Mukherjee noted that credit issues still linger in the system and we need to be very vigilant over the next 4-6 month to ensure that some of these issues do not blow up once again.
The fall in crude prices, cooling off of the benchmark bond yields and favourable turn of a few other factors has led to a pullback rally in the market; however, we are not completely out of the woods yet, said CNBC-TV18 Consulting Editor Udayan Mukherjee in an interview with Moneycontrol Editor Santosh Nair.
He pointed out how the IL&FS news has simmered down a bit and with it the fear that the NBFC space would freeze up completely. “Now, things have thawed a little bit. Business is flowing, it is not a shut-down mode,” he said, adding, this has led to a sense of relief that maybe the worst is behind us.
Credit issues still linger in the system and right now, he believes, we are in a bit of a salvage mode. “But we need to be very vigilant over the next 4-6 month to ensure that some of these issues do not blow up once again. I am not sanguine enough to say that it is all over behind us,” he said.
Mukherjee believes investors now need to be more vigilant even on good businesses and “to get wedded to certain sectors and stocks may not be a good idea."
“I just want to leave that thought on the table for people who are long-term investors that maybe the world has changed a bit now and you need to have a slightly more tactical focus or a more vigilant focus to your portfolio,” he said.
Q: We have seen a good pullback in the Nifty over the last couple of weeks. Do you think the market may have bottomed out for the time being?
A: For the near term, 10,000-10,100 looks like a fairly stable place for the Nifty from which the bounce back has happened. We are on our way to the 200-day moving average now which is close to 10,800. This is not just because of short-covering. It is also because of some factors which have changed around. Primarily, the fact that crude has collapsed by 15 percent from $86 per barrel to about $73-74 per barrel, that has been a big change for India. Therefore, as a coincidence or as a fallout, we have seen the benchmark bond yield also cool down from 8.2 percent to 7.8 percent. These two were the major problem areas for the market, the way the bond market was behaving and the way crude was behaving. And both have retraced and pulled back very substantially which is the source of this pullback rally that we are witnessing.
Along with that, we saw that positioning had become extremely short in the October series after the major fall in the Nifty and that short positioning has now started to come down as we enter November and long positioning has increased. So the market, in a sense, was very light and therefore, the ability to take on some long positions is still there which is what tells me that the market will probably not find it very difficult to head towards the 200-day moving average.
Now, once we get there, we need to sit back and take stock once again. Because then, many of the shorts will be out of the system and the market would have adjusted for the fall in crude. And then we will have to see whether the global factors allow us to flesh this pullback beyond the 200-day moving average which is the technical resistance. Given that the market will run into election season in 2-3 weeks after that, we will have to take stock of that as well.
So right now, we are in pullback mode. I do not think we are out of the woods completely, but the market is only factoring in some of the issues which have changed around in our favour over the last two or three weeks.
Q: You just mentioned two key factors. One was the bond market yields and the other crude. Specifically, on bond yields, do you see the situation changing any time soon or things have really cooled off there for the time being?
A: Things were very bad for a while and now we have had a bit of a respite because this whole IL&FS news has simmered down a bit, people are talking about providing for it. There was a fear that this whole NBFC space would freeze up completely. Now, things have thawed a little bit. Business is flowing, it is not shut-down mode. Therefore, it has led to a sense of relief that maybe the worst is behind us. Maybe it is. But, to think that things are back to where it was four or five months back, that kind of liquidity in the system, that would be really pushing the case.
We are still in a very tricky kind of situation with the whole NBFC bond market situation. Right now, there is a relief and I do feel that there is some good work which has happened from the regulators and from some of the stronger players in ensuring that we do not have a major credit default situation on our hands. To that extent, people are heaving a sigh of relief.
Now, the point about all of this is that after a bad phase the moment you see the first sign of stability, everybody rushes to say the worst is behind and now everything has got sorted out. That is jumping the gun a bit. We need to wait and see how things pan out. Credit issues still linger in the system and right now, we are in a bit of a salvage kind of mode, but we need to be very vigilant over the next 4-6 month to ensure that some of these issues do not blow up once again. I am not sanguine enough to say that it is all over behind us. All one can say is it is better than what it was two months back. It is improving and we need to keep our fingers crossed.
Q: What is your assessment of the overall macro situation? Going by car and two-wheeler sales for October, the numbers were not all that inspiring.
A: The macro challenges remain. There has been a bit of a respite, but the GST collections are indicating we will have a fiscal deficit shortfall and that means that the government will not be able to spend its way out of trouble and that is a crimping factor for the economy. On the other hand, we might be saddled with more taxes in the next Budget. That is possible because of the GST shortfall. The current account deficit is also an issue. The rupee is not strengthening significantly in the near-term beyond a point. So these headwinds remain.
Now, for the last 10 days, things appeared better because crude is at $73-74 per barrel. For some reason, for any reason, as we saw a few weeks back if crude starts to go on the boil and gets back above $80, all these macro problems which we are breathing easy on today, come back to the table once again.
So macro is shaky, we are going through a bit of a respite right now, but we do not need to celebrate, we need to just hunker down and be very cautious because things are going to be very volatile for the next few months. The macros are still not sorted. It cannot be sorted overnight and we just have to wade through this phase and hope that some big global shock or a crude shock does not roil us again.
Q: So, what has been your assessment of the second quarter earnings so far?
A: It has been a patchy earnings season. At the end of it where earnings for the Nifty or expectations for the Nifty will be brought down once again. There have been some positive surprises like L&T and some of the private corporate banks, there have been negative surprises from the telecom sector. But overall give and take we are still going to have earnings downgrades net-net at the end of the season.
That is not that major point that the Nifty earnings come down in another 2-3 percent at the end of the season. In my book, it was always going to happen because we started the year with 24-25 percent earnings growth expectations and now it has already come down to 16-17 percent. We will end up with 14-15 percent earnings growth for FY19. Already, therefore analysts are looking to FY20 where again they will pitch it at 25 percent and then hope that miraculously it comes together.
So, we don’t have major negative surprises on earnings this time. We have had an up and down earnings season but we haven’t had a howler of an earnings calendar this quarter. So, we don’t need to be despondent about earnings, but we don’t need to be celebrating or be jubilant either. So, earnings are not what is causing the delta in the market right now. The bigger impulse or the bigger impetus is actually coming from macro, will come from politics by the end of this month and it is coming from global.
So, as I said in my last discussion with you earnings are always important over the medium term. But right now earnings are somewhere in no man’s land. It is not great, it is not terrible and therefore it is not causing the next big impulse. The bigger impulses are the three which I mentioned – not necessarily in that order – macro, global and politics.
Q: You just mentioned politics. So, how do see the market reacting, let’s say the results are not so favourable for the ruling party?
A: It is not just one election. You have got three of them – big ones. So, it is a combination of what turns out. The market will be nervous if BJP loses Rajasthan. If it loses Rajasthan, but somehow manages to scrape through in Madhya Pradesh the market will breathe a little easier. Chhattisgarh we don’t know, that is also too close to call I hear.
So, it depends on how these three states actually turn out and the market will basically then have to sit and say, okay between these three possibilities now that we are presented with let us see what it means for the next year’s central elections. So, it is complicated but all one can say is we will know the day the election results are announced and it will be a big day for the market I imagine. But right now it is the recipe for volatility out there.
Nobody knows how things will turn out. But the market is anxious, it is nervous and therefore, it will feed the India Vix as we get closer to the election and the result date and it will be one more factor to contend with. After the results, we will, of course, stock and analyse these numbers and see what it means for 2019.
Q: For the past few months you have been saying that investors should clearly focus on capital protection or rather capital preservation. So, how does one position that portfolio as the year draws to a close?
A: It is a tough one. As I have said earlier it depends on your time frame also to a certain extent because what may work for the next six months may not necessarily be what works for the next three years.
But there is another point which I want to mention this time. The general view in the market has always been that you should buy good businesses or what looked like good businesses and then hold it for a long period of time. That has been the altruism in the market and I am not saying that that should be debunked. But events of the last 6-9 months suggest that you probably need to have a slightly more tactical edge to your portfolio creation these days because things change around a lot. And if you are not responding to how you are looking at some of these changes in flavour then chances are that your portfolio will not do very well. I am not saying that you should stop being an investor and turn to be a trader, far from it, investors will always make more money.
However, to get wedded to certain sectors and stocks may not be a good idea. I will give you a couple of examples as well. If you just look at the start of this year, I am not even going back deep into history and you look at most of the portfolios of the mutual funds and professional investors, you would have found that the biggest top-up load was in sectors like oil marketing companies, everybody had a ton of them, autos – everybody owned almost every auto stocks. And you had some of these private sector banks. Things started changing around somewhere in the middle of the year and now we sit and say that oil marketing has been the biggest wealth destroyer this year; autos, even big stocks like Maruti Suzuki have lost 25-30 percent, forget about Tata Motors which have been some of the biggest howlers and you have seen some of these private banks like Yes Bank, IndusInd Bank absolutely implode.
So, you need to be a little vigilant event on good businesses and when the tide looks like it is turning you need to be making adjustments in the portfolio. So, I just want to leave that thought on the table for people who are long-term investors that maybe the world has changed a bit now and you need to have a slightly more tactical focus or a more vigilant focus to your portfolio.
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