The Indian equity market may have touched record highs at the start of 2018 but will remain rangebound for the rest of the year and keep wrong-footing investors.
That’s according to Atul Suri of Marathon Trends Portfolio Management Service. “This year, going ahead, we will not have any massive moves on the index,” Suri told BloombergQuint on the sidelines of the four-day Traders Carnival. “The index is going to wrong-foot you. The moment you feel very bullish, the market will correct and the moment you start feeling bearish, the market is going to go up.”
This is the year where it will be more about stocks and being stock-specific. This is the year where quality is going to re-assert itself.Atul Suri, Chief Investment Officer, Marathon Trends PMS
Volatility is just the nature of the markets and will return from time to time, the market veteran said. “Market corrections happen, certain sectors get re-rated, certain sectors gets de-rated, but that is the nature of the market. If there are no concerns, you will not have markets.”
Watch the full interview here.
Here are edited excerpts from the conversation.
What’s the current market prognosis that you have? Do you think we have topped out for 2018 or can one still witness fresh highs?
It is a very significant day because.. 1) 10,600 has been an important level and on the way down it has seen a lot of resistance. So taking out this level is significant. I won’t say that we have topped out for the year or we will not reach fresh highs. I think it is possible. This year, going ahead, we will not have massive moves on the index. This index is actually going to wrong-foot you. The moment you feel very bullish, the market will correct and the moment you start feeling bearish, the market is going to go up. So this is the year where it will be more about stocks and being stock-specific. This is the year where quality is going to reassert itself, very different from what it did last year and that’s the nature of markets as they are cyclical. No trend will last forever. So, last year we had a very good index move and more importantly very big move in small caps and mid caps. But this year we will not have very large index moves. The index will be in a broader range, rangebound. Quality will re-assert itself and we are already seeing early trends of that. So, that will be the trend going ahead.
Will that also mean that this could be the year for large caps and not broader markets because we have seen a sharp correction in the mid cap and small cap indices this year?
Quality transcends large caps and mid caps. So, even if you are a large cap but you are not qualitatively good then it’s not going to go up just because it is a large cap. Even in mid caps, there are lots of stocks which have come out with excellent numbers, excellent quality and they will continue to trend and keep making new highs. So, it is about quality and performance. Last year was a hope rally. Lot of people thought that this thing will happen, and this stock will do well, or these earnings will improve. But this year wherever there will be demonstrated earnings or wherever there will be proof of the pudding, that is going to get rewarded and get disproportionately rewarded. Already in the correction, we are seeing signs of that.
Last year where there was a big rally, there were lot of investors who entered into equity markets and most of them were putting in money in mid caps and small caps. And now when you interact with them, they are gloomy.
The reason is, people while investing in mutual fund, PMS, or AIFs focussed on returns. And that is the wrong way to go. You have to focus on strategy. So, 6-9 months ago any investor you met wanted to put money in small and mid-cap funds or a PMS which is smaller mid-cap strategy. Not because they cared for the strategy but because the returns were so good. People were chasing returns. The pain for the people who come late is that they are seeing massive draw-down. The fault is not of fund managers or strategies. The fault is in the fact that if you chase returns you cannot have strategy which will outperform on both sides. You have small or mid-cap strategy and it will do very well in a bull market. We know historically that if the markets correct, the correction here will be larger. So, investors should focus on strategy. Strategy is the function of their risk profile. As it is said, if spring comes, winter is not far behind and if winter comes, spring is not far behind. That’s the nature of markets. If you have that kind of draw-down and you come in late I don’t think the fund managers or strategy is to blame but that is the nature of strategy. Invest based on a strategy if that strategy suits your profile. Do not follow returns because returns are very cyclical.
Do you think volatility will be an elevated level in 2018?
I feel so. At the end of the day, we may not make massive outperformance on the upside or the downside. So, you will see lot of volatility but net-net the index may not be a big plus or minus. So, the distance the market will travel is a lot. But at the end, the journey it covers will be little.
What are the charts of crude and rupee indicating right now?
In this whole thread which is very complex, I look at the tip, which is crude for India because it has immense impact on the currency and bond yields and this has knockdown effect on market, stocks and sectors. Crude, in THE short run, has run up pretty hard and it may stabilise to correct. But I think it is going to be short term.
Ultimately, I think crude will get higher. My target for crude is $90. But it does not mean that just because it goes to $90, Indian markets are going to get adversely affected.
What is important for the market is preparation. When unexpected events happen, the markets get surprised and that’s where the hit happens. If the markets start building and factoring in this kind of moves, the important point is that market is coming to accept that crude will stay elevated.
But when you look at a country like India which is importing a majority of its crude requirement, there is fear of fiscal slippage.
Yes there will be and there is no doubt about it. You are going to have pressures on currency, bond yields. But I don’t think it is going to go so out of whack. It will not destabilise the whole thing and people will fear market crashes. It will not happen. Market corrections happen, certain sectors get re-rated, certain sectors gets de-rated, but that is the nature of markets. If there are no concerns, you will not have markets.
This also gives you an opportunity to churn your portfolio.
Absolutely. Right now, oil marketing companies are getting smashed and certain information technology-related sectors are going up. So, there is fear and greed here. These things will keep happening in the market. That’s what the money managers’ job is – to navigate through these things. We are surfers. There are waves which will go up and down and our job is to just surf.
IT is one sector which has bucked the trend for 2018. Rupee depreciation is creating tailwind for this one. What else, according to you, will buck the trend?
I am a trend follower. So I am not into picking bottoms and nor into finding hidden gems. I am into identifying longer-term trends and riding them. For me, IT is definitely attractive as space. It is a very large sector in terms of weightage. A lot of people have been underweight. When you have a sectoral breakout, like in IT, the beauty is when the underownership leads to very big surge. So I like IT.
The second space may sound cliched and not too brilliant – consumption. I think consumption will have a long way to go, whether it is FMCG or other related consumption stories, I think it is here to stay. The beauty of this sector is, it is relatively detached from crude, etc.
People are going to consume biscuits, chocolates, coffee, etc., irrespective of what happens to crude. The same goes for IT. Crude is big story for me this year. I feel that crude will go higher but in the short term, it will pause and that pause has been reflected in the market, whether it is today or in the short term. So, you want to get as far away as possible from the industry dependent on crude as an input.
What about the rupee?
Rupee will approach its previous high. But I don’t think it will be a total blowout. I don’t think it will freak out and run away. It will remain calibrated but that is the nature of the market.
You track the MSCI emerging market basket. India has been underperforming. FPI selling remains unabated. Do you think this trend will continue?
If you look at the emerging market basket there are a lot of concerns that the easy liquidity which is getting squeezed and showing up in higher U.S. bond yields, will affect emerging markets. I think the pressure may come in. But I find India is very delinked and it has its own strength and weaknesses.
A lot of emerging market countries like Brazil, Russia are very commodity driven. So, they do well in that kind of phase. But India is very different. I don’t think India is going to be at the mercy of the whole EM basket. If you see the rally in the Indian market in the last 1.5-2 years, it is more domestic money.
Is that sustainable?
I think so. When I meet investors, the kind of interest and participation that there is, and most importantly the TINA factor – the there is no alternative factor – the kind of money that is flowing into equities is more a function of very low returns in other asset classes, whether it is fixed deposit post tax.
Real estate is the biggest area where lot of HNIs have been overweight for years and maybe generations. Even if a small chunk flows to equity, it will have a very big impact. It is already happening. But going ahead, it will take off. Unless and until we don’t have a very big market crash or things like that.
Even if markets remain reasonable and you have a 15-20 percent yield, I think you don’t have to run away. I think there is no reason why this trend will not continue. I think going ahead it will get accelerated. You will have phases where people may have concerns and corrections, squeeze in and squeeze out, but the biggest trend for Indian equities is domestic flows.
When you execute a trade, is it based on trends or do you blend it with fundamentals?
I am a trend follower but I also think that ultimately, everyone is looking for trends - a fundamental analyst or a technical analyst. Fundamental analyst is looking for trends in earnings. He is looking for a company that consistently delivers good returns, good numbers. And that is what a technical analyst is doing. Ultimately, we are all looking for a trend. We are all following a trend.
I use both mediums. When they go hand in hand, they are much more sustainable and bigger trends. If you have great numbers but your prices don’t reflect them, then it is useless. Sometimes there is a price trend, but your earnings don’t reflect that, those are temporary. But when you have a price and a fundamental trend, I think it tends to be longer and sustainable.
But what takes precedence?
I sometimes wear my technical hat, more so when I have to exit something. I am very price sensitive because very often when price damage happens, it precedes something that will follow later on in the fundamental area. Because markets have their own intelligence. There is a lot of inner wisdom as far as price and markets go. Whenever prices break below comfort levels or when the trends break on the price, I tend to not ignore it.
Is there something more to technical analysis that we don’t talk about?
Most people view technicals as just a Rs 2 stop loss and a Rs 5 target. All these indicators were never discovered in this computer era. They have been going on for a few hundred years when people did it on graph paper and by hand. So, I tend to be more classical in my way. That is why I tend to be long term in my approach and I view technical in a very classical way, in a long term way. I am a great lover of the Dow theory, that’s as simplistic as it gets. And it is that simple.
You call yourself a trader and you are running a PMS which is rare.
Traders and investors are very relative terms. When you look at price then you are a trader and when you look at fundamentals, you are an investor. Is that the right way? What is long term, short term?
Traders are chasing prices and investors are chasing value.
I chase earnings and I chase price. I don’t understand value.
What’s the time horizon for your PMS? When somebody talks about trading for longer term then you can think of six months or maximum one year?
I would love to hold stock for five years. There is something called long-term trend following. There are long-term trends in stocks, industries and countries. It is your job to sit and identify these trends and have the patience to ride through them. That’s how big wealth is created and that’s what I am sitting out to do.
Give me three variables you use to execute any trade on the basis of technicals.
I use earnings, it’s not technical. I use price which is very important and third is volumes which is a very classical way. Volumes is something which is little studied or very few people use it. But I look for confirmation in volumes.
Is it safe to assume that for you positional trading works more than intraday?
I don’t know what intraday trading is. I must have done it at some stage in my life. I am at the other end of intraday. I look at months and years.
For long-term trades, how do you place your stocks? Did you place stop losses for long term trades?
I don’t call them stock losses. I call them as exits. You can’t have the 2-3 percent rule. It is just some mathematical number which may or may not work. For me, it is a change in price and trend. I use the Dow theory, lower tops and lower bottoms is for me a very big exit area. So, it is not about percentages.
It’s like when you are climbing steps, even if I blindfold you, if your next step is higher you know you are climbing. You are still blindfolded but the next step you take is lower and you came to know that you are going lower. So, that is the Dow theory. It is higher bottoms and higher tops, lower bottoms and lower tops. So, for me, when we are changing trends then it is lower bottom, lower tops. You can be blindfolded and the steps can tell you whether the trend is changing.
Do you believe in the theory of averaging?
I don’t believe in catching a falling knife because after that it is your toe it goes into. I pyramid in strength. I exit on weakness. So, averaging is not a mantra for me.
What has been your biggest lesson from the stock market and trading?
Cutting your losses. We try to be fancy and try to talk about these great stocks which are multibaggers. Your success rate in terms of getting the right rate is much lower than what people project. But the key thing is that when you lose you lose little and when you make you make a lot.
So, the objective is to lose little. Because sooner or later there is going to be a nice big wave and that’s going to take ships higher. So, the fact is, to be able to survive for that long you have to make sure your losses are small. A lot of people get into this idea that they will be 100 percent right and all trends will be right, but it never happens. It is good luck or an absolute lie.
So, any advice you would like to give to a new trader?
Be disciplined about cutting your losses because you need to survive to trade another day. This market will give you opportunities. The problem is that most people are unable to cut their losses because their ego gets in the way and that’s where they get eliminated. That’s when the big trade or wave comes, and they are not there to surf it. You have to wait for a big wave. You can’t surf every wave. So, wait for the big thing and till then you may have to pass the smaller stuff. The market will give you a chance for sure.
Who does Atul Suri idolise?
There are three people whom I admire. Warren Buffet is a great guy and there is so much to learn about life from him So, maybe my style is different, but I learn so much from him as an individual. The second is a little known person, Ed Seykota. He is the father or master of trend following. And thirdly, my mentor Rakesh Jhunjhunwala. He is a great person and I am so fortunate that I have been associated with him and learned from him and have his good wishes. I have seen the power of compounding work no better than in his case and that is the biggest lesson in my life, thanks to him.
You are staying close to fundamentals too.
Of course, I combine the two. At the end of the day, it doesn’t matter whether you use fundamentals or technical. The biggest trick is to have methodology that suits your personality because what suits your personality is something which will sustain.
What do you do with your profits?
I reinvest them. That is the power of compounding.