In an interview with CNBC-TV18, Jaipuria said with each of the three factors easing going into the new year, markets should have a better year — even though returns may be a bit back-ended — and says he expects foreign flows to pick up.
There is one joker in the pack, though: China. “China has been in a slowdown and if it chooses to devalue its currency next year, it could bog down markets,” he said.
For the very near term, the outlook is muted, says technical analyst Sudarshan Sukhani who expects the next week to be as listless as this week.
“Markets will persist in a range and may end the next week around 7,900 (Nifty),” Sukhani said. “There will not be much opportunity for traders even though I expect the market to either break out or break down from its current range going into the next year.”
The two analysts also discussed a number of stock and sector strategies.
Below is the transcript of Jyotivardhan Jaipuria and Sudarshan Sukhani’s interview with CNBC-TV18’s Reema Tendulkar and Ekta Batra.
Reema: 2015 has not been a great year, we have largely consolidated negative returns, what is the outlook looking for 2016 now?
Jaipuria: 2016 will be a better year than what 2015 was. 2015 was like the year of consolidation in some sense because we had a great 2014 and markets were consolidating after that waiting for earnings to pick up.
I think next year could be better but it could be a little more back ended year than a front ended year. So, we may see lot of returns coming in the second half.
I think in the second half what we will see next year is basically the recovery starting to show in numbers and earnings probably not disappointing the way they have been for the last 5-6 years.
Ekta: One of the key things which are over in December is the Fed overhang. They have hiked rates and hence that uncertainty is over and we have seen FII flows sort of come back into the market, they are not robust but they are still not selling anymore post December 17. You sense in terms of whether 2016 is going to be much more formidable in terms of FII flows?
Jaipuria: Hopefully it will be a better year than what 2015 was because in 2015 the whole emerging market as a pack saw lot of selling. India I would say got away lightly in that sense because India was probably standing out within the emerging market pack. However there were lot of outflows from emerging market funds. Hopefully next year will be a little better for emerging markets because of two things, one is we have seen a lot of this commodity pain behind us now. So, the fact that oil has gone down, metals have gone down, next year the downside may not be much even if these don’t bounce back. Second is everybody was very worried about the Fed and with all these events, the big worries in the run up to the event – once the event is out of the way people tend to forget it and get on with life. So, that event is out of the way.
The one thing which I am a little worried about next year is what China does to combat its slowdown because now it is accepted that China is an economy which is slowing and probably will remain slow. I am a bit fearful that at some point they do something to the currency in an effort to boost exports and that sets off another round of competitive devaluation. So, probably that would be the one overhang for next year’s returns – what China does and in case we get into this competitive devaluation phase then that could spoil markets a bit for some time.
Reema: We have also got an expiry to contend with right on the last day, what is your sense how is the market texture looking for next week and where do you think we are likely to be by the end of next week?
Sukhani: The markets have been in a range, while we have seen a good week but the range bound market scenario still persists. I do not think next week is going to be different, so the chances are that we will end up somewhere between 7750 and 7900 for the Nifty, which means we could see some rallies and pullbacks and eventually end up around 7900. So, that does not give much of an opportunity to traders for the next week.
I would think that the real opportunities will come beyond 2015 when market participants again come, volumes pickup and the Nifty will either go above 7900-8000 and begin a new up move or it will slide back, that will be the opportunity.
Ekta: Do you expect a couple of these commodity stocks to do well into next week as well, for example Hindalco , Cairn , Vedanta , all of them rallied a good 5-6 percent this week?
Sukhani: I expect the metal stocks to do well next week. I can’t speak about Cairn, it is commodity but it is very different from Vedanta and Hindalco. So, the key picks for me next week where I think momentum should continue are Tata Steel , JSW Steel and Hindalco.
If traders can focus on these three, buy them on intraday dips, take some profits, then re-enter on the long side, I think they could do well because at least for me the metal sector seems to be getting ready for an up move.
Reema: You alluded to the fact that the commodity pain is behind us. So, therefore is it time to bet on commodity linked names like Vedanta and Hindalco considering that in 2015 they have lost nearly 50 percent of their market value?
Jaipuria: I am not very bullish on commodities. I think a lot of the pain is behind us in the sense that we have seen like all these commodities come off 30-50 percent in terms of their prices, so to that extent I don’t expect another 50 percent drop. At the same time, ultimately China is the biggest buyer of most of these commodities, I don’t think the Chinese economy is going to accelerate. It is probably going to decelerate even more.
Also within that economy investments are really going to keep coming off. So, to that extent China is going to buy less and less of these commodities. I think all these stocks are like trading stocks, in the sense you probably get some bounces because lot of them have come off 50 percent, so you can get them rallying 8-15 percent but beyond that you are not really going to make sustainable money in these.
If China does something like a devaluation or something then again these will go through lot of pain.
Ekta: In case China does undertake more measures in order to make the Yuan more competitive in 2016, the recent news is that they have extended the trading hours and hence they have internationalised it a little more so that it would possibly trade during European market hours as well. If they get more aggressive on that in 2016, which are the stocks or sectors where we could see a direct impact?
Jaipuria: One is what China does and the other is what other people do. We saw an example in July this year when China in some sense devalued their currency or there was a depreciation on the Yuan and every country then decided to weaken their currency also. So, in the end China did not benefit because most currencies became weaker. Otherwise if you look at China and they devalue their currency and no one else does the same or let us say the Indian rupee gets much stronger versus the Chinese currency then you will see some of these sectors where we compete with China start to do badly. Like textiles could come under pressure because China probably will start gaining a share. Tyres is the other sector where there is lot of competition coming through from China. Power equipment sector would be the other one facing pressure. So, the pressure would start because Chinese will get more competitive.
My guess is if China devalues then most of the countries will also devalue their currency.
Reema: One of the recommendations is Cera Sanitaryware , is that just a near term call or do you see sustained upside?
Sukhani: I see some sustained upside much beyond a few weeks is difficult to suggest because then it will depend on the nature of the market, how the broad market behaves. However Cera has gone through a deep correction. After that correction it is moving sideways, giving us an attractive bullish head and shoulders pattern. That tells that at least a relief rally or may be a new up trend is coming. In either case for the next few weeks there should be some momentum on the upside. You are buying a good quality stock. So, I am not giving you stock ideas for the next week where markets are likely to be range bound and choppy, we are looking beyond 2015 into 2016 and these ideas then go there.
Ekta: You spoke about Cera Sanitary ware but the other one on your list is National Buildings Construction Corporation Limited (NBCC). That one is a real outperformer. What are you projecting on the technicals?
Sukhani: Yes, it has been an outperformer and after that it had a normal correction and I say normal because it was not deep, it was just something that should be expected after a big bout of upmoves. That correction is now ending with another trading base that is giving us a bullish pattern. So, it does appear that sooner or later it should break out and go and test its earlier highs and that should be quite impressive for position traders. So, you buy it, hold it.
Again these are not day trades, not next week trades and we don’t need them. They are something that you can put your money in and wait for a few weeks and hopefully get something more out of it. NBCC has an attractive pattern, has a very good pedigree behind it, a very big rally and the chances are that it should do well in the first few months of next year.
Reema: This week we saw a couple of these telecom names like Bharti Airtel and Idea rally close to about 6 and 5 percent respective. Is that a pocket which looks attractive to you?
Jaipuria: I am worried about that pocket because next year we will have this competition coming from Reliance Jio and to that extent there will be competitive pressure at least when the launch happens. So, I would be worried about that sector. I would think that stocks are not going to perform too well over the next six months.
Ekta: How would you approach a stock such as Sun Pharma. We got all the details of the warning letter this week and it reacted positively because there were no new or negative surprises that came in from the warning letter. Your sense in terms of how Sun Pharma would possibly perform in 2016 and compared to a Dr. Reddy’s which is also facing US Food and Drug Administration (FDA) issues?
Jaipuria: Essentially what we are seeing in this whole sector is this year we have seen a lot of issues starting with FDA and though pharma sector has probably been the best performing sector this year the FDA issues have been much more than what we have seen in the past. So, to that extent wherever we get this new FDA and the general sense that we come that this is something more deep rooted then the investors will get vary of that company and say, okay we should probably wait till the problems are solved but where we get FDA issues and then the general sense that we come that okay, this is something which is manageable and can be sorted out investors will continue to play those sort of companies. So, it is a sector which investors have liked. It has done very well over the last five years, over this year also because in spite of all the problems a lot of these companies continue to grow earnings quarter after quarter.
Reema: We have not often heard you recommend Kitex Garments. Why has it made to the buy list?
Sukhani: I don’t recommend midcaps often. So, all the four have made it to the buy list because you are talking about Christmas cheer throughout the last two days and midcaps will outperform the larger market next year also. That seems to be a very likely scenario. So, why not go and look at attractive midcaps. Kitex Garments have been the same pattern and a very sharp run up. So many of these midcaps have run up in 2015. After that run up it had a very decent correction. The corrections are not deep enough to cause concern but just enough to let off some steam and bring them back to normal or revert to mean. Now it is making a base and that base is making a bullish pattern, the shape of a bullish pattern. It has just broken out today and that is good news because it is reaffirming that some kind of an upmove has started. Good quality company, good quality charts, a bullish break out. So, we go ahead and buy it. The three stocks we have so far discussed are all position trades which we should hold for a few weeks to really get the benefits out of that investment.
Ekta: One of the big themes for this week was what was happening with the entire defence space and the talks between India and Russia and the possible defence deals that could come through. We already heard about Reliance Defence signing a deal with a Russian company. The likes of Pipavav Defence was very strong in today’s trading session. Your sense in terms of whether the fundamentals justify the stock prices that we are seeing and would you be a buyer?
Jaipuria: Again if you look at the theme what we are seeing in defence is two things, one is the definite movement in terms of order flow happening and second is what we are seeing is the Indian companies are being favoured which is like a bit of change because so far it was like they have orders which used to go mostly to international companies. So, as a theme over the next few years defence will definitely be one of the important sectors where Indian companies are going to do well. The companies which are positioned to get defence orders would do well. So, it is not just the Moscow trip but it is just the trend and the theme that this government is playing out. So, definitely companies which are tuned into defence will do well as a pack.
Reema: Consumption is visible in the auto sectors, whether it is two wheelers ., even commercial vehicles (CV) sales have shown some momentum over the last few months at least. Is that the space that you will bet on at least in the early part of 2016?
Jaipuria: I like consumption. Urban consumption will really do better than rural consumption in the early part of 2016 because one is we will have the pay commission impact coming through, so that will help urban more than rural.
Second is interest rates are coming down. So, both of these things are going to help urban more than rural and that theme will play out. Hopefully my view is that we have had two bad monsoons, so we will not have a bad monsoon and to that extent probably in the second half of next year rural will partly make a comeback also.
Ekta: Coming to you for one of your last midcap picks for today. EIH, why do you like the stock?
Sukhani: It has been doing nothing for years, not months. So, a stock that goes into a hurdle or a trading range for many years and then breaks up attracts attention. Now, there is some news behind it. Just two or one and half months ago there was a big spike up in prices mainly because of say, some kind of a news event and that spike up in prices has been maintained. The stock is now moving sideways but it hasn’t given way to coming down again. So, a large multi year base which breaks out and then adds more value by price spikes tells us that slow and steadily this stock is going up. It is not really a high beta play but for investors and traders who are looking to make more money than the market it is likely to be a market outperformer.
Reema: Considering next week’s expiry and generally banks are the big movers what is your sense about the key levels that we should watch for in the Bank Nifty and any trade you will watch and in particular on Axis Bank because that rebounded close to about 4-4.5 percent this week?
Sukhani: The Bank Nifty itself is a buying opportunity only about 16800 and it needs to sustain above that level for a short term buy to come about. That we will have to see on Monday. For me the Bank Nifty is not giving very attractive signals and while Axis Bank has rallied I would be very afraid of buying into any of the large banks as a short term trader.
Ekta: How would you approach public sector undertaking (PSU) as well as private banks in 2016, which ones would you pick? The financial stability report that came out this week was quite sombre on asset quality?
Jaipuria: Yes, I would still be sticking to the private sector bank. So, very consensus because there is still time before we get into the public sector banks. Public sector banks will be a play where the economy really has picked up and that is why probably you will have one trade in the public sector banks.