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Retail buyers, MFs are back; midcaps hold promise: Ambit

The local investor appetite has been quite strong in the last few months, believes Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital. According to him, investment is likely to pickup in mutual fund and retail industry and he expects multiple midcaps to see good run in the medium-term.

He, however, cautions about the higher market volatility going ahead.

Mukherjea advises investors to pick market leaders or companies that have well-run business. He is bullish on  V-Guard Industries and  TTK Prestige for the same.

Home improvement theme based stocks could see big upsides, says Mukherjea. He, therefore, expects paints, cement, electricals, plyboards, pipes, sanitaryware to show strong growth in future. He is bullish on Greenply ,  Century Plyboards and  Havells India from the pack.

Among other stocks Mukherjea picks Page Industries , CESC , CRISIL , eClerx , and  Mayur Uniquoters as his favourite bets.

Below is verbatim transcript of the interview:

Q: We didn’t see any foreign institutional investor (FII) buy figure yesterday, in fact there was a sell figure, so, perhaps a lot of local action in the market. What is the sense you are getting about what took place yesterday?

A: Hard to make sense of day-to-day movement but local investor’s appetite in last couple of months has been very strong. There was a recent print that it is the first three month period in a long time, 4-5 years, when domestic flows have exceeded FII flows.

It is clear that the mutual fund community is seeing heavy inflows plus retail investors are coming into the stock market and that is but natural. You are into a fairly strong rally and you are likely to see retail inflows pickup quite substantially at this point.

Q: I know it is not possible to guess day-on-day movement but you would be better at it than many others. Will you be worried that the market is moving without too much of fund buying and a whole 2 percent rally on the indices, does it worry you that equally sharp corrections may come?

A: It is not so much of the level of the index which is worrying me. What is worrying me is volatility. So if you see the volatility index (VIX), I think the Indian VIX is at 1, it is at its lowest levels, I have seen it for the last five-six years and in our profession, volatility is mean reverting.

If we have periods of very low volatility, it is almost inevitable that you will revert to the period of high volatility. That is what is causing us greater concern as to how abnormally calm the markets are. That is usually difficult to sustain, something or the other will emerge to give markets a push into a more volatile zone but it is inevitable almost.

Q: Is it also concerning you that we have not seen any resolution of some of the trickiest problems that confront the Indian economy. Coal is still an issue, power producers are still lying ideal because state electricity boards (SEBs) can’t buy much. Intractable problems surely but now we are four months into the new government; it is not a small time. Does it worry you?

A: To be fair, I don’t think anybody expected solutions just yet but I was expecting the government to put on the table various options. So, if you take say the discom challenge, it is a challenge that we have been very familiar with in India for the best part of the last 20 years.

We were expecting the new government to come with some ideas as to how this can be dealt with. So, the fact that we have no public debate on either the discom issue, food inflation or the banking recap, the complete lack of discussion on these subjects is slightly perplexing. If by Christmas we are no wiser than we are today, we will start losing a bit of sleep about FY16 economic growth.

Q: Would that lead to any volatility in the market because looks like the low hanging fruit has now been picked out? How do you approach the setup from hereon and what could the markers be now?

A: If we look at the Indian market, the last couple of years, especially the last 12 months, have been about huge movements in the index; not just the Nifty but also rapid movements in the small and midcap index.

As the new government settles into the office, it is bound to become much more stock specific. So, we still have upside at the index level over the next 6-7 months but it is modest; 10-15 percent at most at the index level.

You necessarily have to go back to stock picking and go back to our favourite theme good and clean companies, high quality companies, well-run companies with clean management teams, clean accounts and we will go back to stock picking and the good news is there are plenty of small and midcap stocks that will have a good run in the remainder of the fiscal.

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