The Market Is Extremely Pessimistic And Oversold, Says Ajay Bagga
Any positive surprise can take the Nifty back to 8,300: Ajay Bagga
Indian shares fell for the seventh straight day on Thursday, with the benchmark breaking key support levels. The Nifty 50 broke below the 8,000 mark for the first time in nearly a month. Market expert Ajay Bagga says the market is in oversold territory and is already factoring in earnings degrowth in the next quarter.
What’s behind today’s weakness and does it look like the next six trading sessions will see similar volatility?
We used to have a Santa Claus rally, we had a January effect but in the last 3-4 years hedge funds arbitraged it out. So you are expecting fund managers to go on leave, volumes to decrease, but today volumes were three times the average of last week’s volumes. It’s difficult to take a call on fund flows, but what is clear is that we lack a domestic trigger.
Demonetisation has meant lower earnings growth in this quarter, numbers are not good for all the leading indicators. Nomura came out with a report showing that their indicators are back at 1996 levels. So overall, there has been a fall in cement offtake, in automobile, in textiles, in gems and jewellery, retail footfalls. There is a big liquidity crunch in the economy, that’s having an impact. Above all, there is the movement of money from emerging markets to developed markets.
We are moving into January now, the biggest trigger will be the Union Budget, to an extent we will see Donald Trump take over as president of the United States, and we are going to have a lot of other triggers such as data coming in from the demonetisation scheme. Based on that how are you viewing January?
January will be tough on the earnings side. The earning season will start from January 15 roughly and you’ll see pretty poor numbers coming in. Of course, if they are not as poor as anticipated, the market goes up. What we are expecting is a fiscal stimulus from the government, that’s a crying need. But that’s wishful thinking. I don’t know how much fiscal leeway the government has and what will come through. What we are seeing as a positive is that they have taken a very strong decision, a very strict measure, they have expended a lot of political capital in this demonetisation drive, so will they follow this through with other reforms? Will GST finally get passed in the budget session? I think those are a few questions the market will look at.
In terms of the global set-up, the dollar rally is overdone. UBS had a report out yesterday saying that the dollar is looking overvalued. So, I think the market is oversold, extremely pessimistic. We have factored in a lot of degrowth in earnings this quarter and the next. Any positive surprise here, it cracks through and it goes through 8300, which has become roof for the market in the last few months.
Metals has been the best performing index in 2016, contrary to expectations. Do you really think there are fundamentals in place or is there room for more upside when it comes to metals? How are you playing that.
I think it’s very difficult, I would say. We were extremely wrong last year. Nobody thought that the materials will do well except some of the good hedge-funds. They bought all the stocks in middle of 2015 at the bottom. So metals again will depend a lot on China. China housing is showing some kind of slowdown. If China housing slows down, sell metals and get out. If China continues the stimulus, please go ahead and buy metals, you will have one more good year, it is as simple an equation as that.
Pharma sector, the once defensive sector has lost that tag and undergone a lot of derating. I don’t know if you will talk about specific stocks, but say for a stock like Sun Pharma which is at a 2.5-year low, after falling close to 600 points. Is it looking good as a valuation metric?
I can’t comment on specific stocks but on the but pharma sector overall, what you have to differentiate is keep out the U.S. focused exporters. I think they have to fall further because you have had more than 36 Form 483 cautions into Indian pharma. Look at the players who are serving primarily the domestic market. Domestic growth is more than 15 percent, valuations are good. You have some names there. But for generic players, there is one thing that will come, that is, if Obamacare goes, as they have been talking about, or gets modified and they go for cheaper medicines, our players will be benefitted. But the U.S. FDA is worried that India being the second biggest repository of FDA-approved plants outside U.S. and seeing plant after plant having problem, I think you are going to see more action by the FDA.
Second, is the anti-trust case in the U.S. I think that is still not baked in except for the couple of players whose names came in. That can expand across states, across companies, across products. It can expand much more next year. So I would say stay away from pharma, in a nutshell, very little triggers and too much headwinds on the regulatory side to really be able to take a decent valuation.