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Nifty may crack till 8200; buy PSBs for sure: Mizuho Bank

The recent correction in the Nifty is likely to continue and the 50-shares benchmark index is likely to test levels of 8200, says Tirthankar Patnaik, India Strategist, Mizuho Bank.

Speaking to CNBC-TV18, Patnaik says if the market falls to those lower levels then it becomes a screaming buy, despite all the negatives.  

“Earnings are not likely to improve over the next 2-3 quarters, growth is likely to remain weak and in a sense people are also getting a little impatient about the changes that were supposed to happen since May, 2014 June, 2014. But we still have a fairly good macro support for the economy in terms of a very stable currency, rising reserves, low inflation, cost of funds which is fairly high and likely to go down,” he says.

Patnaik is bullish on the public sector banks (PSBs) as he is confident about India’s growth story.

Below is the transcript of Tirthankar Patnaik’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.

Sonia: It has been a slightly tricky patch for our own markets after a phenomenal run last week or rather last year, this year has not gotten off to the best start. What is your own assessment of how things will pan out from here?

A: The long-term indicators are in place. Are we looking at growth going up? The answer is yes. Are we looking at fairly comfortable external scenario? The answer is yes. Are we looking at inflation coming off and remaining low? Yes. Cost of funds going down? Answer is again yes. So, having put all of these in affirmative, what would be that the market is looking forward to be negative? There is not much.

In terms of the market going up over the next 3 quarters, 4 quarters, the answer will be in the affirmative. Having said that, none of the news indicators that I had pointed out were unknown to the market and therefore in terms of new fresh delta that is coming to the market, that is where you draw a blank at the moment. And, therefore, we could see this ‘sell in May and go away’ kind of scenario panning out a month earlier actually. You could see this correction panning out in the next one or two months.

Anuj: Two point question. One is, is the market still showing complacence here? Because, till Friday, the midcaps were still doing quite okay and the volatility index is also not really indicating any kind of fear in the market. And two, do you think this correction could get a bit ugly? We have not had any bull market correction so far larger than 7 percent. Do you think this could be that 15-20 percent correction that we had so many in the last bull market?

A: If you look at the market for the last month or so, you might see a different picture than we have been seeing in the last one and a half years. The market has been on a one way trip with very minor corrections as you rightly pointed out, 5-7 percent kind of corrections. So, the way one looks at it, as the odds of a bigger correction rise, the longer the market remains in this one way kind of street over a very general scenario. Last 15 months or so we have seen the markets essentially move up with only minor corrections. I would say the odds are rising. But are we looking at a very significant correction? I guess the macro indicators that I pointed out earlier in terms of improving growth, low inflation, cheaper cost of funds, strong INR. They preclude a very negative scenario in my opinion.

Sonia: So what do you do at this point then? For a longer-term investor, if you do see some more downsides in this market, do you go ahead and accumulate? And if yes then what are the pockets that you would advice accumulating into now?

A: For a long term investor, the idea is definitely to buy. You get these chances when the market is coming off Rs 9,000 levels, it has gone down to about Rs 8,500. Chances are that it might go to about 8,200 odd levels also if this correction continues. So, for a long term investor these are definite opportunities to buy. And, in terms of what he buys, banks have certainly not done well in this particular calendar year. We have seen the public sector (PSU) bank space essentially getting hammered fairly badly after the third quarter results. So, if one were to pick and choose, one would go after PSU Banks, one would go after non-banking financial companies because these are all going to benefit from the macro recovery.

We might differ on the magnitude of the recovery, whether we follow the old gross domestic product (GDP) numbers, the new GDP numbers, but I do not think we will argue on the direction of the recovery. In terms of asset quality, we have probably seen the worst. We are not likely to see things improve in the next quarter or so but things will going forward, improve. So, I would be a buyer in rate sensitives in general. Whatever that is, local over global, that theme will continue. Of course I am in a position to pick and choose at the moment.

Anuj: We will discuss some more sectors in a bit but first, let us address some more points on the broader market. So far this market has corrected without any kind of outflows from the foreign institutional investors (FII). In fact, on the margin, FIIs have been buying for last couple of days as well. There has been a buy number. Is there a risk that the market now starts to discount a Fed rate hike and we start to see outflows from the equity markets. In which case do you think things could get even tougher from here?

A: My read would be that there are two indicators here. If you look at the Fed assessment of the economy, I guess they have pushed the can, kicked the can a little down the road. So in terms of a Fed hike coming in quickly, those odds are lower. So, terms of the FII caution that we were noticing before the Federal Open Market Committee (FOMC), I guess we have seen some amount of comfort there. Having said that, if you look at the INR in separation, rather than not looking at it as an emerging market currency, you will notice that the INR has been doing fairly, much stronger than the emerging market peers ever since 2013 fourth quarter or so. So, there is a fair amount of performance differential that is built up on the INR in the near-term and if the INR does go back to mean, in terms of going back to emerging market (EM) peer median kind of performance, you might see some kind of FII outflows coming in. Having said that, the external indicators for the INR remain comfortable. The fact that European Central Bank (ECB) has already started its quantitative easing (QE) and it is likely to continue for the next 18 months would preclude the Fed, in my opinion raising rates in the near-term. So, the only worry on FII outflows would be that of an INR mean reversion to its EM peers. Other than that, I do not see any scenario where FII outflows could be severe, anything like we saw in 2013.

Sonia: If you can just give us an assessment of how much the fall in this market could be. Someone was telling us earlier in the week that if the Nifty cracks below 8,000, then he will start to get worried. What would that panic situation be in your mind?

A: My read is that 8,200 would be a place where the market would become a screaming buy. I gather all the negatives, earnings are likely to be not improving over the next 2-3 quarters, growth is likely to remain weak and in a sense people are also getting a little impatient about the changes that were supposed to happen since May, 2014 June, 2014. Having said all that, you still have a fairly good macro support for the economy in terms of a very stable currency, rising reserves, low inflation, cost of funds which is fairly high and likely to go down. So, I guess these factors provide support for the market and I would look at 8,200 as a place where one would definitely see the market stabilizing in a worst case scenario.

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