We are in a pendulum mkt; consumption under stress: Nilesh Shah

There is no doubt we are on a long-term uptrend but in order to reach there, we will swing like a pendulum, he said. Regarding US Fed moves, he said if the FOMC, which is scheduled for today, gives an aggressive guidance, our markets will correct.

Consumption stocks will come under pressure in the next 3-6 months. It will get a boost by government hopefully providing some tax sops in Budget.

He believes crude won’t remain high for ever. Following OPEC and non-members of the cartel agreeing to an output cut, oil surged recently.

The second half of calendar year 2017 will most likely be better in terms of volatility.Below is the verbatim transcript of Nilesh Shah’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Sonia: First I wanted to start off by asking you about the comments that we got from Bajaj Finance yesterday and today for that matter with respect to the worries that lie in the NBFC space. He did mention that these challenges could continue for the next one to two quarters. How are you positioned on this sector and how long do you think the pain could last?A: I think on the NBFC sector, we are underweight. We are underweight because valuations are pretty expensive in NBFC space. We are underweight because banks flushed with the cash deposited will provide very tough competition to NBFCs especially in procuring new businesses. Third, some of the NBFCs especially in microfinance related business could get impacted on non performing assets (NPA) side because of the demonetisation. If we put all these things together, it is time to be underweight NBFC sector. Anuj: You are sounding a lot more bearish than I know you. Even in our last interaction, you didn’t sound very bullish. What has changed? A: Essentially it is the pendulum market. I am not bearish but I could foresee what Rajeev Jain was talking about that we have to take one month at a time. Market hates uncertainty and today we have two cross currents going into our market. On one side, there is earnings uncertainty. As Rajeev Jain mentioned that I have visibility only for one month and let us take one month at a time, clearly we are living in a very unprecedented time. Corporates, analysts, fund managers, all are trying to decipher future with very limited visibility. Typically in this uncertainty you see prices becoming weaker. On top of it, if this uncertainty was not enough, we have events which are going to shape up over next three to four months. So, between these events and the earnings uncertainty, markets will swing, they will not move in a particular direction. It is a three to four months of pendulum market. Latha: The Tata action today, the Tata Sons coming out and showing the cash as it were, how would investors in all Tata stocks react to this news? A: We have already seen that today’s top four gainer at the beginning of the day were all Tata Group companies. Clearly, with this on-going saga Tata Group stocks had suffered and this kind of cash being put on table by Tata Sons clearly gives confidence to minority investors in Tata Group companies that they believe their companies are undervalued. They probably take out a fair amount of weak holders, those guys who were uncomfortable holding Tata shares would have sold out into this bet and that will now make comfortable guys holding Tata Group shares which is generally boarding well for the prices. So, this show of commitment, this show of confidence by Tata Group definitely gives more confidence to minority shareholders. Sonia: We have seen the market up until now at least take every bad news in its stride and move up higher. What do you see as the next three to six months for this market, do you get a sense that we could continue that longer term uptrend although shorter term there will still be volatility? A: There is no doubt that we are on a longer trend uptrend. However, in order to reach there, we will swing like a pendulum. We will not crash as the pessimistic is predicting, we will not rise like an optimistic is predicting, we are in a pendulum market. For example, on December 14 global markets as well as local markets have priced in 25 basis point rate hike from Fed. However, what if they don’t hike? Then our markets will rally. What if they hike 50 basis points? Both these are extreme low probability but in that case our markets will correct far more and more importantly, what kind of guidance Janet Yellen will give. In December 2015 her members suggest that four rate hikes in calendar year 2016. Till today we haven’t seen one. However, that aggressive guidance spooked the market. It probably pushed China to depreciate their currency and between January and February 2016 our markets corrected 15 percent. They all recovered once the fear of four rate hikes from Fed disappeared. Now, will Fed become wiser of its December 2015 experience and not give aggressive guidance? Then our markets can rally. However, if they give aggressive guidance, then probably our markets will correct. So, there are so many events which can impact market and today it is impossible to predict whether all those events will be against the market and hence we should be bearish or all those events will be for the market and hence we should be bullish. My guess is that some events will be against the market, some events will be for the market and that is why again I am repeating we are in a pendulum market. Anuj: You were pretty sanguine all through last year that we are in a long term bull market and consumption and those financing consumption should do well. Do you retain that view at least? A: Again, for three to six months, consumption stocks will come under pressure. However, my guess is that the consumption activity will get boosted over a period of time. Partly, it will get boosted by the government providing some sort of tax sops in the Budget. They know fully well that consumer is suffering, consumption is suffering, they will give tax incentives in the Budget. Either the expectation of tax incentives before the Budget or actual announcement of tax incentives after the Budget will push the consumption story up. The second benefit which we are going to see is the leveraged consumption. The banks are flushed with cash; they would not know what to do with that money. They are unlikely to go and give corporate lending in a hurry. They will all chase auto loans, housing loans, personal loans at the retail level and this will create consumption maybe in affordable housing, maybe in mid-sized cars, maybe in some discretionary activity. So, these tax incentives in leveraged consumption should give support to consumer stocks over next three to four months but in the meantime they will have to swing. Sonia: The other space that is getting hit very hard is the crude linked companies, paint stocks, tyre stocks, aviation companies. What do you do over here, do you stay away and if you own some of these good quality names like Asian Paints, what is the advice? A: I think on the crude related side, our advice will be to average into this correction. I don’t think so crude prices are going to remain high forever. Today, there is OPEC and non-OPEC cooperation, but in the past whenever such kind of carterlisation has happened, we have seen that members do produce more than what is allotted to them, then they try to sell into black market. More importantly, at USD 55-60 of oil, the shale oil producers from US will be back into business. The last month’s data on rigs which are employed on to the shale oil field, that has grown to the highest level in this year. Clearly the rig deployment gives you confidence that shale production will jump up, if not in December, in January and February. So, you have a cap on the oil prices and my guess is that if the OPEC and non-OPEC countries actually produce more oil than allotted to them under quota, we will see softer oil prices rather than higher oil prices. Not that oil will crash down but it will not rise as the market is fearing right now. Anuj: What is your gut feeling telling you about the market in 2017, do you think we will have a bit of a near term bear market even if we have a long term bull market? A: Again, I will say it is a pendulum market. Let us assume that Fed does not give very aggressive guidance and only raises by 25 basis point. Let us assume that China does not depreciate their currency significantly because of pressure from America, Third, the Budget is good enough and gives instead of let us say 3 percent, just about 3.1-3.2 percent kind of deficit and we see some amount of earnings recovery happening courtesy this demonetisation effect slowing down and the seventh pay commission impact and good monsoon coming into play, if all these events come positive for the market, then we are in a bull run again. However, who knows where the events will be and that is why I am saying it is pendulum market. Maybe it is fair to assume that the second half of calendar year 2017 i.e. June to December 2017, probably will be better than the first half in terms of volatility.