Stock Market

Rate cut a possibility with 50%+ probability; like ONGC: BNP Paribas

The current market scenario is such that there is global risk aversion and as a consequence, funds are being drawn out of emerging markets and are being reallocated towards developed markets, says Manishi Raychaudhuri, Asia-Pacific Strategist, BNP Paribas. Hence, no large and liquid emerging market can be immune to this kind of volatility, he adds.

While rebuffing the idea that India can rally even if emerging markets fall, he says: “India remains an island, and as a consequence, on a relative basis, I think it would outperform the market complex.”

Additionally, he feels, an interest rate cut on September 29 is a possibility and with a possibly higher than 50 percent probability.

CK Narayan, MD, Growth Avenues Asset Advisors, too feels that the RBI policy can perhaps provide sufficient cheer for the market to go up in the initial part of the month. “I think if we make our way upwards in the month of October toward 8100-8200 which seems quite probable given that we will also be playing for the earnings when they unfold in the second week of October, I don’t believe the market will really go down to break the lows it created in September,” he adds.

Below is the verbatim transcript of Manishi Raychaudhuri and CK Narayan’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Sonia: You said India is the best performing emerging market and it is the best bet, but it will not be insulated from the global slowdown. What is your base case for emerging markets and for India? Will we fall less than the emerging markets or will we rally despite the emerging markets falling.

Raychaudhuri: Your latter case, that is India would rally even if emerging markets fall, that may be too optimistic a scenario. Today, we are seeing global risk aversion and as a consequence, funds are being drawn out of emerging markets and being reallocated towards developed markets. In that scenario, I do not think any large and liquid emerging market can be immune to the kind of volatility that we are seeing.

Having said that, India remains an island, and as a consequence, on a relative basis, I think it would outperform the market complex and when I say that India remains an island, I am really referring to two or three broad macro-economic parameters. First of all, the big uncertainty in emerging markets today rises out of China. India’s linkages in the Chinese manufacturing supply chain is relatively limited. We do not even export all that much to China. In fact if you look at the history of last three to five years, every country in Asia has become more China-centric. Their final exports to China have increased in proportion quite remarkably. For India, it has remained stagnant.

Third, as a consequence of China slowdown, commodity prices tend to go down and this is a well-known argument. It has been made repeatedly. But, I would still make that point that India remains a commodity importer and a big commodity user in this region. And as a consequence most of the macroeconomic parameters we look at, current account and fiscal deficit, inflation, etc. they would actually tend to be a lot better going forward and indeed we are actually seeing the impact in some of these numbers like current account and inflation.

So, on a relative basis, India would be much better off compared to other emerging market peers. But, to expect that India on a standalone basis would move up significantly even while emerging markets collapse, that would be too optimistic to assume.

Anuj: Let us talk about the India market in particular. We have the policy on Tuesday. So, two part question. A: Will the RBI cut rates? Is that your base call? And B: Is it already priced and can it still be a bit of a catalyst for the market?

Raychaudhuri: Even about a week or so ago, maybe week or a couple of weeks ago, we were not quite believers in a rate cut, but now we are faced with the fact that the Fed has not done anything and inflation decline has been much more severe, much more precipitous than we had anticipated. We think rate cut on September 29 is a possibility and a possibility with a possibly higher than 50 percent probability. I would characterise it that way.

Now, having said that, one rate cut of maybe 25 basis points each, this of course, not just the first rate cut, it would be the fourth this year. But, it may not really achieve much as far as cost of capital decline to both consumers and investors are concerned. For that kind of a sustained reduction in cost of capital, we have to see a lot more. I am not saying that that cannot happen. In fact in the near-term, maybe over the next couple of quarters, it may happen because the target inflation rate for the RBI, that is almost certainly likely to be undershot, both in January, 2016, and possibly even in January, 2017.

So, I think, yes, coming back to your original question, a rate cut on September 29 is a possibility, but for that to translate into equity performance and more importantly investment acceleration, we would need more such monetary stimulus going forward on a sustained basis.

Sonia: 7800 on the Nifty got protected this week but do you get a sense that, that could be taken out very soon on the downside purely because of all the big triggers that we have lined up and global volatility?

Narayan: I don’t believe we are going to really take out these lows that we recorded in early September. I think the evidence in terms of the technical’s as well as sentiment indicators were quite substantial at that point, suggesting thereby that we may have definitely put in a significant low. At the worst I would expect it to be retested with probably a higher bottom. However, I don’t believe that we are really going to go down. I think most of the global factors seem to be getting priced in, even the Fed hike can is kicked down the road for about a month. China, I am told is closed for about 10 days. We have Reserve Bank of India meet coming up next week and that should probably provide us with some sufficient cheer to go up in the initial part of the month. I think if we make our way upwards in the month of October toward 8100-8200 which seems quite probable given that we will also be playing for the earnings when they unfold in the second week of October, I don’t believe the market will really go down to break the lows created in September. So, I do think a significant bottom has been formed.

Anuj: That is an interesting point. So, would you say that maybe Monday morning may be a good time to take long positions if traders haven’t done that already and what would be your stop loss for any fresh long calls at this point?

Narayan: Traders have been a bit slow to take fresh positions in this week, A; because we had a little bit of extra volatility, B; post the expiry we are having three days of holidays and a lot of red ink in most of the traders’ balance sheet for this month as well as the last. So, the willingness to take up fresh long positions is still quite limited. Sentiment rebuilding may take a little while so, maybe we have a slow pace start to the next month. So, whether we should rush in with buys right at the start of Monday is a debatable question but the answer is still in the affirmative. I would be looking to build long positions and here I will probably not venture all at one go but seek to build it in different lots allowing the market some breathing room on the downside.

I would probably venture into stocks which have shown some upside traction within the month of September. If you look at it from a sectors point of view IT was a clear gainer and within IT you have Mindtree , Infosys , HCL Tech , Tech Mahindra . These are three-four counters wherein one could probably prospect. Mindtree is within shouting distance of actually pushing up to an all time new high and among the majors it would be the first stock to do so if it were to continue in the next week and any stock pushing to new highs under conditions like this is always a buy in my set of plans.

In the pharma space which is another one where favourite prospecting happens. Lupin is another thing which is shaping up pretty well. Reasonably long correction in few months wherein it didn’t lose much by way of price but certainly kind of accounted for the time aspect of correction and now it seems to be up and running. The news flows starting to get positive in the counter again. I would certainly take a look at Lupin. The other two stocks from pharma space I would probably venture out with some buys would be Strides Arcolab and Aurobindo Pharma, both of which have been pretty steady in and through the declining phase of the market as well. So, these are areas where it seems to be safe to tread the waters right now. Once we have more confirmation we can broad base our set of purchases.

Sonia: What is your call on the banking space. The collapse of the Bank Nifty has actually broken the back of this market. Should we be prepared for more or is it a good time to perhaps buy into the banks now?

Raychaudhuri: The two main issues in the whole banking space are asset quality and capital raising and both these counts it is the public sector banks which are worse affected than the private sector banks.

On the private sector bank side, I personally think that this recent underperformance is actually providing a good buying opportunity for good quality banks, the ones that don’t have a demonstrated asset quality problem. The ones that don’t really have a major capital raising requirement right now.

On the other hand the public sector banks do have a problem. Majority of them do need to raise capital. Possibly about several billions of dollars of capital in next three to five years. Even the asset quality problem is much more pronounced in the PSU banks. Even though they have started reporting larger – versus that is NPLs over the last three quarters or so. I personally think that problem is likely to get worse and if you look at the sector in which these NPL problem is concentrated they are really the metals and mining and power.

Government policy, new project negotiation, new tariff negotiation can solve the problem partly in the power side. But for the metals and mining side that problem for now remains almost intractable. It has got to do with the global commodity price decline and global metal prices declining. China consumes about 50-60 percent of many of these and with Chinese affairs slowing down there is no respite from hard commodity price decline.

So, on that scheme of things our preference would clearly lie for private sector banks. Again, coming back to your original question we think on a selective basis some private sector banks are providing buying opportunity at these levels.

Anuj: What is your call on auto and auto ancillaries? We had Maruti going almost back to its all-time highs after a 10 percent correction and on the other hand, we had that spectacular crash in Motherson Sumi and Bharat Forge . How will your approach these names now?

Raychaudhuri: The spectacular collapses that you talked about, they are related to possibly one company and we know who we are talking about – the emission related concern and the near investigations that are happening in the United States, that has its whole ripple effect across the supply chain. And this is something we are seeing across the world and the Indian component suppliers are not going to be immune to that. So, that is a company specific or supply chain specific issue that we are seeing.

Apart from that, within autos we are also seeing that same demand compression. Urban demand in India is now slightly better than rural demand. So, the beneficiaries of urban demand that is passenger cars, they are naturally doing relatively better and therefore our preference also lies with the four-wheelers.

Now, within four-wheelers, there are some companies which are also correlated with China because they generate 25-30 percent of their demand from China and those companies, they have declined anywhere between 40-45 percent. So, some of those stocks which have declined so sharply, also look kind of tempting to us at this point of time.

So, again, to summarise, we are more positive on the four-wheeler side and within the four-wheelers, not just the market leaders, but also those which have declined very sharply as a consequence of the Chinese concern. So, we will be both sticking with the defensives and be slightly opportunistic here.

Anuj: From your last note I see that you have NTPC , ONGC and Oil India in your value list. Is the list still the same or have you made any adjustments or any changes?

Raychaudhuri: I would possibly change that list slightly. ONGC I think can remain in that list. I would possibly add Power Grid Corporation . I would not really thump the table on Oil India in that context. However, in general I would say that stocks that have relatively safe earnings profile and revenue profile, some of those regulated utilities that I talked about which have a regulated rate of return they would possibly make the cut at this point of time. The companies that have certain visibility about the new projects that are coming up they would also make the cut at this point of time. So, I think on that space one has to be slightly cautious, slightly selective. In fact entire India or entire Asia is now very much a stock pickers story. However there are interesting opportunities there nonetheless.

Sonia: Wanted to ask you about some of the laggards of this market. We have had a big pressure come in on some of these capital goods names like L&T and BHEL lately. Is there any fresh shorting opportunity that you would advice in these names?

Narayan: There is no doubt that these have been under pressure in the last week or two. In fact L&T has been under pressure for more than I think a month or two. I think they are now probably reaching levels where shorting them afresh would not really be a good idea. There may be days of slight bearishness when they may fall a percent or two but I don’t think that really qualifies them for a short. I would rather wait for the market to revive and look for these join up in the rally attempt and therefore shorting is certainly not the way I would go in both these names.

Sonia: If you had to stick your neck out would you expect 9000 first on the index or 7000 first, you don’t have a constraint of any kind of timeframe?

Raychaudhuri: On an unlimited time horizon that question becomes relatively easy to answer. I would clearly place my bets on 9000. I am not saying that this would happen this year or even in the first half of next year. India is a market where the nominal GDP growth is still in the range of about 11-12 percent and that should lead to similar corporate revenue growth and corporate earnings growth. In fact corporate earnings growth on an average tends to be slightly higher than that. So, even if we reach about 12-14 percent, may be early teens kind of corporate earnings growth in fiscal 2017 and 2018 then the market should logically be somewhere around 15-16 time PE and that if you do the simple math calculating backwards, you would possibly see Nifty at somewhere around 9000, may be Sensex somewhere beyond 30000 and so on.

Anuj: You spoke about some of the largecap names but any midcap that you would want to venture into? If the market goes to 8200 or so midcaps should outperform. So, anything that stands out?

Narayan: I think in the midcap area one should probably prospect in the non-futures area, I think that is where lots of action continues. Again the preferred sectors would be something from pharma, FMCG. Two stocks which come to mind, one is Marksans Pharma where I think the layup in the charts is very interesting and I believe lots of fresh money is flowing into that particular stock. It just recently crossed Rs 100 level again this week. I think Marksans qualifies as a buy. I would think 40-50 percent kind of returns if one is having a 6-12 month outlook on this.

The other stock which comes to mind as a midcap would be CCL Products . I think that is another one where recent results have been pretty decent. I would think the market would probably hope for continued good results in the September quarter. I do believe that at about Rs 220-225 CCL Products presents a very good, I won’t say a value proposition but certainly something for growth in the immediate future.