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Bank Nifty may break key support, drag Nifty lower: Ambit

In the latest correction that took place over the past 15 days, the Bank Nifty has under-performed the Nifty, a move that has made traders worried over whether the sector that has led most part of this bull market is under strain.

In an interview with CNBC-TV18, Gaurav Mehta of Ambit Capital said that the Bank Nifty was perched above an important technical level – which stood at 18,800 – but he expects the barrier will break.

“You should be looking for further downsides on the Bank Nifty. It should take the Nifty lower as well,” he said.

Below is the transcript of Gaurav Mehta’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.

Anuj: Nifty and Bank Nifty, how are two positioned right now because we have seen the Bank Nifty correct 10 percent from the highs, the Nifty corrected about 5 percent but the Bank Nifty has been the leadership sector?

A: Banks are supposed to be the barometer of markets both in up trends as well as down trends and one telling sign that the market was looking near-term toppish was that in spite of the second rate cut by RBI Governor Raghuram Rajan when the Nifty had gone up to around 9100 odd, Nifty had made a fresh high yet Bank Nifty had failed to take out its highs that it made in January this year. So, from that point of view banks have been the lagging part of the market for at least one to one and a half months now.

As we speak today, they are poised at a very strong technical level at about 18800. However, our expectation is that given nothing has materially changed on the ground, corporate earnings tend to stay weak, credit demand is hardly picking up our sense is that 18800 barrier on Bank Nifty will go and you should be looking for further downsides on the Bank Nifty.

As a result given that the Bank Nifty has lowered that should take along with it the Nifty lower as well. So, the current up move to us looks like a relief from the correction that already started about a few weeks ago.

Ekta: If you expect lower levels on the Bank Nifty and 18800 is what I heard you say where do you expect the Nifty to go, what is the downside risk at this point in time and maybe even the near term range?

A: 18800 is a good support on the Bank Nifty and if that were to hold then you should expect the Nifty also to hold levels closer to 8500. So, 8500 on the Nifty and 18800 on the Bank Nifty are near-term supports. However, in the event of 18800 breaking on the Bank Nifty even the 8500 floor on the Nifty might not hold and in which case levels closer to 8000 are a real possibility. However, all of that is contingent on the 18800 on the Bank Nifty whether it breaks or not.

Ekta: And the range on the Nifty?

A: 9100 stays the upper cap for the Nifty but just to put a context to it from a structural point of view we are continuing to be very positive on the markets. So, from a 12 month point of view we are still looking at 15-20 percent upsides from the current levels.

What I am talking about is more of a tactical correction and tactically it doesn’t look – for example over the next two or three months before decent correction there should be any meaningful upsides; that looks unlikely.

Anuj: You have initiated a long on ITC , now that has been a rank underperformer so what leads to this kind of outperform rating?

A: ITC ever since the huge volatility that you saw on the Budget day, it has been coming in one direction which is down. However, at about Rs 330-335 range ITC for the last 12-13 years it has followed a very strong long-term up trend and that up trend now continues to support the stock at about Rs 330-335. So, in the base case we do not think that that support region in the Rs 330-335 range should go.

So, as a result it is very close to a very strong, almost a decade old, more than that long support. From that point of view this is a great time to be accumulating that name and especially given my view on the markets if you were to see a correction overall in the markets from the defensive space after the correction it looks like a reasonably priced largecap stock which people might want to move in for safety.

Anuj: What explains this buying inflows into mutual fund but selling from the insurance companies? What does that indicate from the retail perspective?

A: If you look at the overall domestic figures, let us say from the day Prime Minister Modi came in in May of 2014, you would see that the overall number looks a little negative and as a result you would tend to think that perhaps there is selling from the domestic side.

However, if you exclude the mutual fund figures from that, the mutual fund figures overall have got something closer to Rs 40,000-45,000 crore. So, that is about USD 7 billion of inflows that have come in through the mutual fund route. That clearly suggests that retail money is moving towards equity.

Over the last four or five years the real interest rates were negative and hence the logical trade to take was to buy real estate, to buy gold. However, since Raghuram Rajan came in, real interest rates have become positive and hence it is natural for people to move their money into financial assets like bonds and equities and that is the move that is happened.

Why are insurance companies selling? I think there can be ‘n’ reason for that but the clear point is that the retail investor is indeed coming back to this market and for us that is going to be a big theme not just for this year but for the next two or three years and that should keep equity valuations supported.

Ekta: You have three other stocks that you have a call on – Cipla , Canara Bank  and Infosys ?

A: Infosys faces a very strong long-term resistance at about Rs 2300. We are sellers on the name fundamentally. As a relative value trade you could rather shift to Tech Mahindra as I mentioned earlier from Infosys. So, that looks like a good trade to take at this juncture to us.

On Cipla our call is predominantly very tactical, very short-term in nature. 5-10 percent decline from here at max but from a longer term point of view it looks like a good story.

On Canara Bank, that again fits into the view that banks have been a lagging sector in this market and our expectation is that that should continue to stay underperformer for the next few weeks at least. From that point of view given the weakness in Bank Nifty one stock that looks especially weak technically is Canara Bank. So, a good point to use this up tick today to short banks and Canara Bank as well.

Disclosure: I would have recommended most of these stocks to my clients. Me and my family might hold a little bit in Tata Steel.

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