It was a touch week for the Indian markets with Nifty and Sensex slipping 4-odd percent. But there was silver lining in this chaos and that being the 8000 psychological level was protected on the Nifty.
Additionally there is fear that there will be flight of capital from emerging markets due to the rise in bond yields in Germany and the US.
But Sanju Verma of Violet Arc Global Managers begs to differ. She says: “Nobody seems to have realised that this time around the rise in bond yields has less to do with any rise in inflationary expectations or growth coming back because growth is still in the doldrums in the US. This time it has more to do with the risk premium pertaining to deflation having come down.”
Jai Bala of 1857 Advisors on the other hand says the sentiment towards India is one of the lowest at the moment. So from a contrarian perspective, it is a positive. He explains: “We had put in a possibility that Nifty at 7,997 was a very significant low, but there was a 10 percent probability that that low could go. In the event that it goes, given the sentiment is low towards India, the probability that it goes much lower is very low. So, it is not going to go much below, it is probably going to hold above 7,800.”
However, from a long-term perspective, Bala says the structure for India is still positive. Also, he adds that with the Chinese market becoming frothy, ‘money out of China is good for India’.
Below is the edited transcript of Jai Bala & Sanju Verma’s interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.
Sonia: What is the sense you are getting about the market itself? Are we in for some more rough times and do you think 8,000 could be protected or is it just a matter of time before that gets taken out on the downside?
Verma: Speaking of the markets, there are two very important variables that need to be accounted for – one on the international front and another on the domestic front. Variable on the international front that has been spooking emerging markets including India.
The general consensus view is that with the rise in bond yields in Germany and in the US, risk aversion is back and that basically means that there will be a flight of capital from emerging markets.
Nobody seems to have realised that this time around the rise in bond yields has less to do with any rise in inflationary expectations or growth coming back because growth is still in the doldrums in the US.
The general consensus is that even the 0.2 percent gross domestic product (GDP) growth, for the first quarter of calendar year in the US, is likely to be revised downwards to a contraction. You are welcomed to basically empty malls and emptier showrooms. The sell offs in global bonds and the rise in yields basically has less to do with the rise in the risk premium pertaining to inflation.
It has more to do with the risk premium pertaining to deflation having come down. So, I think as Bill Gross of Janus put it very succinctly – this sell off in global bonds and the subsequent rise in the yield is nothing more than a momentum reversals because perennially till kingdom come for the last 2-3 years we were investing in bonds as a safe heaven so the law of averages had to catch up at some point.
There is not going to be a flight of capital from emerging markets because situation globally particular in the US is pretty bleak. A couple of months back I had said that I don’t foresee any interest rate increases in the US. My sense in speaking to some of the global fund managers there who manage large chunks of money is that before there is a rate hike there could actually be small rate cuts given that even the second quarter GDP number in the US is not likely to better than the 0.8 percent.
For everyone who is being routing about the fact that unemployment in the US is at 5.4 percent they seem to have forgotten that retail sales is the single biggest indicator that the Fed takes into account and December 2014 to March 2015 retail sales were down between 0.6-0.9 and April it was static. So nothing much is happening on that front so there will be no rate increase and to that extent emerging markets are safe.
Sonia: Do you concur with that view, technically that emerging market equities will continue to be relatively perhaps a better game than some of the other markets and within that what is your own view on how India will perform?
Bala: The sentiment towards Indian markets that we track in a global macro is one of the lowest. So, that is actually positive from a contrarian perspective. There have been many markets that have been falling since March, but the sentiment towards India is one of the lowest.
So what that tells us is that, we had put in a possibility that 7,997 was a very significant low but there was a 10 percent probability that that low could go. In the event that it goes, given the sentiment is low towards India, the probability that it goes much lower is very low.
So, it is not going to go much below, it is probably going to hold above 7,800. But from a larger timeframe perspective, the structure for India is still positive and when you are talking about emerging markets, China is looking very frothy.
We call this, in technical terms, as a wave five of a five. So, when that happens, it goes through a significant reversal. So, it could even work with the thesis that money out of China is good for India. But the structure for India is positive and there are a lot of structural negatives in the emerging markets which are looking fearable for India.
Ekta: One of the significant things this week was that the Bank Nifty broke 18,000 very decisively. In fact, broke its 200-day moving average as well. It closed at 17,500. how significant a level was that for incremental weakness on the Bank Nifty, according to you?
Bala: That was an important support. But as long as the May low holds, the probability of the markets getting higher and surprising everyone is still there. But as long as the important factor for Bank Nifty holding up is SBI not closing below Rs 255. It barely closed above that this week.
So, basically, we are looking at very important supports for Bank Nifty as well as the Nifty. It is holding above the May lows; as long as those hold, the probability that, we saw a very significant low in May is still on. But, the odds are still receding. Be a bit cautious in the market.
Ekta: One of the big sectors that were in focus this week was the entire FMCG space. How have you read the news on Nestle as well as ITC where there was that news about the loose cigarette ban in the state of Maharashtra possibly coming through?
Verma: Given that most of these FMCG players have 30-40 percent of their sales coming from rural areas, I will not specifically comment on Nestle or ITC . Between the two I like ITC.
While the results for the fourth quarter were nothing much to write home about, the interesting point is that despite a 14 to 15 percent fall in volumes, the revenue growth was still static.
I had anticipated the revenue growth to actually inch several notches down which did not happen but personally speaking there is so much to choose from within the FMCG space that you really don’t have to get into controversial stocks like ITC or Nestle.
If I have to look at the pecking order, it would certainly be some thing like a Dabur , an HUL , a Marico and an Asian Paints perhaps in that order.
One very interesting point which needs to be brought home is that in the fourth quarter the volume growth for some of the biggies surprised on the positive. Be it an HUL, which had a volume growth of six percent or Dabur, which had a volume growth of eight percent. What increasingly tells you is that demand is slowly but surely coming back and the reason why the top-line growth was muted.
Despite of volume growth of six percent, you only saw a sales growth of 9 percent from HUL and a ten percent sales growth from Dabur. That is because companies chose to be discreet and smart. They passed on the input cost deceleration on to the customers and did not get greed in terms of raising prices, which was also reflected.
The input cost fall was reflected in margins expanding by between 80 bps to 120 bps for all key players within the space be it HUL, be it Asian Paints, be it Dabur with the sole exception of Marico which saw a small contraction in margin.
So, my point is that FMCG does look interesting and for all those who are screaming their lungs off that rural demand is just not picking up, people seem to have missed the point that if you take the April inflation print and read in between the lines, rural inflation actually came in at 5.37 percent more than the urban inflation at 4.36 percent, something which was amplified by Marico’s numbers where the rural growth was 24 percent year-on-year (YoY) whereas the urban growth for some of their products was just about 18 percent.
So, rural growth is coming back into the system but it will take a while before it becomes more visible and more lumpy. So, FMCG is something that I am surely betting on because when you buy an HUL, you don’t want to look at the 30 times or 40 times it is trading at but the fact that the return on equity and return on working capital is at 100 percent or more.
So, you look at different parameters or more for different stock and in terms of efficiency ratio, FMCG stocks definitely rule the roost.