The market could drift lower, cautions Udayan Mukherjee. According to him, a “dangerous cocktail” of poor earnings, steep valuations, sub-par monsoon forecast and waning of NDA’s “honeymoon period” has contributed to the recent correction.
On the technical side, he feels Minimum Alternate Tax demands on FIIs and India’s underperformance relative to other markets, could be prompting further selling from foreign investors, and aggravating the weakness.
However, he feels one should not chase stocks right now and should rather build a portfolio patiently.
“You want to let stock prices come to you as they have over the last one month. Many of the high quality names have corrected between 15 and 30 percent,” he says.
“That is a classic case of stock prices coming to you rather than you getting anxious about the Nifty going to 9000 and getting into a tizzy and buying stocks at very high valuation levels,” he says.
Latha: Nifty is 10 percent lower since we last spoke or at least since recent highs of 8996. What is the sense you are getting? Are we going to lose a lot more from here?
A: It is possible that we drift lower from here because we have been discussing the fundamental reasons which might have triggered such a correction in any place. I mean they were all in place. We had weak earnings and earnings which were not recovering quarter after quarter that was the fundamental weakness driver. Around it you had very high valuations compared to many other markets in India.
So poor earnings plus high valuations anyways is a dangerous cocktail for the market and around that you had other small irritants like the prospect of a not so great monsoon this time around. Even the new government’s honeymoon period euphoria is also beginning to wane from a market perspective. These four fundamental drivers were acting as some kind of a headwind to the market but what is precipitated this 10 percent correction might have been some technical triggers.
Sometime fundamentals can be bad but you need some technical triggers to just about jolt the market into corrective phase. The minimum alternate tax (MAT) on foreign institutional investors (FIIs) along with the fact that market has been a fairly ranked underperformer compared to other emerging markets, which in a tactical sense, is putting a lot of FII outflow pressure on this market. These twin technical triggers might have brought about the correction which was fundamentally overdue in any case.
Sonia: Is this an opportune time then for retail investors to jump in and buy some of these good quality names or given that we might see further weakness in earnings there are still some negative global triggers to play out, you can get better opportunities in the months to come?
A: I would hesitate to say jump in. However, I would say that you might start getting your feet wet. I would say the same thing that I said about a month back to you that this is not a phase where you want to chase stocks. You want to let stock prices come to you as they have over the last one month. Many of the high quality names, you look at the Nifty or outside the Nifty, have corrected between 15 and 30 percent – that is a classic case of stock prices coming to you rather than you getting anxious about the Nifty going to 9000 and getting into a tizzy and buying stocks at very high valuation levels.
I still think we are in that phase where you want to patient when you are buying. Yes, to answer your question in short I would look to be a buyer in this correction but you want to be a little tactical right now given that you are not feeling terribly left out. This is a phase where stock prices are giving you opportunities so you don’t want to rush in and say I need to buy today otherwise the Nifty will be at 9500 tomorrow. I think the chances of that are fairly dim and therefore you want to be patient in building a portfolio. So, yes, you need to buy but you need to buy slowly and patiently and not jump in and buy because the market will run away from you tomorrow.
Latha: The IT space, when that dip comes will you buy IT, will you advise IT space buying at all or are all the numbers all of which were unnerving below street estimates telling you something about the sector?
A: It is a difficult call admittedly because in the near-term I don’t think the market is feeling very bullish about the IT space. So in the near term there is underperformance. Keep in mind that stocks have corrected already. Most of the largecap IT names are down 10-12 percent post their earnings. These stocks usually don’t correct 30-40 percent; they trade in that valuation band of 15-20 times. When things are not great they will drift down to 14-15 times, when things are good they will go up to 19-20 times but broadly they don’t have the kind of volatility that you associate with a lot of other sectors.
These are very high quality businesses so it depends on what your risk appetite is. If you are a near-term tactical trader maybe IT will give you a little bit more grief in the near term. However, if you are the sort which wants to basically buy good businesses when things are a little rough and you want treat them as annuity kind of businesses and ride them over a three to five year period then the next three to six months – not even six months I think the next one to three months might be a good time to accumulate some of these high quality names.
When you look back after three years you will find that this phase might have been a rocky phase but on hindsight it would turnout to be a good accumulation phase for high quality business like them. Over a period of time I still think you will make money from IT but one to three months it might just give you a little bit more pain.