The markets, which have been on an upswing since March, are in line with global peers, said Tirthankar Patnaik, Market Expert, Mizuho Bank.
Global macro triggers will continue to hold sway over Indian markets, he said.
In banking, while some private players like ICICI Bank and Axis Bank saw mixed numbers in the fourth quarter, others like HDFC Bank , reported good earnings.
Until asset quality issues are softed out, there will be a difference in numbers, he said.
Rural incomes, which have been subdued so far, will increase depending on the monsoon, he said.
Nifty by the end of the year will be in 8300 levels.
Below is the transcript of Tirthankar Patnaik and Ashwani Gujral’s interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal.
Sonia: This week the market couldn’t really make up its mind as to which direction it wants to take but by and large we have been in an uptrending market. Are you getting a sense that that uptrend could be stalled for a while for the lack of any positive cues?
Patnaik: Markets since the recovery in March they have been inline with global peers be it the S&P500 or the MSCI World that we track and that has been not just restricted to the equity space but also in major risk assets. So, we have commodities move up and a number of the emerging market countries are commodity producers. So, that has also seen their stocks move up quite sharply.
India remains differentiated thanks to its better macro positioning, growth numbers are better than expected, better than most of the emerging market peers. The inflation and current account deficit, fiscal deficit these were the issues that were dogging the economy over the last two years, have not been really an issue and are not likely to be issues over the next two years. So, markets are likely to remain differentiated. From near term perspective what would happen is global macro triggers will continue to rule the roost as earnings season at the moment looks fairly good. However as we get deeper into the earnings season you might see much more sobering numbers come in.
My sense is that numbers in Indian market should look better than EM peers. The kind of differentiatedness, the kind of difference we saw in this week should sort of continue.
Anuj: Within banks – which is the largest sector – we again had this bipolar nature. The likes of ICICI Bank and Axis Bank are underperforming while IndusInd Bank , Kotak Bank , HDFC Bank , have started to outperform do you think this bipolar nature is going to continue, this dichotomy that we have seen?
Patnaik: Until the asset quality issues that are dogging the Indian economy are sorted we are likely to see a continued separation between banks in terms of their asset quality. What we have seen this week and the previous weeks has been clearly an illustrative example in this case. So, private banks and specifically the subset of private banks without taking any names that have had reasonably better asset quality numbers are likely to continue performing. So, from a sector perspective you have had PSU Banks space that is looking at roughly 5.5-6 percent NPAs over the next 4-6 quarters and you have private banks specifically that have around 1.5-2 percent or even less kind of NPAs and these are banks that have been continuously performing. We see no change in this scenario really over the next two quarters.
Sonia: What about the auto space because we had a really good run in some of the names like Eicher Motors, good numbers coming in from the likes of Hero Moto Corp etc. Are you bullish on that space and is there more value there?
Patnaik: We clearly see value in the auto space. The numbers in April have been starting off on a very good wicket. We have had numbers from the largest auto maker coming in north of 14 percent. We have also seen overall passenger vehicle sales north of 12 percent. We have seen two wheeler numbers coming in at over 20 percent and part of it can be described thanks to the marriage season that we have, a short marriage season in North India. However overall one would expect two wheeler numbers, tractor numbers to be fairly good in this year and that will largely be led by a monsoon which is expected to be normal after two years of deficient monsoon. One should look at rural wages moving up, rural wage growth has stagnated. It has come in at just about 3-3.5 percent over the last quarter or so. So, we should see rural incomes move up when favourable monsoon comes in and that should augur well for the auto space going forward. One should also see the CV space, the MHCV space, that also did fairly well, one should also see the MHCV space continue to do well going forward.
Anuj: The big talking point this week was Japan and the fact that we did not have any additional stimulus from Bank of Japan (BoJ). In fact that spooked markets first thing Monday morning. How is the global picture shaping up for you and do you think we have headwinds from the global markets which should take the market lower at least in the near term?
Patnaik: View from the BoJ was that they would remain inline with what their counterparts did at the ECB and the Fed which was essentially maintaining the monetary policy view that they had since January. So, from BoJ the market expectation was that given the inimical move in the Yen and the Nikkei since January, since the negative interest rate policy started, the market clearly expected Bank of Japan to provide far more stimulus and a pause there. So, to speak it had a very negative impact on the Yen.
We believe that BoJ would come in with further stimulus probably after another global event which is again very important for markets gets out of the way. On June 23 we have Britain going in for the referendum to remain in the EU or not. While most of the markets or the odds would essentially believe that Britain will continue to remain in the EU, opinion polls are not really so favourable. So, there is a 30-40 percent chance that at least according to opinion polls that you might see a negative outcome there.
We believe that central banks largely would take this into perspective and then keep their stimulus measures or keep any kind of additional measures until after this event trigger is past. So, we expect BoJ to probably provide more stimulus going forward on the Yen. Clearly they would see the Yen weaker going forward which should in turn help some of our companies as well but it will be after this Brexit trigger is past.
Sonia: If you had to put your finger on the pulse of the market and tell us where you see the Nifty say by the end of the year, a lot of forecast have been flying around, most of them have not played through but what is your own expectation, by the end of the year where do you see the Nifty?
Patnaik: Our sense on the Nifty would be largely determined by where earnings growth is going to land up towards the end of the fiscal. At the moment consensus earnings are still in the high teens. We are looking at 15-17 percent growth. Our own sense is that just like FY15, FY16 we are likely to see consensus numbers getting downgraded as we go into the subsequent quarters into FY17. We might end up something like 10-11 percent in terms of earnings growth and that should in turn take the market driven by this earnings growth to about 8300 odd levels by the end of the year. That is where we would say that we might end the year with.
Anuj: That won’t mean too much return from index point of view. It won’t beat the fixed income by a large margin. Individual stocks can still do that. Any particular segments where you think investors can invest right now to beat this fairly sedate 7-8 percent returns?
Patnaik: Market returns may not, this will remain a bottom pickers market. We are in the midst of an extended recovery, we are looking at 7.5 percent growth for FY17 as well and probably well into FY18. Until capacity utilisation improves and gross fixed capital formation improves in the economy we are not likely to see a full-fledged growth, we are likely to see cost of funds come off and consumption led recovery. So, from that perspective there will be certain sectors which will do better than the market but it will be essentially a bottom pickers market. So, from a sector perspective we like auto, that is a sector that we clearly like. Anything related with the agri sector in the medium term should be fairly good. In the rural sector as I pointed out has not been doing well and favourable monsoon should do better going forward there.
Sonia: One of the big stocks of this week was HDFC Limited . It has risen almost 10 percent this week and we saw some really good profit numbers come in – 40 percent growth. Do you see a resumption of some of these heavyweights, the erstwhile favourites likes of HDFC etc and does it still offer value now?
Patnaik: I would not want to comment on specific stocks.
Anuj: Your call has been that this is a market which is going through a near term correction but is in a larger uptrend. So, what are the key markers to watch out for not just on the next weeks point of view but from someone who wants to take a fresh positional trade right now?
Gujral: Clearly we have seen this week that our markets have outperformed which means they haven’t fallen as much as global markets. Markets go through deep correction when almost everybody is in the market. Right now there is so much scepticism, denial – I mean, who is in the market. We first need to have an overbought market in order to correct sharply. This will become some sort of a rule that each time we correct to 20 DMA you buy and you make money. That will happen once two or three times the market reverses from here. But that is still to happen and overall you could have 60-100 points in sympathy with global markets. But more or less it appears that the market is finding key support at 7700. Maybe we could do 7600 but not much more than that. Every day the bet starts from four decliners to one advancer and by the time we end it is almost one is to one. So, broader market is also still holding its fabric fairly well and large cap some leadership is emerging from HDFC etc. So, chances are that at some point next week possibly we could end this correction.
Sonia: If you had to pick out a couple of stocks to trade next week what would be on your buy list now?
Gujral: Last week we had spoken of rural themes. This week financials have done very well. So, I have three financials which are from three categories. First one is Bajaj Finance which has completed its correction. So, clearly ready for a positional buy. Next intermediate rally could carry it up all the way to 8500.
L&T Finance and Holding which came up with decent results in the next rally probably three to six months type of target could be Rs 120-125.
Finally HDFC which has also emerged from some sort of bear market and the next target here could be closer to Rs 1,340. Obviously it is a multi week styled target. So, anybody who enters say, next week should wait for some time before these targets are reached.
Anuj: The problem this week was also IT stocks, when Infosys came out with numbers, hit all time highs. We thought we had a leadership stock and new lifetime highs would be the pattern, that hasn’t happened. Technically, what’s next for the big stocks like Infosys and TCS ?
Gujral: See IT is underperforming ever since this rally started and there was only stock which is Infosys which was trying to outperform. Given the way HCL , TCS etc are moving I think it will be too much to expect IT to outperform from here, but possibly even as a market performer chances are there is some hope of upside. Each times the global markets come down IT index is the one that’s get impacted the most. Once Nasdaq recovers possibly if not outperform, IT has scope to gain from here. The other worrying thing on the market is probably Reliance. It’s getting to it 200 day moving average, so one of these guys IT or Reliance have to push their weight because banks anyway are being weighed down by ICICI , so let’s see next week one of these sectors should pick up.
Anuj: Now once this correction is over, do you think the Nifty would take out this 7,980 zone where its struggled and what are the next targets on the way up?
Gujral: See, we remain below the 200 DMA for the last whole year, since August of last year and now the market is getting ready to get past the 200 DMA, now may be its just about waiting for the first news on monsoon because once that happens clearly a lot of bulls will come into the market, lot of bear will turn bullish once the 200 DMA is sustained, so may be it needs that kind of trigger, but if the monsoon is in place 9,000 should happen within this year and it just needs a global risk on if we are already outperforming once the global markets starts to pick up, we could actually move much better than the global markets themselves.