Unless we breach 11,200 on Nifty, we will remain in bear grip: Atul Suri

If we cross 11200 I think we can have a very good short covering rally can take us to 11600--11700 also, where everything will be forgotten because it would be 1000 points from the base, says Atul Suri, Founder & CEO, Marathon Trends - PMS. Excerpts from an interview with ETNOW.

In summer of 2019 when Prime Minister Modi got re-elected, we thought that it would be an exciting summer. It has turned out to be a painful period. What has gone wrong? The state of the mid and smallcap stocks, reminds one of 2008. Excruciating pain, one-sided fall, complete absence of buying and only selling?
Absolutely. Today it is exactly three months from the Nifty top we had at 12100. Let us look at these three months of underperformance; we hear a lot of headline global news, you get a lot of these links of WhatsApps -- inverted yield curve, trade war, Trump tweets, Brexit problems. But the global markets are doing pretty okay! The US is 4% from lifetime highs. But in the same three months, we are down almost 9-10%. The smallcap index is down 17% after a dismal 12-18 months. There are pockets of problems in the markets. However, the bad news on economics, 5% GDP growth etc the market had been expecting to some extent.

This is yesterday’s data?
Yes, because the fact is out of the 25 global markets we track, barring Argentina which has a problem, we are the worst performing market on a three-month basis. The markets are beaten down in anticipation of data, yes it can be a little worse than what was expected etc those are semantics, you will have a 100 point Nifty move etc. That is fine but the fact is the bad news was expected in the market. But what after this? The market is looking for action by the government. What I have been observing is a sense of denial. Till about a week ago, some bureaucrat was saying we are the fastest-growing economy in the world and that bubble has to burst. The feel, the need for some positive action is very important because as we know, this is a man-made crisis. There is no structural problem. Globally markets are fantastic, there is a lot of chatter but there is really no problem; the crude is below $60, bond yields are tanking, interest rate cuts are happening in India. So, it is very important to see government action.

Let me out this in terms of markets and Nifty. We are sub 11,000. I personally think 11200 is a very important level for the market. We get to 11,100, 11,200 and we got exhausted and came back and this has been happening for the last one month. Till we go past 11,200, we will remain in the bear grip. Mind you bear market or bear shorting is tremendous. If you start looking at the data, there is a lot of bear hammering that is happening. To make the bears cover, you have to make them uncomfortable and they are sitting on pots of money that they have made in the last three months.

It is only beyond 11,200 that we will be out of the woods. For me, that level is very important. But coming to the earlier point, the market is extremely oversold, yes bad news is expected, yes, things are not perfect hunky dory but the silver lining is if we see good government initiative, things will improve. It is just a sentiment issue. Everyone-- who is not even connected with the market is talking of 5% GDP.

Everybody has a view on slowdown, whether it is real or not.
Absolutely.

Are you saying that worst of the newsprint is behind us? Markets are a forward looking beast. You never make money based on yesterday’s data. How much of the bad news is in the price?
A substantial part of the bad news is in the price. That is why even though bad news comes, we will sell off but beyond a point, recovery will come. We will fight, we will try to take out this 11200 which I think is going to be a very important level for me to watch. And the sectors that I would look for or spaces that I would look for are essentially banking.

A common friend, Mr Jhunjhunwala told us exactly the same time last week that he feels that 10500 thereabout is the bottom for the Nifty.
It is possible. It is possible but the thing is that bad news is economically things are not going to turn by itself. You will have to see assertive action by the government or the government needs to be seen acting. So I personally think that this market really depends on what sort of government actions, what voices, what sort of body language is visible.

So are we in for a long winter?
It will take us time. It is not going to be a turnaround. Yes, if we cross 11200 I think we can have a very good short covering rally can take us to 11600--11700 also, where everything will be forgotten because it would be 1000 points from the base but to take out 11200 is very important. Why I am saying this is because globally things are good. Global markets are strong, the macros are okay, it is just that we need to be able to come out of this bear grip.

Why I am talking about bear grip is because if you look at data for the last three months, the FIIs have some Rs 23000-24000 crore negative but the DIIs have put in Rs 30,000 crore positive. Our net institution inflow is there of Rs 10,000 crore.

And I am not throwing in LIC and EPFO. If I add that data, the net liquidity from institutional investors maybe surplus?
Right. And the Nifty short position by FIIs is at record. These oversold levels I last saw in 2013 and beyond that I feel when you have such markets pull to one side very often, if there is no disastrous news, it is something beyond our control. If there is some disastrous news, it is a different story; but if there is no incremental crisis, the markets will spring back by the sense that they have been pulled to one side far too much.

Let us understand the scenario here. Scenario number one, we do not see a rally but we see a mild recovery. Scenario number two, this is the best which we will get for the year and now there could be a gentle or a gradual decline and we may retest the earlier lows. Which scenario do you think will play out?
I personally think scenario number one will play out. The reason is that the 11,200 level I have been mentioning will break out not based on something spectacular happening in India but rather global markets. I am very bullish on the US and European markets and in spite of Brexit happening, the UK markets. I feel the global markets look very good and if global markets do rally from here, there is no reason why we will get so stuck or so oversold. That is for me the biggest silver lining there is.

In India, bad news will continue. The GDP numbers are not going to turn around. They can get even worse next quarter but the important thing is what sort of government action is going to happen? If there is no government action or if there is no government pronouncements, that will be a big negative.

How come markets are not reacting to what has come out in the last 10 days? FPI tax has been reversed but FIIs have not come back. PSU banks merger has been announced. Instead of denial, there is a widespread acknowledgement from the government that we need to do something. They are talking and they are walking. Why have the markets not reacted?
It will take time. They have been silent for far too long. The government should have fixed the FPI tax as soon as they realised that they had made a mistake. But it took them two months to even say something about it. They have been in denial and the fact is if you have been in denial,a band-aid is not going to solve it, you will have to put in a plaster. So a lot more activity is needed. Communication is a very important part of the game which I find was lacking with this government.

What are you doing for your clients long, short?
Essentially I am a PMS, so I cannot be short. I am also sitting fairly invested, and my cash levels are low, but my largest allocation is to financials in the private bank space and consumption. Consumption actually was in a very difficult phase two to three months ago. Everybody was talking about how it is over in consumptions. But the numbers that came out for some of the consumption stocks which we have in our portfolio have propelled these stocks to lifetime highs. Lots of these stocks are touching lifetime highs. They actually have really helped the portfolio in the last month.

Financials or what you call the private sector space, surprisingly even the larger private sector banks, have been a little on the back foot. The cause of the recent pressure on the market in the last one month surprisingly has been due to private sector banks -- the Yes Banks and RBLs. But even among the larger players like the marquee HDFC Bank, it has not been a pretty month. Otherwise, this is a stock that always stands out and is the first to rally. You are not seeing those kind of things. For my portfolios, the last month has been spectacular as far as the consumption revival is concerned, because we were overweight consumption.

You were plus in the month of August?
That is right. It has been a positive month for us in spite of the index being negative.

You were not short?
No, we are not short and we are 95% invested. You are able to muster positive returns in a very difficult scenario if you are in the right spaces and for me the right space, the multi-year theme for India is consumption. This is a very long term trend and we are trend investors.

95% of the market is going down. You are betting on that minuscule portion which is going higher. You are betting against the trend and a trend watcher never does that!
See essentially one is the market trend where I take a view on the market and that is if I am trading the index but I am trading bottom up in stocks. What you said is right that my universe two years ago would have been 50% of the market but as this long down phase is happening, sadly or worryingly this universe is compressing and you are right that we are all stuck. All those who are doing well in this scenario are stuck to that 5% of the market.

Does not make sense to do that. The last man standing will not stand forever?
No, essentially very often stocks that fall less in falling markets are leaders of the next bull market. If markets revive, these stocks could actually be the leaders and there is always this thing that oh! they are very expensive, they have run up too much but I have personally seen and I have been veteran of many cycles -- stocks or sectors. Look at insurance as a sector. It is standing out so well in this market and then you go down and look yes earnings have improved. Yes there is under ownership. These things will set out and as a portfolio manager, it is your job to protect the client’s capital. These are the spaces where hopefully the drawdowns are low and when markets revive, they are the first leaders to fall less in falling markets and the moment markets go up, it will be the first to go up is what you are really trying to achieve.

Great point so I would spend some time here. The markets will recover -- today, tomorrow, this month, next month. One day, this bear market will become a bull market. You are making a case for the narrow stocks which everybody is criticising -- a case of sour grapes for those who don’t own them. So whether it is Nestle, Asian Paints, some insurance names or a couple of private banks?
They will do well and you have to look at things across cycles. If the markets suddenly revise you will find that in the beaten downs midcap and smallcaps, we will have 5% gains but it is important to look at portfolio performance across the cycle. Two years ago, all the kachra (junk) stocks were the best performing stocks. If you held all these stocks, you would be punished. But when the cycle turns and you just cannot assess somebody on an upcycle, you have to go through a complete cycle and when the cycle ends, you realise what are the compounding stocks.

Net-net in India, big wealth has been created by 50 compounders and these have always been expensive. I am not talking about a phase, I am talking about cycle over cycle 10 years, 15 years, 20 years. That is what we are there for. Ultimately, wealth is created in these phases.

Like a common friend of ours who always says that a flat at Peddar Road will always be more expensive that one somewhere in the suburbs of Mumbai?
It is unfortunately a reality. We get seduced into that phase but the thing is that if you are patient and having in fortunate India we are a certain generation like our generation has seen a few cycles and we hopefully we learn from every cycle you realise that these have been the wealth creators.