According to him volatility will continue for at least next 48 hours till the Fed uncertainty is out of the way and then the focus will shift to oil, yuan devaluation etc. The market will also keenly watch for Fed commentary.
He expects Fed to say that going forward they will hike in a gradual manner.
Sector specific, he advises staying away from oil marketing companies except for smart money with a three year horizon. He is not upbeat on PSU banks but like housing finance companies and private banks with retail focus.
Media and autos are good consumption themes, says Bagga.
Below is the transcript of Ajay Bagga’s interview with CNBC-TV18’s Surabhi Upadhyay.
Q: What do you make of this manic Monday?
A: Totally manic and totally manic depressive because the way it is whipsawing up and down and that is continuing in the international markets. If you look at the US markets very crazy Futures day and even as the markets have opened they are kind of going from one end to the other. So, difficult period and I hope the Fed now acts and outs this uncertainty at rest.
Q: It is the Fed week, if we go with the assumption that we are going to finally get that 25 bps hike then what can we expect, is this volatility going to be the norm for the next 2-3 days?
A: At least for the next two days till Janet Yellen comes and announces at press meet or just before that we get a ticker out, I think till then, so next 48 hours will be very volatile. Post that it will be okay, we are done with a very big event and then focus on the other things. Global turmoil is there be it the oil price, again today Brent has gone down to a 7 year low. So, oil price, Yuan devaluation, China has played well in terms of calibrating the devaluation. So, 4 percent devaluation they have achieved even before the US dollar moved. They are kind of de-pegging themselves from the dollar move. Then the junk bond issues that are emerging in the US, how bad will that get? There is Howard Marks on one side who is calling it the opportunity of the decade. Post 2008 Lehman he is saying, this is the biggest distress data opportunity I have seen. Lot of respect for him, very experience value investor.
On the other side you have Third Avenue and other funds like that who are stalling redemptions now. So, clearly that is an emerging situation which could roil markets. At the base of that is again the oil. Oil industry is highly leveraged specially the shale gas in the US, cycle to cycle, 2006 to now hardly anybody has made money in that industry. So, lot of money at stake there, lot of bonds, corporate defaults anticipated there, that is again an emerging situation. So, clearly difficult situation for global markets but at least with the Fed hiking one event will be out and then the focus will be on the commentary. I am sure she will come out and say we are looking at it moderately, we are looking at moderated increases and very calibrated increases. That is the language we are expecting.
Today Draghi has done his job. While speaking in Italy he said we will do whatever it takes. Once more he has brought his bazooka and kept it on the table in full visibility of everybody.
Then you have Bank of Japan later in the week. So, very interesting times.
Q: In a market like this would you advice buying anything at all right now, should one sit out for the next couple of days on cash? You mentioned oil, so I want to get your specific take on the short covering bounce that we are seeing on stocks like Hindalco on Cairn India, even Reliance moving higher in the last couple of sessions. So, what to do with this entire basket?
A: I think one thing that is coming out clearly and if you see the oil complex even today specially the big producers and refiners getting hammered, I think stay away from the oil marketing companies, that is a change of stance. I have been saying we are bullish on oil marketing companies given the oil reforms have happened in India but you are looking at inventory losses again this quarter. So, I would say stay away from the refiners.
The producers with this kind of prices they are in trouble. So, it is the smart money with a three year horizon which can look at commodities and oil, I would say not for the retail investor, not for you and me. You will find better price value equations. This is a good value but it can become a value trap very soon.
Look at it this way, today there is data out, our understanding was that Saudi’s would play ball till about USD 15, now the understanding is that USD 3 is their marginal domestic onshore cost of production. They are going to keep playing this like they did in 1986 where they brought down oil right down to USD 10. They are out to cripple all other producers. Russians marginal cost is about USD 15. So, you are looking at a lower oil. USD 20 is not really out of the realm of possibility.