Will be surprised if Nifty breaks 7550 and moves to 7700: Udayan

Against the backdrop of global volatility, it is difficult to say whether 7000 will be the near-term bottom for the market, says CNBC-TV18's consulting editor Udayan Mukherjee. On the upside, he feels that the Nifty can move to 7500, but the ceiling is 7550.

According to him, markets bounced last week as global stocks were in the oversold zone. For a pre-Budget prop, he advises traders to look into sectors such as roads, agri and perhaps even banks.

However, he says investors as well as traders need to be extra cautious on the long side.Below is the verbatim transcript of Udayan Mukherjee’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: It is a little bit of green on the screen, last week all the global markets put in about 5-7 percent in terms of gains; we did about 3 percent in terms of gains. Would you say the Indian markets have found a bottom at that 6,900 mark at least for the near-term? A: For the near-term, it may well be the case, but I think we should be careful to just call it a near-term bottom because the jury is still out on whether that is an intermediate bottom or a long-term bottom for our market. As I discussed last time with you, it looks like we are in the midst of a global respite that was coming because markets were heavily short and oversold. So I was frankly little surprised to see the market actually do that nose dive and go back to 6,900 again because it seemed to have started then a pullback rally but suddenly, surprisingly it went back, once again it retested that and has come back to 7,200 once again. I think we are still good to crawl up to maybe close to 7,500 kind of levels. In a downtrend you always want to monitor and the key thing to monitor from a trading perspective is whether you are still making lower bottoms and lower tops. So, if that downtrend were to be in place, most of the traders would expect the Nifty to rally up to somewhere in the vicinity of close to 7,500-7,550 but not go on to pierce that on the way up and then probably fail just a bit short of that and turn its way down. That coincides very nicely with the event which is stacked up on Monday. So, I would not be surprised if this rally extends itself globally and locally for another few days. It is just not local and not about the Budget only, even globally you are hearing noises of hope. China is throwing in a few more billion dollars at the problem, there are murmurs that the Fed may not go on to raise rates once again and all of that is culminating into a bit of a global respite. At this point it does not look anything more substantial than that but I think there is still juice left in this pullback rally. Sonia: What should the trader orientation be, continue to be on the long side at least until that 7,550 zone? A: For the moment yes, I think traders would be long and would need to be long for the moment. Now whether till 7,550 or not is a difficult call because I think it is important to understand that despite all the hopes for the Budget, this is still very much a counter trend rally and counter trend rallies have a very nasty habit of ending very abruptly. So, it is good to trade along but I think you need to be very vigilant and careful because you are not trading a trend out here, I think you are trading a counter trend and therefore you need to be extra cautious about when the market might turn against you. So, I don’t know whether this rally will last all the way to 7,550, I think it would be surprising if it pierces that and went on to those 7,700 kind of level. There is a small possibility of that happening as well but my expectation would be that this rally fades before it gets to 7,550, maybe somewhere between 7,400 and 7,550. Now, I am no trader so this is all guess work but in a downtrend you would normally respect lower tops and bottoms so 7,550 for me remains the ceiling for this rally and between 7,200 and the next 300-350 points, it would not surprise me if the rally abruptly ended somewhere on one fine day. Latha: What does one go long on before the Budget? For trading or for investment, should people do anything, they are two very different categories?A: For investment, no but for trading yes because you buy railway stocks before the Budget and they do go up for a couple of days and make you a lot of money if you are a good trader and then you forget about them. I think the same might hold true for some sectors going into the Budget once again. I don’t think the investment case for any sector changes dramatically unless the Budget says something that we are not expecting. So, there are three key expectations from a trading point of view, broad clusters. The two main clusters of course are what might happen in banking, what might happen with infrastructure and the smaller cluster is what might happen with the rural sector which is a small club of agricultural stocks. You should be very careful about which agricultural stock you are buying because some of their balance sheets are broken, some of them are not great managements but there are one or two agricultural stocks which might actually flare up and flare up a lot if there are some positive announcements in the Budget. It won’t last very long because as I said, they are not intrinsically strong stories or strong balance sheets to be backing. The two bigger sectors are banking and infrastructure. I think by the time you get to the Budget, my sense would be that most of the banking rally would have played out already because the market knows more or less what is coming and it will play this banks up before the Budget and if the Budget does not deliver anything extraordinary, I just hope they don’t announce another committee to look into the banking problem and that would be a 10 percent down on that day because market hates committees. Another fresh committee on what might be another new blueprint for the banks but there might be some recapitalisation, some positive noises and you probably should be long on banks right now between now and the Union Budget and maybe till the day of the Budget. After that, I think the green tint will begin to come off. Infrastructure, just be careful of what you are playing. I think roads are good place to be because whatever else the government does it would announce some higher planned expenditure that will feed into roads. R oads anyways are doing well as a sector so I think you are on safe ground there trying to be with some of the better balance sheets in the midcap road space. I think those would give you nice pops before the Budget. So, my preference would be for roads and some of the banks from a trading perspective and agricultural if you know what you are buying, you could probably trade the pop. Sonia: A sector that did very well last week in this pullback rally has been metals. Vedanta, Tata Steel, Hindalco, all up 15-20 percent. Would you expect that to continue, is there any more steam in that space? A: There could be if the global rally lasts. China is up quite a bit, they have announced a USD 25 billion package, globally there seems to be a bit of respite in the metal space. Don’t confuse this with value investing; this whole notion of rallies having arrived is a big trap from an investment point of view; don’t look into it very carefully at all. However, I think as we discussed last time around too that these are such powerful trading bounces that you don’t want to be very sanctimonious and sit on the sidelines, I don’t like the sector and therefore I will not touch anything in the pariah space which is metals and banking. In the market, you are in the business of making money, if we can scalp a bit of gains and step aside, why not? So, you don’t want to take that kind of moral high ground on some of these terrible sectors. They remain terrible as sectors but I think the bounces could be quite powerful and therefore traders will be long for maybe another couple of days. Just as I said earlier, don’t overstay, you are welcome because the pain is far from done in some of these global linked sectors. I think fully that many of these metals, public sector banks will make fresh lows which is the lows which they made at 6,800-6,900 last time around. It wouldn’t surprise me if they went and pierced those lows sometime over the next couple of months._PAGEBREAK_Latha: Going by what you are saying and going by experience of Budgets, we are no longer that kind of a command economy. The Budget, even if there is a capex, is about 1.5 percent of the gross domestic product at best; that is the capex number. Do you think it would be a good idea to sell on Friday or on Monday morning? A: Depends on where we reach by Friday. If you are very close to 7,500 in the next five days and it is completely conceivable that that happens with some global support, I would tend to lean towards what you are saying because as you know that the Budget will not change anything from a durable perspective, it might on the margin play with atmospherics, nudge sentiment a little bit or that but I don’t think what the government throws at the economy, maybe 0.2-0.3 percent on extra planned expenditure, is going to galvanise the capex cycle in any significant way. It will probably nudge a few sectors, lead to little bit of an order book expansion here and there. To borrow Uday Kotak’s words, it will stroke animal spirits in the private sector.  I think this market is suffering from an abysmal lack of private capex and that will not be galvanised by a 0.3 percent announced uptick, not executed uptick in government expenditure. So, I remain skeptical about what the government might do in its Budget, it will try its best and good luck to it, I don’t think it will be able to rekindle the dead capex cycle with a little bit more planned expenditure. On rural consumption, I think the monsoon this time around in general sentiment might be a little bit more important. In any case consumption will pick up a little bit during the course of the year because of all these things which are happening. Hopefully a good monsoon, the pay commission, etc, so, per se I don’t think the Budget is very important. There are just two make or break points, not so much infrastructure spending, etc or sticking to that fiscal deficit number; I know a lot of attention will be on that but they are not game changers for me strictly. The game changers from a positive and negative point of views is that the government surprises on the banking reform plan and they come out with something which is really path breaking and fixes the problem or attends to fix the problem. I am not holding my breath on that but if that happens I think that will cause a more durable rally than this pop that we are talking about. On the way down, in the short-term, this long-term capital gains tax could be a game changer, just from a trading sentiment point of view. So, I think these two could be 200-300 points on the Nifty on either side if they were to surprise; the rest of it is really more ho-hum.    Sonia: I just wanted to get your view on, on what investors should do because ever since this downfall began in October, you have been suggesting capital preservation. That has worked well up until now but what hereon? A: I would still focus on capital preservation because my sense is we are not done with the pain. I would be very glad to be proved wrong. However, at this point, if you get these nice rallies and 6,900-7,500 does qualify for a nice pullback, I would still advice great caution to investors because I don’t think the drama has played out to its fullest extent yet. Latha: I just wanted to scratch that public sector bank point a little more. I am almost sure they won’t appoint another reform committee, I think PJ Nayak Committee report is available and alluded to but there could be some announcement on how to treat bad loans. There are a lot of ideas floating, the bad bank idea is not yet given up though the Reserve Bank of India (RBI) is seriously worried it will lead to cronyism. The stressed asset fund was something Jayant Sinha speaks on and off about but with that Rs 20,000 crore of National Investment and Infrastructure Fund (NIIF) which also is just something they are hoping the sovereign wealth funds (SWF) will invest in, I don’t know how much money that pool will have, there are various plans about how to get rid of some of the chunky bad loans. Do you think anything constructive, I don’t know what constructive idea can come, but that might pull the PSU banks a little further than beyond the Budget as well?A:  I don’t know what idea the market will like but I think the market is intrinsically very leery of any of these plans which have been put forward. I think the bad bank ideas precisely that, a bad idea and I hope that the government does not persist with it because it will be frowned upon buy the market. I have also been trying to think about what the government can do to give the market the sense that it might deal with this problem once and for all. I don’t know whether the finance ministry had the time to weave in these elements because this whole January 15 onwards, the meltdown which happened in markets and the kind of fall that we saw post results in many of the bank stocks, I don’t know whether it was part of the Budget making exercise that the Finance Minister had made some comments from time to time trying to convey that he recognizes the enormity of the problem but whether it is a core plank of the Budget speech or the Budget exercise is something one cannot be very sure about. I think he will allude to an exercise in the Budget and probably mention the recapitalisation plan which probably will be a bit more than the market expects just to soothe the frayed nerves a little bit. However, the longer term surgery, the blueprint might still not be in place. I doubt whether he will announce the contours of a bad bank plan in the Budget itself, if that were to be the solution. However, all of us know that the longer term solution is not just about recognition of the current bad assets and dealing with this problem because this is not a one-off problem that the moment you solve this problem this means that banks become bankable once again or buyable once again. I think everybody recognises that this is a recurring problem with the Indian banking system. It happens every five to seven years with unhearing regularity.I think what will soothe the markets nerve is if the government comes out with a structural and fundamental plan, which aims to stop these problems from happening every five or seven years and for that there needs to be a lot of stuff which is being done on the HR front and banking is all about people. So, unless you address that problem and sort of plug the holes on why these kind of decisions will not be taken in the future, this trading rally that you might see in the banking space will just be that, a trading rally because once you have been stung once, twice or thrice in the past, then you are extra cautious about believing something which is essentially temporary in nature. So, I am at a bit of a lost to understand what the government will do which will suddenly make investors bullish on the long-term about these public sector banks.Sonia: You were mentioning that you won’t be surprised to see the PSU banks and the metals revisit their earlier lows once again. What about the markets itself, do you think this 52 week low of 6,850-6,870 that we saw a while back, do you get a sense that that could be revisited as well in the course of the next couple of months?A: Both from a global and a from a valuation point of view, it would not surprise me at all if we slice through that old floor. However, in what sequence and how long it takes, and in markets you can never be ascertained because at some point maybe one month down the line, we sit and talk and we discuss the fact that globally things have cooled down a little bit and we have taken some measures in our own market which might have led to 6,900 or 6,800 being the floor. In markets you can never say this and put a full stop or draw a line under an expectation.So, things are fluid. For now I would say that it would surprise me enormously, not just mildly if the market did not at least retest and even break the old lows of 6,800-6,900. However, before that, you could see an extension of this rally and I think the reason why the markets are pausing today, is that it has come to the first point of resistance which is 7,250 which is that level which took a long while to break and we are flirting with that level right now. It is completely understandable that the market has a lot of self doubt at this point in time; it doesn’t know whether to break a step beyond 7,250 because it might turn viciously against long traders and therefore traders would also be trading very gingerly around important resistance levels. So, you could see a little bit of to and fro around 7,250. If that level is taken out, then I think you will find a rediscovery of the momentum and the market might extend its canes maybe even up to 7,500 kind of levels as discussed. However, I would not get very carried away because this looks very much like a big relief rally globally and locally. There have been no changes in earnings or policy or global backdrop to suggest that the tide has turned. I know there are breathless calls for a bottom, every time the market goes and bounces off a level, that you would expect here because that is what most people hope will happen but that is still in the realm of hope. So, my call is that there is a relief rally, it probably extends a bit more from here but eventually we will probably have some more pain to wade through over the next two to three months. (Interview transcribed by Priyanka Deshpande)