He added that he does not believe the market is “frothy” and sees a floor for the Nifty at 8,500.
Sharing his outlook on the market with CNBC-TV18, Jayakumar drew attention to the low premium levels in the futures markets. “The annualised carry forward rate is at 5-6 percent, which is extremely low for lenders to put out money at. Lot of foreigners are short on futures, so the market has adequate cushion from falling perceptibly beyond a point,” he says.
He also shared his take on certain sectoral trends. Pointing to the unsecured nature of lending by microfinance players, he said that private banks, considering merger with microfinance companies, should not take the path “where angels fear to tread”.
Similarly, in case of public banks, he said there is only a point up to which people will be ready to buy resolution of problems or non-performing assets. “Beyond that, buying requires growth,” he said.
The metals sector, he said, is ready for a shake-off. Bigger companies not seeking any debt restructuring despite huge debt burdens seem to be getting penalised while smaller ones are getting loan waivers. “This is not a healthy trend.”
Below is the verbatim transcript of N Jayakumar’s interview to Latha Venkatesh, & Anuj Singhal on CNBC-TV18.
Anuj: My mind goes back to post demonetisation news and when we had you here, you said it won’t surprise you if the market hits new high in January. It has taken a bit longer but in February we are at new highs?
A: I am sure we will take that but one of those lucky predictions.
Latha: It is more than that. What made you sense that the market is in a mood to absorb bad news?
A: More than the prediction the thought was that if you looked around there, you were in a minority and at most times like this it makes sense not to use your own intelligence, however limited that might be, which is actually to figure out what public was saying. So the fact that something like a demonetisation even attempted was a big news and people were expecting the worse, apocalypse was a kind of prediction at that time and Trump was even more outlandish a prediction which came true. Therefore, in that scenario people were extremely scared and there was a lot of fear on the street etc. So the thought was that give it a three-four month period and some of this could turn out to be the stuff that the market — we have been seeing strength in the market, make no mistake, the market was telling right through that and the fact that Brexit came and went, the fact that so many events came and went when the market least expected them and it is usually said that crowd do not make money, so when everybody was on one side, it is very inconceivable that they would end up all being right as it were.
Anuj: Has it now turned the other way round?
A: You could say that but there is one particular metric I would like to point out which is this – the biggest activity in the market is in the Futures segment. If you see the Futures month-on-month carry forward rates, they are still at about 0.4-0.5 percent a month which indicates an annualised rate of 5-6 percent. No moneylender puts out money at 5-6 percent. So if Futures positions are being carried forward, I hasten to add that there is a lot of shorts getting matched with the longs as it were, of course there has been SIP money and arbitrage money coming but it surprises me that they have settled for 4-5 percent return, which is the annualised return, net of all the cost that is coming through.
Typically, the froth is indicated in that space. So a lot of foreigners or foreign funds, hedge funds are short on the Futures and therefore the market has adequate cushion and that is why it doesn’t fall perceptibly beyond a point and beyond a point is a 3-4-5 percent fall immediately meets with buying and this is indicated by the fact that the Futures premium are at very low levels and that to my mind is a biggest underpinning of this market and it is not frothy.
The second thing, if you ask me, optically things have moved but have people being in the stocks when they moved; Reliance Industries has moved 10 percent, how many funds have table thumbed and said Reliance has been an overweight position and we have got it right. They haven’t.
The third thing, if you take local markets, I do not want to mention names, but some of the biggest names in the domestic market who would be 365 days having Futures position, if you will, have actually been completely absent at 8,000-9,000 run or very limited in their participation. Given that kind of thing I get the feeling that this big great Indian public buying which has happened, which is the SIP money, which doesn’t get noticed or earmarked as this is buying as it were but you know the sellers were in this market, you know who the sellers are; foreigners are selling, you know that private equity funds are selling, you know the government of India is selling, you know that issues are coming through. Who is the buyer? You don’t know the buyer. When you do not know the buyer is and it’s the great Indian public in a manner of speaking which is quietly lapping up without ostensibly creating a noise as it were.
I get the feeling that we are in the midst of a very powerful rally and when you look back and you see that now suddenly in the last five-seven trading sessions, you had five big things that have happened, the buyback in the IT space lead by Tata Consultancy Services, the huge Reliance move, the subsequent upgrades, Morgan Stanley going gangbusters etc, on Reliance. The fact that the Trump announcements haven’t been followed with policy measures as it were which means that pharmaceutical and IT may have more than skipped a bullet and you suddenly take into account the coming together of telecom mergers etc. So these events, of course the telecom thing was a little dated, but each of these events tells me that the market has got suddenly one finite leg to stand on in addition to what it already had, which means when I look back and say I can see 8,500 as a bottom for the moment…
(Disclosure: Network 18, which publishes moneycontrol.com, is a part of the Reliance Group)