Indian Shares May Hit Lifetime High In A Month: Ajay Bagga
Indian benchmark indices poised to cross March 2015 high?
Indian equity benchmarks may touch lifetime highs in the next one month, Ajay Bagga, executive chairman of OPC Asset Solutions Private Ltd. said in an interview with BloombergQuint.
According to him, three factors are aiding the market right now - improving global macros, strong domestic flows, and relatively unscathed corporate earnings in the October-December despite the demonetisation storm.
Here are edited excerpts from that conversation.
New High?
What is your reading of the market right now? While the Nifty has struggled at the upper end of the range, it managed to close above 8,850-mark.
The market has consolidated for nearly two weeks now. I think what’s holding it back are the state election verdicts. It is likely to break out either side irrespective of the outcome. I do not think it is going to be a long-lasting correction even if the verdict is adverse from the perspective of the market.
Overall, I see three factors aiding the equity market. First, the domestic flows are very strong and foreign institutional flows have also turned positive post the budget. This is a big booster.
Second, the global macro, where U.S. economic recovery will lead the markets higher. We will know in another 15 days or so about Trump administration’s fiscal spending plan. So if the U.S. president commits funds to U.S. infrastructure etc., that will take the markets higher.
Third, will be the Indian macros. After demonetisation, there were enough pessimists who said it will take five or six quarters for the economy to recover from the shock. But it looks like there has been a V-shaped recovery. We have normalised very fast and the third quarter results have been relatively unscathed. Materials have done well – all the global-linked sectors have performed well.
So that is showing that fund flows and global macros have overtaken the Indian macro impact. We are expecting the Indian turnaround to come strongly in the second half of the year. So another three months from now, that will start and markets will discount it. I am expecting a lifetime high for the market in the next one month. We should cross the March 2015 high on both the Sensex and the Nifty.
Key Risks
What are the concerns right now and what would you advise investors?
Investors have actually beaten the experts. In January, when the market was looking squeamish, we saw more flows coming in. So investors are investing in a very contrarian manner both through systematic investment plans (SIPs) and lumpsum.
For example, SIP is giving a very strong backbone of Rs 50,000 crore a year to the market. So you have Rs 6 lakh crore with mutual funds in equity, you have another with insurance guys. So you have an asset under management of Rs 25 lakh crore out of which roughly about 25-30 percent would be equity. So you are talking of a good backbone for the market with SIPs contributing Rs 4,000 crore a month. So retail investors have got it right already. They are doing much better than all the so-called institutional investors who have been buying high, selling low and panicking at every move. While retail investors have solidly come in whenever market turn volatile and go down. So they are going very well as that is the best way to invest.
In terms of what could go wrong in the market, we have to start from the top. One, if Trump fails to live up to his promise. By February 28, we are expecting the contours of his tax plans. The market has discounted very bold tax reforms in the U.S., so if that is damp squib then you may as well see a selloff.
The second factor will be what Trump does on the fiscal deficit front. If it is not agreed to by the Republicans and there is a logjam again, there could be some amount of market reaction.
Third factor to watch will be whether the U.S. Federal Reserve moves fast. Interest rate futures are showing two rate hikes, the first one in June. But the testimony from Fed officials is that the economy is doing well and even March is not off the table. While we do not expect an early rate hike, even if it comes, it should have a limited impact on market sentiment.
Fourth, if the BJP does not do well in the UP polls then there could be a little bit of volatility that may come in. I think the market will justify both events. If BJP wins, they [investors] will say Modi has a larger mandate and if it loses, they will say state-level does not impact much – anyway a majority in Rajya Sabha will not be achieved until 2019 even if they win UP.
So until the next election, the Rajya Sabha majority will elude the NDA government. They will have to work with the regional parties and some get work done in Rajya Sabha. That’s how the market will rationalise it but in the short-term, for 15 days or a month, it would derail the market. These are a few factors that could hold the market but I think there are enough solutions and antidotes to any of these events.
What about the Eurozone?
Of course, we have elections in Germany and France. Also we have Greece where the lenders are fighting. But the situation is much better than what we had in 2008-2010, so any negative news can be digested. The way the market took Trump victory and the Brexit referendum in its stride shows there is some inherent global macro strength. While you cannot ignore them, I don’t see a major concern arising out of it.
Investment Strategy
Would you use these bouts of volatility as buying opportunities?
Definitely. All fund managers I have been speaking to, even the insurance guys, are keeping money on the sidelines. If we get any surprise on March 11 and there is a correction, people will buy because there is cash waiting on the sidelines for an adverse reaction.
Restricted Inflows
We recently had a micro fund run by DSP BlackRock temporarily put restrictions on fresh inflows. What did you make of it?
It was a very wise thing to do. We have seen in the small and midcap space, if you increase the size too much, you start tending towards the index. Since the fund size is so large the impact you can make by one single position becomes less. So you start owning 100 stocks with one percent each or a maximum exposure of 5 percent; then generating alpha becomes difficult.
We have seen that in fund of funds and even in the large cap space. Indian large cap is equal to global midcap in terms of size and impact costs come in. So you have funds, which are Rs 20,000 crore even in the large caps. Now, generating market beating returns becomes so difficult because to hold a 8 percent position, for example, you need something like Rs 1,600 crore. And if you were to buy Rs 300-400 crore of a particular stock in a day, you will move the market massively – except for the top 5-10 stocks.
So, it becomes very difficult to generate returns. I think it is a wise move and others have done it in the past.
Deploying Money
Should investors stick to large cap funds or midcap funds?
I think for retail investors, if you want to buy yourself, should stick to large caps. Use the mutual fund route for investing in midcaps and small caps because you get diversification, liquidity and protection of SEBI. You also get someone who is scientifically creating a portfolio across sectors.
No one has the track record of midcaps – not even fund managers. He or she will buy 40-50 stocks and keep churning out laggards. Out of that 10 will be multi-baggers, which will take your portfolio higher. For you to get those kind of returns, you would have probably had to choose 100 stocks and the failure rate would be much higher.
Strategy On Gold
What is your outlook on gold this year?
Gold will react a lot based on Trump’s polices. I would say keep a 5 percent exposure to gold; it is not going down by any chance. There are three mega trends going for gold. First, all central banks are buying and hording, especially China and Russia, which are against the dollar. Second, any move away from the U.S. dollar—if Trump gets more protectionist for example—will be gold positive. Third, any geopolitical risk will hold up gold. So, one can invest around 2-5 percent of their portfolio in gold through the paper route i.e. fund and ETFs.