Bull market is 100 per cent intact: Madhusudan Kela, Reliance Cap

In a chat with ET Now, Madhusudan Kela, Chief Investment Strategist, Reliance Capital, says buy in banks now and buy systematically


ET Now: What a year it has been. You look at the screen and you say 20 per cent down in midcap stocks, 10 per cent down in large cap stocks, everything is melting away, no one saw this coming.

Madhusudan Kela: I would not say that no one saw this coming. It was there in some of the midcap companies. Since the last two to three years, we have been seeing some kind of euphoria being built up because there are so many new investors. The market was crazily following up. Whenever money making becomes easy, you look at some website or you look at someone tweet, you buy shares and you make money. I wish it was so easy to make money. So in the midcap and the small cap space, I think some amount of euphoria, some amount of frenzy was very clearly visible.

ET Now: So Diwali has now become Diwala for midcap investors?

Madhusudan Kela: I would not say that. You should not categorise all companies under one trade. So I would not say all midcaps have a problem. I would say there is selectivity. Wherever there is too much euphoria, you can expect correction. One did not expect China to correct 25 per cent in 10 days but the feeling was there that somewhere what was going on was not sustainable and it has corrected. So I would not say that people were very surprised by this move.

ET Now: The fact that China is shifting its business model is old news. Crude in epic bear run is yesterday’s data. The fact that world’s growth rate will be challenged in 2016 is well known. The economic data this year has not worsened yet markets are nervous. So what explains this volatility?

Madhusudan Kela: What has happened because of this fall in crude prices is that the countries were essentially big suppliers of crude. They had all the sovereign funds and they were the people who were supplying money to financial markets. So our estimate was that at $100 and above, $1.5 trillion was going into oil producing countries and a significant portion of that was coming into financial markets. Now at $30 or $40, this amount is roughly $450 billion. So effectively speaking, one $1 trillion of liquidity has been taken away because of the fall in oil. Now the argument is that ultimately it is going to the consuming countries and it is boosting their economy. But, there is no one-and-one relationship with the financial markets, because when this money goes away, it goes away from financial market. When it comes in, it may be somewhere else which may have its impact but it is not one on one proportion. So the impact may be very delayed while that selloff is occuring of now.

ET Now: Is the current market setup or compression or volatility a long-term investor’s great friend? Right now we are calling it risk but do you think this is volatility? You told me in Diwali that embrace volatility and is this we have got?

Madhusudan Kela: So that is what my call is that let that the long-term India story is intact.

ET Now: Why is it intact?

Madhusudan Kela: Because you rightly said yourself that the crude prices are coming down. It is fantastic news; one dollar of crude equals one billion of savings for India. And if you have had let us say last year your average was $86-$87, this year, your average is $50. So you have not yet felt fully the impact of $25 and $30 of oil.

ET Now: But bulk of the crude benefit is being gobbled up by Government of India, it is not coming to the end consumer?

Madhusudan Kela: Somewhere it is helping the economy. No, I think half of this is being passed on to consumer and half being retained by the government which actually is a good thing. Fiscally they are able to make their situation much better. If globally things are going to be so challenged, which are the economies which have a potential to grow at 8-10 per cent? I would say once the dust settles down then you will see a lot of flows, even on FDI front, in India. So nothing has changed just because markets have corrected by 15-20 per cent. We cannot say that India bull story is gone.

ET Now: So the bull market is still intact?

Madhusudan Kela: Bull market is 100 per cent intact. If it was not intact, I would not be giving you interviews.

ET Now: But you have spoken to me in bear market as well but...

Madhusudan Kela: I am saying we are all here because there is a hope that we are in a real long term bull market.

ET Now: So this is just a structural correction.

Madhusudan Kela: This is a structural correction which may last a couple of months because once markets fall specifically globally there is a consolidation which can happen and few people are arguing that this is a fresh bear market, where is the fresh bear market for two years Nifty has not made any returns.

ET Now: So this not 2008, let us be very clear on this?

Madhusudan Kela: See we have to watch the global events, I am not saying whether it is 2008 or it is not 2008, at this point of time as things stand, it does not look like 2008 at least for a country like India.

ET Now: What should an average retail investor do? In the last five years, they have only bought real estate and gold. They came back in 2014-2015 and in the very next year, 2016, they have lost money?

Madhusudan Kela: No, I think you know in equities you cannot evaluate your performance based on six months' return because equity investment is not supposed to be made specifically by retail investors for six months or 12 months. When you buy a piece of land, do you go and check with your real estate agent what is the price of the piece of land every three months? When you buy gold, do you check what is the price of gold every month with jeweller? No. When you buy equity why are you gauzing your performance? Remember, a majority of the Indian public has not yet participated in the market. Not even 3 per cent of the savings have come into the stock market yet. Even though the inflows in the last 12 months have been very good in mutual funds, a five-year view cumulative shows there is still net outflow from equities. At the same time the absolute saving has gone up, absolute size of GDP has gone up, absolute size of financial savings has gone up but net-net there is no money which has come into equity. So this kind of correction, provided the medium and long term bull market is intact, is a fantastic opportunity.

ET Now: Yes Friday morning to be precise.

Madhusudan Kela: That is right. So I am saying that crude is the most important thing for global markets stability and we believe that maybe bottoming out of the crude oil prices have started. I am not expecting a bull run. Nor am I saying the crude will go to $100 again. But at this $25-27 of crude oil prices, there are lot of non-OPEC countries which will start to make cash losses. A lot of this shale oil which came in US, Canada, will start to make cash losses. Now the oversupply is only 1.5 per cent, it is 1.5 million barrel every day in terms of money. It is $10 billion and that is eroding market caps and valuations. To my mind again it is a problem that can easily be fixed. Cutting production of crude by 1-1.5 million barrel is not a big deal but I cannot say why it is not happening. I can feel as an investor that at $25, $27, $28 there is very limited downside in crude and in this year maybe in the second half you will start to see some improvement and that should stabilise at least some nerves in the international markets.



ET Now: Now Nigeria has put a ban on forex control. Ebezina is saying that you will have to pay 20 per cent taxes if you are taking money out of that country. To your mind, the adjustment of crude in this new world is that over or is it going to be an ongoing process whether it happens in a country level, a sovereign fund level or whether that happens at a liquidity level. Is that behind us?

Madhusudan Kela: Not it is not behind us. It is coming. The pain will be felt. In case of Nigeria or Venezuela, a very significant portion of their income comes from crude. Nigeria has $29 billion of foreign exchange reserve. Venezuela has only $5 billion of foreign exchange reserve. While that crude loss, absolute loss between $100 and $30-40 of crude price, is significantly larger than the foreign exchange reserve they have. So they have only two options – a) resort to borrowing. To countries like Saudi Arabia, the world will be willing to lend but is there enough dollar liquidity which is available for Venezuela? The answer is no. Is there enough dollar liquidity available for Nigeria? The answer is no. If the crude oil prices stay at $25-30, then some of these countries will feel accentuated pain which has to get reflected in the worldwide financial markets.

ET Now: Now on paper, we can prove that India is the biggest beneficiary of decline in crude prices. So we are in an enviable spot right now. Local growth is coming back and globally things are on our side, yet Indian markets are suffering.

Madhusudan Kela: Because of the financial impact. It is a fantastic news for economy but once liquidity gets sucked out globally, the selling number by foreign financial institution investors is nothing else but the explanation that the sovereign money which came into India in the last few years because of high crude oil prices, since they are feeling the pain, they are withdrawing the money. The short-term market is all about demand and supply. If the supply is more, then obviously markets will feel the punch. Apart from the fundamental recovery which is taking more time than required in India, we are talking about earnings growth. In the last two years, we have been saying that this year we will grow at 20 per cent but eventually by the time the year ends, the growth comes down to 6-7 per cent. So I am hoping that if crude prices recover, sometime the financial impact will be significantly lesser in terms of outflow of money from the Indian market and that should be a great news for the markets here as well.

ET Now: So for those who always wanted to buy, buy now?

Madhusudan Kela: Absolutely, buy now, buy systematically. And I am saying do not be afraid. I am telling that you know just because Madhu Kela said that 7200 is a good point to buy, you put all your money at 7200. I am saying markets have its own reason and we all make our assessment and judgement based on what are the variables which are available today, if the variables change we will change our opinion but I am saying anyone who systematically invests through this year, I am saying specifically in these first six months which is what I expect to be much more volatile, I am sure he will make money in the next three-five years.

ET Now: What has gone wrong with banks, I mean if everybody is so optimistic about economic recovery and if the long term trends for economy are looking strong, banks is the biggest proxy for any economic recovery and banks are down 25-30 per cent?

Madhusudan Kela: So again banks clearly the big issue is the nonperforming assets and the fear of those nonperforming assets.

ET Now: So do you think there is a fear in the banking system or there is absolute problem there?

Madhusudan Kela: I think there is combination of both, there is definitely some absolute problem but I think the fears are significantly exaggerated so when I meet the analyst community today, even for private sector banks they want to tell me that whatever is their corporate and international book you take 30 per cent will be completely written off, you take 50 per cent might be bad assets. And for a change actually, I actually did the number myself this time, even if I take 25-30 per cent off from the balance sheet which is to be written off over the next three, four years, some of these banks are very compelling opportunities from a three-four-year perspective.

ET Now: So your big call is that the selling in banks is overdone, buy banks?

Madhusudan Kela: Yes. Yes. And buy systematically. Can it get accentuated on the downside? The possibility is yes, we have seen times when the same banks were trading at three time and four time book. Just few years back, even a few months back, they were in a much more respectable position. Now the pendulum has swung on the other side. So I would say for a investor who has a three-four-year perspective, it is better to buy bank stocks than put money in bank deposits.

ET Now: Fair point. That is a wonderful comment. We broadly classify banks into PSU versus private. Llet me classify differently, wholesale versus retail, banks which will gain because of economy, banks which will gain because of consumption demand coming back. Which one would you bet?

Madhusudan Kela: Buy the Reliance Banking Fund. At least let us do that job for the investors who are watching us. I do not have a specific advice to give which banks should you buy and at what price should you buy. My compliance does not permit me to do so but for the people who are smart, they can figure out for themselves but the people who actually want to give it to some professional there are lot of banking funds which are available, there are people whose portfolio is overweight on the bank stocks, I think those are the places which retail investors should look to.

ET Now: Were are you reasonably confident of earnings recovery and where do you think the selling has been overdone, is it IT or is it pharma?

Madhusudan Kela: There was a complete bull run in pharma from 2008 when the market cap was Rs 1 lakh crore and it touched Rs 10 lakh crore for the sector as a whole. So in this timeframe, whatever you bought in pharma, you made money. I think one has to start to differentiate because the normal pharma companies which are making money by just exporting to the US and in a normal generic market, I expect that will become very competitive because now USFDA has come and already said that we will accelerate the process of giving approval to 10 months in 2017. This means more competition but still there is lot of opportunity in the pharma stocks. For pharma companies which are going into a complex journey of generics, there are people who are going into biosimilars, the people who actually have approvals for lot of complex drugs. So this pocket is going to be mixed. Again you need an expert to figure out which is the pocket which will do well and which is the pocket which will be under pressure.