The markets at a crossroads right now. Crude has cooled off but global markets have started correcting. Nifty does not seem to able to push beyond 10,600. What is your view?
I totally agree with you. I am a bit disappointed in the short term because after we went down to 10,000, we were extremely oversold and a bounce was inevitable. We just needed triggers and we got some very big triggers with crude. Nobody could have predicted where crude is today. It is also not seeming to bounce back. It continues to weaken and yet there is a very placid kind of a pullback.
The first level that I would have looked for in Nifty was 10,700. We tested that, again went back and retested 10,000. That is the first hurdle. Any short covering bounce should have easily taken us beyond that. But really it is struggling at 10,500. When I try to analyse what is it that is causing it to underperform in such a big way, the only dark cloud I see is the way global markets especially the US is performing. All in all, there is a bounce but I would have expected more.
You study the dollar index as well as the Dow charts. Is this the tipping point of a bigger correction which is coming? Is that pulling us back?
When I look at the US charts, that is what seems. The Dow is definitely a front-line index. If you start looking below the hood, and consider Russell 2000, which is a smallcap index, you will find that the damage there or the kind of chart patterns that are emerging in the US are not very encouraging.
Look at the Nasdaq also. There are some marquee FAANG names. The way those charts are panning out, makes me think that there is a dark cloud as far as the US markets are concerned. The only silver lining is when I do a ratio chart of EM versus the US, the emerging markets have been underperforming the US for the last 8 to 10 months, right from January. I find that they are at record oversold levels.
On a longer term chart of the EM versus developed markets, we are almost oversold. Underperformance was last recorded in 2002. In last two-three days the US market has been falling and day before yesterday was a big whack, about 600 points and yet we closed positive! So maybe emerging markets may not fall or in case the US goes in for a longer term consolidation, money may flow to the EMs and you may start seeing a recovery. Of course, all this is a lot of conjecture. It is something which I am pre-empting and maybe it is my bullish mindset which is trying to see the silver lining but to sum it up, the US charts are not looking very good. A breakdown like Dow going below 24,000 again could be a bit of a problem.
How are you mapping the dollar index?
It is very spiky. It is a fearful chart because anything above 85 is in a positive or a bullish zone. For the dollar index to start dampening, it will have to go below 85. A spiky dollar index is definitely not good for commodities it has a knock down effect. So it contradictory to my theory that EMs may relatively outperform, but there are some contractions out there.
What would work very well for EMs is oil…
Brent would go to $60-61 level and the WTI would go to around $50-51 levels but the major part has been done, the back has been broken and you should have seen a lot more bounce or spikiness. That is really disappointing me at the moment.
I will take the clock back. When crude was at $60, Nifty was at 10,000-10,500.
I think it is also at 11,000 plus.
Thereabout. We did not plunge from 12,000. The three-year Nifty chart is not a gangbuster. It doesnt show 50% returns. It has been a10%, 15%, 20%.
So, you have good years and bad years.
Small and midcap stocks have corrected, NBFCs have corrected as have the hallowed overcrowded trades. But the Nifty never went up. So the scope for correction was also very less. So if the correction is less, the bounce back also will be less.
But we have had Nifty in an outperforming market. In January or even in April, May or June, India and US were the only markets touching lifetime highs. Relative to the EMs. India was the outperforming, marquee market.
EMs since January have been on a secular downtrend. India had a very good bounce in May, June, etc. We actually went out and made new highs. India fell in September-October. So it is not that India has been a relative underperformer in the EM space. India has been a relative outperformer in this space. Yes vis-à-vis the US, it seems much more dampened.
It is not that we have had spectacular returns. There was this blip in the mid and smallcap index. , you talked about it but how much did somebody capture? More people got hurt than benefited from it because most people came in the last one year and those stocks have taken you back by two years. So net-net, the last two-three years have looked good in spikiness but very few have captured it.
Next three months, next six months, even twelve months, markets will remain volatile. How should one make money, go long, go short or a combination of both?
We maybe in a very large range at the moment. I would say 10,000-11,000 again. It is a 10% range but we could have that kind of move. We are at the mid point, but in this 500-point blip, you will start seeing how sector churns are happening. You are seeing new trends emerge, a case in point is ICICI Bank touching a new high yesterday. I may have vested interest in the stocks I talk about.
Look at the charts of some of your infra stocks, L&T for that matter. I feel that with a good churn, interesting stuff can happen. My pet theme is consumer. The consumer charts are still intact.
The Levers, the Britannias, the ITCs of the world.
They are still very intact.
Which is the strongest one?
Let us not talk about stock because again I have a vested interest in that. What I am seeing is that even in the smaller thousand point ranges, you will have a churn. There will be sectors and themes that will outperform and something will just go off or do nothing for that matter. That is why you would have like stocks at 52-week highs and stocks touching 52-week lows in the same day. That is something we do not see in a runaway bull market or in a runaway bear market. They are all loaded on one side of the spectrum. I feel that you will see that kind of space.
It will be more a question of whether you are getting into the right themes and there are some interesting spaces happening. Specialty chemicals is not a frontline sector. There are very few liquid names but you look at the charts. They have hardly corrected and are all nudging lifetime highs. I guess you will have to play out that theme and that is how you will take it from here.
This divergence that you talked about is playing out within autos as well. Do you see this decline as a buying opportunity in any of the names?
Yes, I think so. Some of these have been extremely oversold and you are seeing significant bounce-backs going ahead. I do not see that you are going to have a runaway bull market. You can have a big range of 1,000 points, a 10% range. Different sectors are going to be part of this. The commercial banks in the private space have very good looking charts. There were themes or sectors that have not been participated in the last 10 years. They are very under-owned. I feel that this could also be an interesting opportunity.
The markets will keep having activity. At the moment, there is good, there is bad; crude is off and that is fantastic. The whole NBFC issue seems to be dissolving slowly. The EM outperformance can come now.
To offset that, you have got a little weak-ish global charts, especially the US and elections, though I think that this whole election thing is highly overrated. Even the politicians themselves fighting elections do not know the outcome. I feel it tends to get very overrated. It becomes a great talking point but it is mostly a case of short-term volatility. I do not think they are going to be trend deciders. Trend deciding is liquidity and liquidity or flows that come domestically and globally. There has been no better case in point than the DII flows that we saw last month.
What will remain weak sectorally?
You are not going to have some outright bear trades but you will find spaces like real estate which are going to remain under cloud. The entire small and midcap space — barring a few stocks which come out with good numbers or which have certain genuineness — is still going to be under the cloud. This is where the breadth is and that is going to be a bit under the cloud.
Look at the three-year chart of L&T. Despite earnings, they have not done much. What are you seeing in chart patterns to have that sense of bullishness and optimism?
These charts are done on the basis of three-year, five-year consolidative patterns. They have come to lifetime highs, disappointed, again come back. Now, they are pushing towards lifetime highs and the interesting part is that they are pushing not when the market is bullish or frothy. They are doing well when the markets are not doing well or when markets are struggling or at best are a bit limp. That outperformance or relative strength that you are seeing in them is the bullishness which you have not seen in the last three to five years.
Over last three to five years, these stocks have gone up because the market has gone up. When the Nifty makes a lifetime high and you are a Nifty stock you are bound to find your share of buyers. But the ability to not fall in this correction relatively and to push to new highs when the market is 4-5% from the recent lows I think that is the silver lining. And importantly that these are actually sector leaders, they just do not represent one stock, they just do not represent one index stock, they represent a theme. L&T represents a theme and that is why you will also see it in a lot of infra stocks.
For five to seven years, consumer stocks have been on a bull run. For cyclicals, the bull run has just about started. ICICI Bank, L&T have just started making new highs. Would you bet on the old timers or would you bet on the new leaders?
I prefer longer term charts and trends. I do not think that just because consumers have moved for five years they cannot move for 10 years or 20 years. I feel it is a very secular and long-term theme. It does not give you excitement.
In HUL versus ICICI Bank, would you go for HUL?
No, look at timeframe. What is your timeframe and what is the level of excitement. I am a fund manager, my job is not to create excitement every day. I no longer do very active trading. I personally prefer consistent compounders, that is my style. Over the years I have realised that is my theme. I am never into the very exciting space and bottoms and tops. If I can compound at 25-30% year-on-year, I am pretty okay.
My only fear with some of these so-called consumer and haloed stocks is that the PE multiples are so expensive that the headroom fundamentally is not there. Would you still bet on them?
Yes I would because I feel that a lot of them will surprise you on the earnings. What looks expensive today can get cheap tomorrow. The function is that earnings have to come. I do not want to take names but I can give you five stocks which always look expensive but you are much better off in those stocks than getting into one stock today, getting into another tomorrow. They look very cute in terms of our Excel spreadsheets but when you go to do it , you realise that there is a lot of challenges in doing that. You are better off being in a longer term compounders.