Markets are showing signs of fatigue ahead of key policy meetings from Bank of Japan and the US Fed later this week.
In an interview to CNBC-TV18, Udayan Mukherjee says the correction in the Nifty has been modest.
From mid-February onwards, a lot of emerging market indices have performed well. Largecaps, in particular, have rallied about 30-40 percent during this time and foreign direct investments have come down, says Mukherjee.
“And so there is no harm in taking profits and stepping to the sidelines,” he says.
Global trends will play a key role in deciding how investors react in May — and it would be best to take it one day at a time, says Mukherjee.
If the US Fed takes a hawkish view, panicking won’t help. But worry you must if the Chinese economy turns sluggish or Brexit happens, because these developments would bring back fears that the world is slipping into a recession again, says Mukherjee.
As the earnings season in India kicked off last week, Mukherjee feels it has been a mixed bag.
Mukherjee would buy Axis Bank over ICICI Bank any day. Axis Bank is the best private sector bank, he feels, as its valuations are reasonable, and the management has shown far greater prudence.
Sonia: There is a bit of trepidation in the markets ahead of these global events, the Federal Open Market Committee (FOMC), the Bank of Japan (BoJ) meeting, how would you read into that?
A: The market is showing some signs of tiredness. I don’t think there is any great sign of weakness on the screen as such. Traders who are long, I don’t think there are any panic signals flashing on the screen at all. You can sense some fatigue and that is understandable given the extent of this rally — we have rallied about 1,000-1,100 points in a very short span of time on the Nifty.
At this point, as we can see with a lot of domestic institutional investors (DII) action, people are taking profits, some people are getting a bit cautious ahead of the important events, which are lined up over the course of the week and anyway we are wading through an earning season, so people are in wait and watch mode.
So, the correction has been very modest so far, just about 100 points on the Nifty. So as I said, it is probably more fatigue and tiredness rather than anything more significant than that. But the global events will be very key during the course of the week — what the Fed comes out with and says and how to interpret that because there are short-term and long-term ramifications of what it could do to markets.
Latha: There is this usual sell in May and go away phenomenon and hence the fear that since mid-February a lot of indices have rallied a lot, a lot of emerging market indices have rallied a lot and therefore will it be right for profit taking in May?
A: It is right for profit taking and that is happening in any case because a couple of days back, the market started with a bit of a gap up and almost attempted 8,000 peak and then it got sold into. So I think there is already an awareness that we have come a long way. Individual stocks have rallied, largecap names have rallied, 30-40 percent. We can see that the foreign institutional investors (FIIs) flows have started diminishing as well compared to last month. So everybody seems to be feeling that we have had a massive rally to an extent, I would imagine that a lot of people would can see, it has been unexpectedly large rally globally and locally and therefore there is no harm in taking profits and sitting on the sidelines.
Whether it turns out to be a sell in May and go away or a different kind of May, which basically remains vigilant — during this May, you can take it day-by-day would be more appropriate kind of a phrase to summarise what might happen next month because I think the market is now quite worried that given the strength in global markets and the fact that the US market is pushing all time highs, the Fed might use this opportunity to become a bit more hawkish and if that happens, you will see pressure on emerging markets, emerging market currencies and India might also correct.
My take is that if that were to happen and that was to be the reason for the correction then I think it would be no more than an orderly correction making a sharp pull down but that would still very much be within the buy on dips strategy for a lot of people. I don’t think people should panic if the Fed sounded a bit more hawkish because the underlying principle would be that the Fed is breathing easier about the state of the global economy.
If however, in May the old problems come back to the table which is that the kind of softness that we see in the Chinese market and the yuan offlate that starts festering once again and worries about Britain exiting EU, China becoming sluggish once again and those bring back to the table all those familiar fears of the world going into recession kind of phase, I think that is a far more pernicious outcome for the market and will dent it back far more significantly. So I think if this is a hawkish Fed tone, which triggers off this correction in the market then I think it would be 7,400-7,500 kind of correction if that for the Indian Nifty. If however, the global fears come back in a bigger way led by yuan and China then I think all bets are off and you need to start very cautious about the trend once again.
Sonia: X of some global catastrophe, what do you think the trend could be over the next six-eight months because the view so far is that the rally since the Budget day is a resumption of the bull trend in the market with some minor corrections in between. Would you concur with that?
A: I don’t know how everybody can take a call on that because you have prefaced the question with a big X and that X is the big unknown elephant in the room. You said X of global volatility but this is all about global volatility.
Sonia: I said X of global catastrophe — volatility we all can handle but if there is a catastrophe then all bets are off, right?
A: Of course but catastrophe is difficult to predict so let us not talk about that. I think this trend has a long to do with how this global outcome pans out. As we have discussed many times in the past, it is all fine in the midst of global trend to talk about your own market, its pluses and minuses and arrive at some kind of a trading strategy.
We have had a big global rally and the month of May or the next few weeks will tell us whether this global trend will continue with punctuated by some kind of corrections. If that is the case then we are very much part of an uptrend which might take us higher in the near-term.
However, it does not take long as we have seen for things to change and risk-on to become risk-off. So you need to be very vigilant about what is going on in the global space. The dollar particularly will probably give you a lead indicator of whether bad times are coming or this is just going to be a correction after, which we can see a resumption.
I think for traders who are long India, they should certainly keep their window open for a correction and then the resumption of this rally which can take it to an eventual target of something like 8,300 which we spoke about last time. I think that trade is still on the table but it could change if the global context changes and levels like 7,600-7,700 gets taken out from the Nifty on the way down. This is the time to not panic about the trend, which we have been in but to be hyper vigilant about which way the global wind is blowing because that will determine whether this remains a buy on dips market, or it gets pushed back in to an intermediate downtrend once again.
Latha: I don’t know if you have read the recent Creidt Suisse report and the dramatic change in stance they have taken on the material space believing that the steel restocking can continue for the next three quarters. So for the next nine months, they are bullish on metals in particular steel. How do you rate that metals in particular, buy even now?
A: We spoke about it briefly last time. The kind of trade that we have on our hand right now can be summarised by bad is good. The worst markets are doing the best. How can you justify fundamentally Brazil and Russia outperforming India by such a large margin during the course of the year?
So I think this rally has a lot to do with the under-owned sectors outperforming and because we spoke about how the genesis of the rally was because of ultra-pessimism and under-ownership of many sectors. So now the bad sectors have a good chance of tactically doing much better in the near-term and I would classify commodities or metals in that bad space.
This will not last forever. I have read the report and they are going out and saying that the kind of stimulus packages that they are talking about in the second half will continue to drive the metal cycle higher. Time will tell whether that is a good call. If it is, it will be very handsomely rewarded call because they are buying very low in the metal cycle.
However, I think at this point in time, you don’t want to believe very long-term forecast about the metal space given the kind of problems that the world is dealing with. It is best to look at some of these sectors like metals and public sector banks as very powerful tactical trades, which are playing out because of the terrible under-ownership that they suffered from. So you want to participate in this trade as we spoke about last time but these trades have a good chance of changing at some point in the future.
You were asking about whether this is a resumption of the bull trend. I have never seen too many bull trends which were led by essentially weak sectors like metals and public sector banks. So at some point, I think these tactical trades will end because valuations would have come back to what would be reasonable levels and not those terrible beaten down levels. Then people will start looking for earnings, growth, solid balance sheets, the usual stuff which creates wealth in the longer-term.
So if you are a smart trader, there is a good chance that you should be participating in some of these trades like metals and public sector banks but do remember that these are not great companies essentially and they go into deep bad cycles.