Nifty may fall 10% more in 2-3 months: Envision
Given the slew of negative global and domestic
news surrounding markets, the Nifty may fall 10% lower from current
levels in next two-three months, warns Nilesh Shah - MD & CEO, ECR,
Envision Capital.
Come April, we are going to be confronted with an earning season where earnings growth will get back into a double digit mode.
Nilesh Shah
MD & CEO
Envision Cap
Given the slew of negative global and domestic news surrounding markets, the
Nifty may fall 10% lower from current levels in next two-three months, warns Nilesh Shah - MD & CEO, ECR, Envision Capital.
"A confluence of news is playing out simultaneously. The market has seen
bit of support at around 5,700-5,800 levels and if none of these
improve then this support could easily break," he said in an interview
to CNBC-TV18.
Continuing his bearish tone, Shah added that anemic earning seasons
would add to market's pain and he doesn't see earnings growth touching
double digit mark in April. However, there is a possibility of market
moving higher if crude price corrects meaningfully from current levels.
On specific stocks, Shah expects IT and oil and gas stocks to outperform
going ahead, but cautions of downside risk to auto stocks on sluggish
demand. Midcap stocks have become attractive post the recent carnage.
"I do not see midcaps underperforming from hereon," he elaborated.
Below is the edited transcript of Shah's interview to CNBC-TV18.
Q: The market has not looked great in the last few weeks. Is there more downside here or would you start buying?
A: Perhaps the market is
confronted with the most challenging situation over the last six months.
We have a pretty vicious confluence of all factors put together. Be it
some kind of global markets peaking or probably a shift away from
risk-on to risk-off. Locally too, we have seen a pretty challenging
political turmoil, a hawkish Reserve Bank of India (RBI) and the mother
of all realities, which is an anemic earning season.
Come April, we are going to be confronted with an earning season where
earnings growth will get back into a double digit mode. So, I clearly
think that we are at a situation where there is a confluence of all
these factors playing out simultaneously. If there is no improvement in
any one of these factors, it is quite possible that the current levels
where the market has found a fair bit of support, around 5700-5800
levels, they could easily break.
Q: If your apprehensions come true, what kind of levels could the Nifty sink to in this turbulent phase?
A: For the moment, the
current levels should hold on. However, over the next two-three months,
if any of these factors materialise, then we could probably see a level
which is even 10 percent lower from the current levels. It could
probably be in a band of 8-10 percent lower from here. That would be the
worst case situation and clearly, at those levels, the valuations from
medium to long term perspective would become really very attractive.
Q: What would 10
percent downside amount to for the midcap space? Would you use the same
buying opportunity theory for the midcaps? Or does that become an avoid
because of the current context?
A: I believe that the
midcaps have become a bit attractive post the correction. Clearly, the
correction has been much more severe in the midcap space. From the
peaks, the midcap index has corrected by about atleast 15 percent
whereas the large cap space has hardly corrected by even 5 percent. So,
over the next two-three months, we probably might see an 8-10 percent
correction in the large cap space.
However, I do not see a corresponding correction of that magnitude in
the midcap space. In a worst case situation, maybe the midcaps too could
correct by 5-10 percent but going forward, I do not expect midcaps to
underperform. In January, when the market had peaked, at that point of
time the midcap index was no longer trading at a discount to the
largecap index. The midcap index was trading at parity to the largecap
index in terms of PE multiples. We are now beginning to see the discount
resurface. It is probably now time for the large caps to start
correcting in a more meaningful manner. So, I clearly believe that over
the next two-three months, we are going to be presented with a
significant buying opportunity in the midcap space.
Q: For the first half of this year, from the near to medium-term, what looks like the cap for the market?
A: I believe the recent
highs should be a significant cap for the market. The level of 6000-6300
on the Nifty should be a reasonable cap. At that stage, the valuations
point well above the long-term averages. We do not have enough evidence
to suggest that the earnings cycle is likely to pick up. We are still
seeing an extended earnings cycle. So, the recent highs would pose to be
significant tops for the market. The only caveat to all of this is if
the global energy prices, global crude prices were to correct
meaningfully from current levels. That, then could warrant a rerating
for Indian equities. However, if that doesn’t happen, then probably the
recent high should basically be a cap for the rest of the year.
Q: Of the factors
you mentioned, which one do you think has the biggest potential for
damage inflexion on India? Will it be a weak earning season in April due
to which the market starts fretting again or will it be domestic policy
headwind because of politics or the global landscape?
A: Of the four factors, I am
least concerned about both the political and the hawkish monetary
stance because that is something which is reasonably well debated. It
is, to some extent expected, anticipated and would have anyway gathered
momentum during the course of the year as we head for the state
elections in December and the general elections.
Instead of that risk playing out in a back ended fashion that is
probably now playing out in a front ended fashion. However, the global
sentiment or a shift from risk-on to risk-off is a significant risk. The
expected correction in the large cap would happen because of the shift
from risk on to risk off. But for a very sustained bull market or
uptrend or for that to lay its foundation, we really need a pick up in
the earning cycle.
While some of the select large cap stocks have been doing well, I
believe that the hundreds and thousands of companies and the rest of the
pack has essentially been witnessing a pretty sluggish earnings
outlook. Till that does not change, we would see an underperformance.
So, the earning season is likely to be an important risk between THE
April to June period.
Q: Which part of the
market do you have comfort buying into right now? People are buying IT
or hiding in fast-moving consumer goods (FMCG) again. There is nothing
else that the money seems to be going in?
A: That is likely to be the
trade for a few more quarters. While valuations are attractive on the IT
side and given that the sector is likely to come out of a sluggish
spending in the developed markets on technology, it is quite possible
that IT still has a strong chance to outperform. This is given that its
valuations are still at a discount to the broader market. I believe that
IT is likely to be the big sector where a lot of liquidity will flow
in.
Pharma valuations are not expensive and one might still see liquidity
getting allocated to it. I believe that on the consumer side, it is
fairly overstretched. We have seen some of the consumer names crack
significantly, for example, stocks like
HUL ,
Tata Global Beverages
, where valuations over stretched themselves. There have been
corrections so, I am not quite sure that consumer is the place to hide
in given that valuations have become frothy. A lot of the growth which
companies have been showing in the consumer space has come in largely
from inorganic initiatives or geographical expansion outside India
getting into markets like Latin America and Africa.
IT and pharma is an important pack where one could see pockets of
outperformance. I believe that oil and gas has a chance to outperform.
However, given the political development in the last 24 hours, I am not
quite sure how easy it is going to be continuously hike diesel prices.
The outcome could be a very constructive gas pricing policy and it is
quite possible therefore that oil and gas too could contribute to
outperformance.
Washington: NASA has said that the large vibrant meteor which shot
through the US sky shortly after 7:50 pm on Friday appeared to be "a
single meteor event."
