Watchword for mkt should be caution, not aggression: Ambit

While being particularly positive on no particular sector, Mukherjea said he saw select opportunities in road construction, manufacturing goods exports and the urban consumption theme.

Below is the verbatim transcript of Saurabh Mukherjea’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: The big event or is it big that is the question everyone is asking, right. Now that the overhang will be out of the way do you think that this will just be a non-event for the markets and the market will move up higher post this?A: In our country, we all love specific events. We have got an obsession about elections and how they will the move the market. We are obsessed about our own monetary policy and increasingly we are obsessed about the Fed’s monetary policy. However, the way I have read this is, this has been telegraphed so far in advance and the general trend of American monetary policy has been flagged so clearly that this is more a sort of moving feat. This is a moving event and I don’t think one day will radically change what is happening. What is happening is reasonably clear over the last year, year and a half we have seen risk assets of all sorts selling off. So, whether it is commodities, whether it is emerging market equities, hedge fund inflows, emerging market equities inflows. What is happening is as American monetary policy gradually normalises risk appetite in that country is gradually diminishing and that is leading to a sell-off in risk asset classes from the entire spectrum from commodities to equities to junk bonds. I don’t think one day will change that. I think that journey will continue through most of the 2016. Specifically for India, it will make foreign institutional investors (FIIs) more likely than net sellers of Indian equities and hence our market will become an increasingly dependent on domestic inflows to see some buoyancy. I think FII equities as drivers of the Indian market will become something that will be gradually forget as the years go by. Domestic inflows will have to be the main sources of support for the Indian stock market.Latha: Therefore how should a stock investor or fund manager approach the markets? Are you saying that what we are seeing now and we are seeing a bright green paint across the emerging markets (EM) – Taiwan, Korea, Hong Kong, Shanghai and Nikkei as well but of course not EM, all of them are up 2 -2.50 percent today. There seems to be an indication that the uncertainty will be out of the way so celebration at least for the moment. For India itself do you see this only as a minor relief rally which will get sold into?A: This has two parts to it – one is monetary flow story which I was just describing where the flow of funds from US central bank into our country gradually abates and as the flow of American hot money into all sorts of, abate risk asset class is staged a pullback as they done over the last year and as I think they will over the next 12 months as well that is the monetary part of the story. The real economy part of the story hinges around China where the drag in the Chinese economy and the slide in the Chinese currency which I am fairly confident will continue, the Chinese will have to continue devaluing the currency in order to re-gain economic competitiveness. The drag in the Chinese currency will exert meaningful economic pressures across the emerging markets landscape. So, let us hope we get a few more days of green here and there to break the monotony. However, by and large the Chinese economies downward drag will be felt even on our economy. We already have high import duties on steel; we are coming up with import duties on tiles which gradually try to build an economy which tries to buffer itself from the downturn in China but it will be difficult. Overall for those who are approaching equities I would say the watch word has to be caution rather than aggression.We are in an economic environment where earnings growth has been very difficult over the last six quarters. I think earnings growth will stay difficult. Earnings growth in the Indian market will be hard to come by over the next six quarters and hence you are largely focused on stock picking. High quality well run companies will have to be the focus of stock picking. The overall market is not going to run away anywhere particularly quickly.Sonia: Since you have referred to stock picking let me talk about some of the stocks that are in the news and as of now everyone is talking about Mahindra & Mahindra (M&M). The Supreme Court verdict on banning of registration of diesel vehicles and stocks like M&M could get hit really hard. How do you approach a space like this where one man’s pain could be another man’s gain? So the demand could shift to petrol cars there by perhaps positively impacting names like Maruti Suzuki?A: I won’t comment on M&M specifically for compliance reasons. However, the overall tone and tenor of the discussions I have had with the auto industry over the last six months is reasonably clear-eye. The auto original equipment manufacturer (OEM) were expecting a degree of pressure to move to lower emission engines and that journey towards better quality diesel engines, engines which lower emission in the auto industry will accelerate on the back of everything that is happening in Delhi. I also think the oil marketing companies (OMCs), the oil refining companies will come under pressure to look at the quality of the diesel they are putting out. Whilst Delhi is front in center because it is the capital city and it is clearly in bad shape from air quality. There are several towns north of the Vindhyas, several towns in North India which have serious air quality problems. So, Delhi might be the city we hear about the most but it is not the only city. There will be at least 10 other large cities in our country with serious air quality issues. So, this matter is not going to be a one day issue. I think this is a fairly serious issue it will stay with us. We will need to move towards cleaner engines and we will need to move towards cleaner fuel. I don’t think that those pressures will go away. It obviously will have a bearing on the auto industry and also on the oil refiners.Latha: I want to persist with where you would hide or where you would invest over the next 12 months. I read one of your earlier reports where you see an earnings recovery only in the second half of FY17? Where do you hide till then? Is it going to be drugs and pharmaceuticals, is it going to be IT?A: I don’t think there is any sectors where in totality the sector will give you storm shelter. It is very stock specific. Just to take three themes which I think have worked in the last few months and I think will continue to hold up reasonably well. It is reasonably clear that road construction is the one facet of infrastructure where the government has been able to give a meaningful impetus. So, government money leading to road engineering, procurement, construction (EPC) seems to work in our country. I think we will see a lot more of that in the next 12 months. Hence, well run road companies well run road EPC companies should be a feature of discerning investor’s portfolio. So, Sadbhav Engineering I would classify as the premiere road builder. Their EPC side it is an efficient operation and they also own 15 roads right in the heart of the country which should do well as and when they economic recovery arrives, so roads is a sector I would look at. The second area where there is reasonable grounds for optimism is the rupee weak. I think it will get weaker. Interest rates are down they will fall a little bit more. More generally our manufacturing export sector will become more competitive in the coming year. I know we got a horrible run on manufacturing -- 13 consecutive months of shrinkage in manufactured goods exports. A shrinkage in exports in totality but I do reckon manufactured goods exports will make a comeback next year. There is a gamut of players to look at – we cover TVS Motor, we cover AIA Engineering. Let's take PI Industries a specialty chemical manufacturer; 60-70 percent of revenue coming from exports to global chemical major such as Bayer, Dow Chemicals. High revenue visibility well run company, good balance sheet, good cash flows. Stock has come off a fair bit in the last three months. I look would at a company like PI Industries to play India’s manufacturing revival which I think will come and in a way, in effect as to come. We are not going to create jobs any other route really. The third theme which we are looking at quite carefully, it is a little fragile at the moment is this urban consumption recovery. As crop prices, as minimum support price (MSP) stay under pressure, as things like the Pay Commission click in, as fuel prices throttle off, interest rates fall a little bit the urban consumer will have a little bit more money in its pocket and he will spend a part of that and hence we are looking for plays around that. We have been buyers of Trent; we have been buyers of Titan for a while. I know Titan is in the news for the wrong reasons today but I think well run retail players like Trent and Titan are worth looking at as urban consumption centric plays.These are really few pockets I can look at but on honesty if I had to look at India today I wouldn’t be able to give you more than a dozen names where I could tell you confidently these are worth buying these are sensibly valued well run companies. It is a very difficult landscape for stock picking but stock picking I believe is the main way to deal with the current situation. Latha: I didn’t notice a single finance stock? Are you moving out of the Axis Bank and ICICI Bank if you already have them?A: We have been sellers of ICICI Bank for the best part of 11 months now and with everything that we are hearing about the Q3-Q4 banking result season, all the discussion around 130-150 new non-performing assets (NPAs) our concerned around banks is heightened. So, ICICI I would say symptomatic of the challenges facing the Indian banking sector where barring a two or three banks everybody else has rotten apples in their balance sheet. It is just a matter of time when they announce the rotten apples to the rest of the world. My hunch is we are moving to an end game in the banking sector where the rotten apple will get announced over the next 3-5 months and hence my gun-shy attitude with regards to the banking sector.