of FY17. So, I think now it is getting priced to perfection and therefore you should worry a little bit. It may still outperform TCS, it will probably still be a performer and deliver positive returns through the next one year but the easy money has been made in Infosys for people who got in much earlier into the trade. TCS is struggling a little bit. Sonia: ICICI Bank is up 7.5 percent right now, what is the sense you are getting about the banking space. I know you have expressed your caution about it in the past but do you think just because there is momentum going now in the market some of these leaders might take charge? A: They are already leading and that is a familiar pattern of the past that when the Nifty is in a terrific momentum groove, the Bank Nifty actually leads it and vice-versa when corrections start, the Bank Nifty actually outperforms on the way down as well. Of course there is reason on the NPA front, as you mentioned the Jaypee Group which is driving ICICI Bank specifically this morning, but I think the way the momentum is shaping up right now the Nifty has a good chance of going and testing that zone. You will remember that the last time the market had strengthened long time in this zone of around 7,500 which was a bottom for a long time and that zone of 8,100-8,300 which remained a ceiling, every time it went up, it bounced against that but then got pegged back and it found support at 7,500 till it broke and it went down a whole lot lower. I think we are on our way back to test that zone of 8,100-8,300 this time around given the kind of momentum that we are seeing; we are not very far from that, 200-300 points from the Nifty that might be scaled quite easily. My caution is about what happens after that because at that point coinciding with the Nifty getting at 8,100-8,300, the US market will also hit a fresh all time high and then we will get into the month of May which seasonally is not a great month. So, I think the strength of this up move is frankly not about whether we get to 8,000, 8,100 or 8,300, I think the strength of this up move would be demonstrated in the pullback or the correction whenever that happens because you cannot believe that this market will continue to go higher without a meaningful correction. When that correction comes, what are the triggers that precipitate it and whether the Nifty on its way down or the US market on its way down just about does a routine 5-6 percent kind of a correction or for the Nifty for example it goes down below that 7,600 level once again and that would be a deep correction. So, I think that will determine whether this uptrend has much bigger legs than just a two-three month kind of a seasonal up move however strong it might be. I am waiting to see what that correction, when it comes about, what shape and texture it takes. Latha: This is a different play for investors and a different play for traders, what would your advise be?A: If you are tracking the market momentum for the last few weeks which a lot of people have been doing I am sure because you can’t be sitting out of a 1,000 point - 1,200 point Nifty rally, I think a sensible way to approach the market is to build a portfolio largely comprising of domestic sectors where there is some hint that things might be turning around. So, it is easier to look at some of these metals real estate kind of rallies on hindsight and say I missed a 50 percent rally or 60 percent rally.However, that is hindsight, so basically what works in this kind of market is to say that I don’t know what is going to blow up globally and when so I remain extremely cautious and vigilant. However, my equity portfolio is comprised of say autos which are doing well, infrastructure which is beginning to pick up may be some cement companies where you have seen a distinct uptake in demand. Those are local plays which are doing well over the last two or three months according to the data that is coming out. So, you stay with wherever there is some kind of growth or some kind of stability and decent quality in companies.As a kicker to your portfolio you add some risk by may be incorporating something like metals right now because they seem to be flying off given global expectations of stability. Now this trade can go wrong so you don’t want to be putting more than 10-15 percent there. However, if it goes right even for a few weeks it tops up your overall portfolio return quite significantly. However, don’t make the mistake of loading all some of these riskier global plays because the risk are still centrally global for the next few months and quarters. So, you want to be a little underweight on those kinds of trades.Just keep them as kickers to our portfolio return, concentrate on a local portfolio which is doing well and that is sensible way of tracking this market on the way up. As we said many months back you cannot be sitting out of a such a powerful rally you have to participate, but I think with participation you need to vigilant about the fact that this is essentially a global play which can change at some point in time and therefore don’t get into this buy and hold forever, kind of a mode at least just for now.Sonia: If you view is that metals in the near-term could perhaps be something that you can look at then would you also advise buying into some of these bank that have relatively larger exposure to the metals sector?A: They are doing well and as long as you believe that the Nifty is headed higher I think there is a good chance that the banks will outperform. That is already happening. It is not like something which is waiting to happen. So, have to include banks in your portfolio if you believe that the market is headed higher in the near-term. I think keep stop losses, even investors should do that because things change globally. These are different kind of market, in three months you make the kind of return that you can expect in a year or a year and a half and then things change completely. So, you have to have some kind of a tactical approach and that must include banks because they are generating a very good return.On the metals side, I know there is a lot of talk about how China is stabilising and eventually it will drive a metal cycle once again. It may well, so right now the sensible thing to do is to include some of them and see if indeed such things are happening. However, you need to be extremely cautious at the first sign of trouble you should be checking out of the metals counters once again. Just don’t make one mistake of looking at valuations in the metals space and therefore not participating because at this leg of the cycle if indeed we are turning around then looking at valuations is not a good sense at all.Valuations might go up three-four-five times if the cycle is indeed turning. Tata Steel was at Rs 950 in 2008 and we are talking about valuations at Rs 350-400, so valuations can go a long way. You don’t want to make that mistake but you want to be cautious while owning these stocks and if China breaks down for some reason one of these days then you wanted to get out of those kind of trades like metals.