India after underperforming in 2017 and early 2018 is now nearing a breakout: Laurence Balanco, CLSA
You have often been quoted as saying that India and especially the Nifty is likely to see further scalability. The uptrend is very much intact. We are just shy of that all-time top on the Nifty and are already at 11,000 mark. Do you think the uptrend is still intact or could it be capped from these levels?
No, it is still intact. We have seen good momentum. We have seen the MSCI India index continuing to outperform the MSCI emerging market index in local currency terms. We think that January peak will be taken out and we are still running with a 12,000 upside target for the Nifty.
Are you saying that 12,000 is the maximum Nifty could go?
No. That is the upside targets. We are flagging the breakout from mid 2017. Basically, Nifty had been in a trading range below the 8,500-9,000 area from 2015 to 2017. That breakup gives us an upside target of 12,000. We still focus on that target where this trend can continue to move towards.
India is outperforming emerging markets. Do you think that outperformance is here to stay or are emerging markets in a hot spot and will continue to to remain under pressure?
The broad emerging market basket is still under pressure and we have not seen support come through for the relative performance of the broader emerging market. Within that, India after underperforming through 2017 and early 2018 is now nearing a breakout. The relative outperformance should continue and supported both in the absolute and relative terms.
Since you have set out the Nifty target of 12,000 and that you believe is going to be the top of the range, what about this dichotomy which is playing out in the Indian equity markets wherein the benchmarks are holding out closing at all-time tops and the broader end of the market continues to be beleaguered?
Part of the underperformance of the midcaps and the smallcaps is the international flow back into India on a relative outperformance that you have seen. China has underperformed recently. Largecap Indian stocks in quality names have outperformed and fund flows are back into India because of the relative outperformance. This dispersant that you have seen on performance, can be seen globally. If you take the global or emerging market indices, you have got India close to breaking out. You have got the A shares down 20%. Brazil was down 20%. So you are seeing dispersant and selectivity developing.
It has been a very concentrated move even within the Nifty. Just 10 to 15 stocks which have formed the leadership group. Do you sense that the leadership is going to remain with the Reliance Industries and the IT pack? Will the concentrated move come in from TCS or is the runup to 12,000 going to be a more broad-based move and do you also forsee some of the other stocks catching up?
At this stage, the leadership groups will continue to drive the index up to this level. Typically, the more mature you get, the more selective markets become and that is how you are get to the 12,000 target is by this leadership group driving it up. I do not think you will see a lot of rotation or new leadership coming through until we get a major setback where we can reset the trend, but for now up to the 12,000 levels, look for leadership groups to drive the market higher.
ET Now: What is your take on the 10-year paper? At 3%, has the US 10-year treasury topped out?
Laurence Balanco: Yes, we have been flagging the attempt to break out in April on the 10-year yield above 3%. It was a false move on the back of momentum of confirming. We also had speculators net short the T note futures. That process has started and 10-year yield can work back towards 2.6-2% and essentially be in a broader trading range. On a longer-term side, the charts do suggest that but over the next six months, they will remain range-bound below the 3% area.
ET Now: How bad do you think it could get for copper and other important commodities before it gets better? This is a very strange kind of situation. The dollar index is strengthening and there is weakness in the commodity. Even though there is select outperformance in emerging markets, US markets are sitting at a record high. How do you explain that?
Laurence Balanco: As I said before, selectivity is a sign of mature trend and we typically will see that towards the ending of a cycle. As for commodities, the worst is behind us. After that initial breakdown in copper, you are starting to find support in 280-277 area.
On Brent crude side, we kept that at $80 and we have seen Brent moving back towards the $65-68 area. A trading range will develop between $65 and $80. In short term, oil has downside risk back to $65. You can see rotation and selectively going on even in the commodity side.
ET Now: In your earlier notes you have talked on how Yes Bank offers an attractive risk reward at this juncture. Does that call still hold through? They have got mutual fund licence coming in and you have already seen a sharp move in the stock?
Laurence Balanco: Basically, since the peaks that we made back in September 2017, the stocks have been range-bound and we got the momentum move last week. With momentum confirming higher, we believe there is more upside for the stock.
ET Now: Where are the secular trends in India? Is it private banks, private NBFCs, where do you think the stocks are in a sweet spot? Also what about the trends in HDFC Bank or Kotak Mahindra Bank? Are those trends intact for next couple of years?
Laurence Balanco: The key driver on the longer term base and very similar pattern to just the broader Nifty index has been the Nifty Bank index. We have a 32,500 target for that index. The banks are a key component in driving the longer term uptrend and that remains intact.