Agarwal said the bulk of bad news have been factored in and price damage may be over. Inflation and interest rate cycle may have peaked out, he said, so banks may lead.
Excerpts from CNBC-TV18’s exclusive interview with Dhiraj Agarwal, CEO of PMS at Motilal Oswal Securities:
Q: What about the market; we have had a good rally from 3,800 to 4,600. What next you reckon?
A: This rally has legs and will continue. It’s not a rally, which would fizzle out in days or weeks but will continue for months. The primary reason for the worry in Indian markets in the last two-three months has been inflation. From that point of view, sharp fall in global commodity prices will remove that fear at least in the intermediate term, which will be good for the market.
Q: So you are not in the camp, which believes this is just a bear market rally, and will probably have another 5-7% upside?
A: The upside remains a bit capped in the medium to short-term. It wouldn’t be so easy for the markets to hit back to the lows. The best scenario for the market in the next few months is a range trade market but at this moment it’s got an upside bias.
Q: What kind of a range would you have in mind if this market does need to spend a while consolidating?
A: 16,500 or 17,000 on the upside on the Sensex and somewhere around 13,500-14,000 on the lower side will provide a fairly good support. That doesn’t mean that if something goes terribly wrong in the next few months we may not see any knee jerk reaction below it. 13,500-14,000 is a good valuation and fundamental support from an Indian perspective. But I am not looking at a narrow range if one sees the broad range, which is 14,000 to 17,000 is quite wide. We have seen that before. In the mid 1990’s where the economy took a long time to readjust after peaking out in 1994, the lows of the market was seen in the first six-seven months of the crash. We spent quite sometime in 3,000 to 4,500 range of Sensex for the next two-three years. This will not be as deep or prolonged in time terms. It will not be multiple years but multiple months. But I do not see new highs coming through very easily neither a big downside.
Q: You are saying that the maximum or the ultimate price damage has happened already now that we have reached a point where we need to do time and get out of this rut?
A: Bulk of the price damage, bad news is in and we need to spend sometime in a range consolidating. However, what might mean consolidation from a market perspective within this range for different sectors or stock might mean different because not all stocks or sectors bottom out at the same time.
Q: Which sectors do you think have bottomed out? Do you think the rate sensitives have bottomed out because they are the ones, which lead this slide, and have leaded this pullback?
A: If one puts that in perspective, for the interest rates to start coming down will take a while but there is a fairly good possibility that we have peaked out. So if inflation and interest rates were the primary concerns, which were hurting the financial sector, the lows are in place. In this rally they have been the best performers. The current rally would continue for few weeks or couple of months. Banking sector would continue to lead and it’s a good possibility. Interest rate cycle has peaked out even if it takes some time to start turning down and the bottoms are in place. One would see some amount of choppy trade from a medium-term perspective.
Q: What about the non-banks; the auto's and real estate. They have also rallied quite meaningfully from their lows. Are you as sanguine as you are about banks on those sectors?
A: Real estate continues to be a concerned sector. It’s a rate sensitive and also benefits from the interest rate cycle. The reason I am a bit concerned on the real estate sector is because it’s a capital guzzling sector. For large capital guzzlers to come out easily, one will see bear rallies and fairly smart bounces along the way. For it to turn for the good, the environment is still not right. So while it’s right to say that the financial and the stock market do forecast the future much ahead in time. It’s probably what one cannot jump and step at a time. The markets might be discounting that the rates have peaked out at this point in time and that’s why some of these sectors including financials are doing pretty well.
But for real estate to start doing well on a sustainable basis, the expectation that the interest rates would now head down is more important. So, real estate is a while away.
Q: How would you approach the broader end of the market now and what are the lessons from history? If this is that phase where the fall has happened and you are basically consolidating and going sideways. How do mid-caps and small-caps tend to perform in this phase?
A: Strong out performance is coming in from mid-caps and small-caps. It is difficult in a range trade market however select stocks will do well. There are two categories of stocks. If one goes back and see the history of the mid 1990’s in a range trading market, either the one which become too oversold do well and hence go deep into value. PSU banks fall into that category which reached valuations of 0.5 - 0.8 times price to book with no insurmountable damage to the fundamentals.
The second category which do well are companies which continue to show strong growth and the companies in the current context of high interest rates environment, the companies which don’t need cash at this point in time. So, one can not club it in terms of which market cap spectrum will do well. It will be more companies specific and sector specific.
Q: Have you changed your view on commodity consumers because they got walloped quite a bit in first half of the year but now that commodities have cooled off? Can one take a more benign view on commodity consumers or too early to write off commodities?
A: I have been a commodity bear for a while. Looking at the economic data which is coming out of the world at this point in time it’s clear that the demand is slowing down and if demand is slowing down historically commodity prices always head down. It doesn’t mean that it happens and at the right time. When you get negative news flow on demand front sometime there is a lead lag effect, which is what we saw this time but the trend is always the same.
However from a point a view of commodity consumers, there are two things to take cognisance of. First is the benefit coming out of reduction in commodity prices and secondly demand for the end products itself. Just to take an example like Maruti or two-wheeler stocks, from a valuation perspective they are great buys at this point. They will benefit from commodity prices coming down etc at some point. However, one might not make too much of money in the near-term because the big kicker will come and the demand starts looking positive again which might be a little while away but there are quite great accumulate stocks at this point.
Disclosure:
It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.
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