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See opportunity in Indian market, more stable macro: Ajay Argal

Post a 3-weeks long bearish sentiment in global markets, one should start deploying money in Indian equities, says Ajay Argal, Head of Indian Equities, Baring Asset Management (Asia).

Speaking to CNBC-TV18, he says there are “opportunities in a set of stocks where there would be decent growth — upwards of 15-20 percent — and some of them are available at reasonable valuations.” 

A bear phase in equities is unlikely in India because over the last few years, the macroeconomic situation has been a big positive for the country (economy), says Argal.

On the currency front, he says the depreciation is in line with some of the much more stable currencies and especially currencies (nations) with current account surpluses. “This is just global strengthening of the dollar rather than the weakening of the currency,” Argal adds.

On the upcoming Budget, he says there is no significant expectation from it, adding, “We have stopped looking at it (Budget) long time back because even if there are some positive developments in the Budget, it takes time for it to percolate down to the broad economy and even within that you have to be focused on the stocks”. 

Meanwhile, even Anu Jain, Director-Equities, IIFL Private Wealth Management, shares his views on the same.
Below is the transcript of Ajay Argal and Anu Jain’s interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal.

Sonia: What are you advising investors to do after this rollercoaster ride, should one take a breather and sit on some cash or should you start deploying money into this market now?

Argal: We definitely feel that it is the time to start investing in the Indian markets, the reason being that the Indian markets are still one of the markets where you would have growth. Since last year, we have been maintaining that the market has become very stock specific. So, even now there are opportunities in a set of stocks where there would be decent growth.

When I say decent growth, it could be upwards of 15-20 percent and some of them out of that are available at reasonable valuations. So, definitely we should start looking to invest in those kind of stocks. We were positive even last year, so from that, because of the global conditions there has been correction. So it is a better entry point from that perspective.

Sonia: Don’t you think we might get better levels in the months to come; on one account we have weakness in earnings, on the others there is still no recovery seen in global markets?

Argal: We can never catch the bottom so we have to look at whether the investment level at this particular moment is attractive enough and for that it depends on the investment horizon. If your investment horizon is a few months then what you are saying could be true. However, what we do is, we are typically looking at stocks from a three to five year perspective and we find that this is a much better opportunity compared to what it was a few months back.

Whether it can be even better down the road, only time will tell; very difficult for anyone to figure out when the bottom is going to happen. We can point that out only in hindsight. So, for that we might have to wait much longer and if we wait then there is a risk that we might have to buy even higher.

Anuj: What is the expectation from the Budget then and how high is the possibility of a sell-off post Budget only because how weak the sentiment is?

Argal: I don’t think that there is any expectation of the Budget, any significant expectation that is to say. There are some expectations of some reduction in tax rates because there have been some reports in the media but I would not say it is very much especially after the correction which we have witnessed, in this calendar year whatever froth and whatever expectations were there even in terms of the Budget is kind of totally gone.

Again, from our portfolio construction perspective, we don’t look at Budget as an event. We have stopped looking at it long time back because even if there are some positive developments in the Budget, it takes time for it to percolate down to the broad economy and even within that you have to be focused on the stocks. So, we always try to figure out where the individual stocks where we are positive are headed in terms of their business growth and whether the valuations are reasonable enough for us to maintain our positions there. We continue to have that game plan rather than trying to predict what would come in the Budget.

Anuj: Since you mentioned that this is a good time to be deploying money into markets, what are the sectors that you are bullish on?

Argal: In the sectors and again I repeat that even within the sectors we are very focused on individual stocks, so, certain stocks in the private sector financials, we are positive on. We are positive on certain consumer discretionary stocks, in the media sector, in the automobile sector, in the auto ancillaries. Then, we are also positive on a few select stocks in the home improvement category. So, it is a sprinkling of individual stocks rather than any sectoral broad brush or even thematic from that perspective.

Sonia: What about private banks which have a corporate exposure, names like Axis Bank that did well this week, do you think the worst of the asset quality pain is over?

Argal: We obviously try to balance within the portfolio. So, we are having a much larger weightage in the retail lenders but at the same time we don’t ignore the corporate lenders and especially some of the better ones including the name you just mentioned. The reason I say this is, it also has to be balanced with the kind of valuations which the markets are throwing at us.

So, the markets have already kind of discounted very pessimistic scenario in our opinion in some of the private sector corporate lenders but at the same time we also feel that in some of the corporate sector lenders, the valuations are kind of justified. So, we don’t need to get into them just yet. In fact over the last few months, we have even reduced the single bank which we had in the public sector category because we are seeing that the non-performing loans is becoming a bigger issue especially in light of the correction which we are seeing the commodities globally.

Some of these corporate are heavily indebted in these sectors and obviously they have a much more larger borrowing from the public sector banks. So, we have reduced from the public sector side but at the same time some of the private sector corporate lenders, we are relatively more positive because to compensate for these asset quality issues, some of them are having very reasonable growth. Even those corporate sector lenders have let us say 30-40 percent coming from the retail book which is anyway growing and so far the asset quality in the retail book is pretty reasonable.

So, we are kind of balancing in the portfolio and in that sense we are doing a barbell approach because we cannot be totally hiding into good quality because then the valuations are a bit on the higher side and the return expectations especially in the short-term could be lower whereas it is the other way round in some of these private sector corporate lenders.

Sonia: Would you a view on the aviation sector Interglobe Aviation  (Indigo) was the big talking point on Friday after 20 percent fall. How would you view that name?

Argal: We have taken a long term call that at least at the moment we don’t want to be in the sector because the earnings are at the peak and at least the expectations are also at the peak with the kind of crude oil prices we are witnessing. So, we are kind of staying away from the sector.

Anuj: Let us talk about some more large caps then. We have seen decent earnings from names like Reliance , Infosys , Asian Paints , Zee Entertainment . Would you be buying any of these names right now?

Argal: Some of these stocks that you mentioned are actually some of our large holdings and they have been large holdings specially since the last one year. So, it depends on what kind of expectations are there. Some of the stocks which you mentioned there just now the expectations are even now not very high and we believe that the earnings which could be delivered over the next few quarters could be sufficient to take these stocks even higher whereas one or two stocks which you mentioned just now we feel that the valuations are not supportive. So, we are not venturing into that.

So, again it is very stock specific. Even when the stocks have done well we don’t kind of feel that it has done enough because we are looking at at least the next three years if not longer and if we feel that over the next three years the growth is not properly discounted in the current stock prices we would like to maintain our positions.

Anuj: How high is the probability of a bear market in equities?

Argal: We feel that the bear phase in equities is not very likely especially in India because India first of all we have seen that over the last few years one big positive which has happened is the macro situation is pretty good which means that the currency should be broadly stable. We have seen the currency depreciating off late but that is in line with even some of the much more stable currencies and especially currencies with current account surpluses as well. So, that is global strengthening of the dollar rather than the weakening of the currency. So, that is the one big positive that the macro numbers of India has been as strong as they have been in the last at least one or two decades. So, that is a good starting point.

Then a lot of froth which was there for the last one and half years is kind of dissipated but there is still much higher valuations in some of the smaller names. So, if you look at the larger stocks and some of the stocks which you mentioned which came off with good results this quarter some of those larger stocks are trading at a very reasonable valuations. So, normally we have seen in the past that when stocks trade at reasonable valuations, especially the large cap ones and even if there is a global correction then quickly you will find that buyers are willing to come in because you are seeing a good growth versus valuation combination. So, we feel that yes, there could be correction in line with global markets but India should be relatively better off.

Anuj: Can the bulls say that we have put a bottom in place or is this just one of those random short covering bounces which will get sold into?

Jain: I don’t think the bulls can say that the bottom is in place. There is just some relief which has just come in. If you look at the fall which came in from the 7960 levels which is your 100 week kind of average. You have given a fresh breakdown which is pretty severe. You have tested close to 7200 levels, you have bounced back on Friday to about 7400. This relief rally may last till 7550. Over that if it manages to hold that is when the bulls can say there is some strength into the markets. Looks unlikely because what I have been harping over the last 6-8 months that the Bank Nifty is not giving any support. It can break down. That has finally happened.

The Bank Nifty where it is where it touched almost 14,800 is giving you a bounce to about 15,200-15,300. Very unlikely that it is going to go beyond 15,800 and if the Bank Nifty is not going to give you support I don’t think the Nifty can really have any legs beyond this 7550 kind of levels.

Sonia: But one of the big stocks that moved in the Bank Nifty was Axis Bank last week. It was up 13 percent and I am sure a lot of traders made money there. So, what is the expectation going ahead. Is there still more upside in Axis Bank?

Jain: Axis has got resistance at about Rs 428. It is about that Rs 420 zone. So, that is about 1-1.5 percent. If it manages to cross that also there is just another percent, Rs 428-432. I see highly unlikely that in this rally it kind of manages to cross that because if it crosses that the next resistance is closer to Rs 450 which looks pretty unlikely in this rally or this sentiment. When I see the supply zone and when I saw the selling happening over the last ten days there will be people who have not managed to sell at higher levels, who would look for these opportunities to kind of supply. So, probably they will wait for two sessions. So, you can see Rs 430-432 but beyond that would be highly unlikely.

Anuj: What about something like Maruti Suzuki and even Tata Motors for that matter. Maruti Suzuki because it was the erstwhile big outperformer, one of the stocks of last year but corrected quite a bit and Tata Motors of course has been quite volatile.

Jain: Let me portray both of them individually. Maruti Suzuki held on very strong over the last couple of months, even when the market was volatile. In fact it was making some new highs. The way it gave up it seemed some people decided to book off the profits. The charts also indicating profit booking and not a weakness. However if we were to keep trading below 39 that is when the break in trend would kind of come in which it bounced off this time but if we see that happening for a second time that could probably indicate more weakness could drop down to 3720 odd.

Tata Motors is a much weaker chart. We saw a pull back to the higher levels and now we are back to these levels. What it is indicative is basically that you would probably see another break down coming. This is a pull back, it can max take you to about Rs 360, but I see the previous lows closer to Rs 280-290 being tested again.

Sonia: But if we had to give you a blank cheque and had to ask you for some advice on what stocks to trade on the long and on the short side next week what would your top ideas be?

Jain: For Monday there could be a positive bias depending on how the markets in the world reacted because you have seen Friday being positive because of Japan, because of the whole world being positive and that can continue for a day or so. If that were to continue you would probably see all the oversold stocks whether it is Larsen & Toubro, whether it is State Bank of India (SBI) giving you a couple of percent points but would I buy into it if I had a blank cheque, no, I would probably wait on the side to take a short position, add a slightly higher range and probably State Bank of India the way it has closed or even Axis Bank as I was discussing or even ICICI Bank , three to four percent higher then you have probably a good idea to short on to all of them.

Anuj: At what point would you say that this is no longer a short covering bounce. Of course at hindsight we will know but at what point would you say that a bottom was in place and it is now time to go long on the market?

Jain: As I am saying 7550 is probably where I am saying it is difficult to cross. I would keep roughly about 1-1.5 percent range from there. So, if we can hold on 7640 for a day or maybe two that would indicate that this can go higher and in that case you can touch almost 7780. Again very strong resistance levels at that zones but the probably even on the charts of seeing that seems to be pretty low. So, 7550 to 7580 can be very challenging. We have seen that, we saw 8000 be a very strong resistance and the we saw that move down to 7800. Now we are seeing that closer to 7600. So, you will see that we have traded in range. We had that 9,000 breaking down, then you were in 8200-8600. Then you were in 7800-8200, then 7500-7800 and now you have broken so, you will be in more like 7200-7600 before you either consolidate for some time and break upwards or the likelihood of breaking downwards seems to be higher right now.

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