Stock Market

Udayan: What last Samvat’s midcap bull run didn’t feel like it

While frontline stocks were up, on average, a middling 9 percent in Samvat 2072, which ended yesterday, midcaps fared better — notching up gains of about 22 percent for the index.

Still, even those returns would not have been easily coming for a lot of investors. In an interview, CNBC-TV18 Consulting Udayan Mukherjee explained why.

Below is the transcript of Udayan Mukherjee’s interview to CNBC-TV18’s Sonia Shenoy and Anuj Singhal.

Sonia: The weather has improved here in Mumbai, I am sure its exceptionally good up in the hills, but how has the year been for you?

Mukherjee: It is very nice to be talking to you on Diwali evening from the Himalayas. It fantastic weather out here — sunny and cold — and it has been a nice year. The stock market might have been better unless you are in the right kind of stocks. I was hearing some recounting of sectors which have done well. If you were in say commodities or NBFCs it would have been a very special year, but otherwise it has been an average year for equities and it has not been a stocks kind of year.

I think this year the last 12 months really belong to commodities and that’s the star of the last 12 months, either its commodity or commodity stocks or commodity emerging markets like Brazil and Russia they have taken it away over the last 12 months. I think if there is one game in town last Diwali to this Diwali it has to be commodities it’s not stocks.

Anuj: What’s your sixth sense telling you, what’s going to be the big sector to watch out for in this Samvat?

Mukherjee: It is difficult to say as you said correctly if you sit at the end of the year and you pick out 100 stocks and say, this have been the stars and they have gone up 80 percent and 100 percent. Its hindsight, it has not been a bad year, at the end of the day you will have to say that the midcap index was up some 23-24 percent, but I think those are two clusters actually dominated very, very heavily — it was commodities of any kind metals, cement, sugar that basket and the NBFC basket if you take out these two baskets the midcap index and small cap index would have probably returned 11-12 percent, which is not bad but which is not spectacular.

I was talking to Rakesh Jhunjhunwala just a few days back and something he says stuck with me. Because he said I have underperformed this year and it was strange to hear Rakesh say that, because he is so successful as an investor and his portfolio is almost completely midcap and then a man as savvy as him was putting up his hand up and said, I actually underperformed. So when we sit at the end of the year and say these midcaps went up 100 percent and Rakesh tells you that he has underperformed during the year.

It just underscores the point of how difficult it is pick those midcaps, which we tabulated at the end of the year and say they were spectacular performers, so it is very, very possible that a midcap investor last year or over the last 12 months was not in commodity stocks or in NBFCs and then his returns were not very spectacular.

This theme looks much better in hindsight then it is actually to do in real life and that I think is a point which is important to mention and therefore we should mention what the Sensex and Nifty have done over the last 12 months and that is go up just about 8-9 percent and in doing that aside of all the noise that you and I keep talking about, because your job is to talk about the stock market everyday and therefore it seems like so much happened in the last 12 months that crash in February, the subsequent rally before that people were talking about the bear market and now we are talking about roaring bull market.

Actually, what has happened is the market has just tracked earnings. Last Diwali to this Diwali earnings would have gone up 8-9 percent and the Sensex has gone up 8-9 percent, so barring all the noise which has happened in between, basically the message was there was no rerating of the market. The market just turned in what earnings did over the last 4 quarters and that is sum and substance of it.

Sonia: You raised a very valid point that despite the market being up about 10 percent and a lot of stocks doing well there are many investors that are still feeling very disgruntled and have not made a lot of money in the year gone by, what would the advice be to retail investors from this Samvat to next?

Mukherjee: I think the last couple of years have been a little disappointing because the year which preceded it was actually a rocket of a year 2013-14 pre-election period, the market did so well and after that for 2 years the returns have been quite average, but if you look at the amount of money which has come in from the domestic fraternity if you take it from the Diwali of 2014 to Diwali of 2016 if I am not mistaken I think domestic investors through mutual funds have put in about Rs 70,000-72,000 crore into the market, that is USD 10 billion plus.

I think there is a serious amount of commitment which has happened from the local fraternity into the equity market, more in the year gone by then in the current year that we are discussing. I would suggest that having put in this money and having not probably got the kind of returns that people were expecting, particularly after the election result which preceded the kind of rally that we are talking about, it is time to probably stay the course because at this point having been so patient and having gone average lacklustre returns from equity at least from the index or from any mutual funds, you just don’t want to walk away probably before the tide is turning in terms of earnings.

I don’t know what is going to happen in the next 3 months, maybe there is a global accident, maybe we have a correction and I would suggest that that could be a buying opportunity and then 2017 and 2018, hopefully you hunker down and you cash in on the patience that you have shown in 2015 and 2016. That would be my submission that this is not the time to get out and if you do get a meaningful correction in the last quarter of this year, you probably add to positions and then you reap the rewards in 2017 and 2018. I think one should probably approach the market with the sense of opportunity or capitalising an opportunity over the next 3 months rather than despairing and probably trying to cut positions in case there is a deeper correction in the market which cannot be ruled out for any global reason.

Sonia: Is that the view you got from some of the market veterans you spoke to recently like Rakesh Jhunjhunwala as well?

Mukherjee: Rakesh is a perpetual bull and I would be too if I have Rs 10,000 crore running in my portfolio. He has to be optimistic given the kind of commitment he has to the markets – – you cannot have that big an exposure and say, I think things are going wrong. And I am not suggesting for a second that it is only because of his vested interest that he is optimistic, but you will expect him to be optimistic at almost any point in time — except from a trading perspective maybe 3-4 months or 6 months where you take a dim view. But generally you would have to be optimistic with that bigger portfolio.

But that’s not the point I think 2017 the next one year since we are discussing that – – the most important question is in my eyes are twin; one will we finally get the acceleration in the earnings recovery, which we have been talking about. Our voices have gone hoarse talking about it, but it still has not materialised.

We are seeing a very, very protracted and slow and sluggish economic recovery in India, whichever data point you look at earnings included. Now will the next 12 months be finally the turning point of that earnings acceleration that we have all been hoping for and have not had yet, and (b) and very importantly I think the next 12 months are very critical with two important global dynamics which are short term and medium term.

The short term dynamic is that globally people will have to adjust with a higher cost of capital and that is something which is a change after 4-5 years of a very, very low cost of capital globally, that is slowly beginning to change around and that adjustment will need to be made. That is a very important short term adjustment which markets have to made and the medium term adjustment is whether for some reason the US slips into recession kind of mode.

It is not a base case scenario for anybody, but there are some thing which are floating in the wind which suggest that you could have something like that in 2017. Now that is an outlier, it is a risk and if that happens then one would have to moderate once expectations from the equity market, but otherwise the whole game of the next 12 months is between earnings acceleration in India versus an adjustment to the global cost of capital going up and the give and take between the two will determine, what kind of returns shareholders make between this Diwali and next Diwali.