I Was Bearish, I Am Bearish & I Will Remain Bearish: Saurabh Mukherjea

Novice investors like you and me are in a fix. We are dependent on the Gurus to give us a clear sense of direction on whether we should be deploying our meager savings into equities or stockpiling it in fixed deposits, whilst waiting for the Bear market to end.

The best case scenario is when the Gurus are unanimous in their advice. If the Gurus are unanimously bullish about stocks, we can invest without a care in the World and stay stress-free.

Some Gurus like Vikas Khemani of Edelweiss are filling us with confidence with their bullish stance. “I remain very optimistic and positive that over the next two to three years, we will see a very robust economic growth environment and that obviously will have to reflect into corporate earnings and market performance” Vikas Khemani said in his latest interview.

Unfortunately, Saurabh Mukherjea is not toeing the same line. On an earlier occasion, Saurabh had warned that we should buy stocks “only if we have a penchant for losing money”. He advised that we should wait for the Sensex to plunge to 22,000 before even looking at stocks.

In his latest chat, Saurabh has continued with the same doomsday scenario.

Saurabh explained that the ongoing rally is not India-specific but is led by the dovish stance of the Western Governments towards interest rates. He pointed out that there are reasons to be bearish because major parts of the economy are still “misfiring”. As usual, Saurabh gave a clear-cut explanation for his stance:

(i) Rural India is still a very difficult story. I doubt that the budget stimulus will be enough to turn rural India around; the monsoon is anybody’s guess. We can see the forecast but given how bad the situation in rural India is, I doubt one good monsoon will turn around rural India’s fortunes;

(ii) The banking sector is expected to come out with bad Q4 results. My reckoning is, right through FY17 we will see deterioration in the banking sector;

(iii) The private sector capex, leaving aside a little bit of road building and irrigation projects led by the government, there is no sign of private sector capex return. I do not think that will return in FY17.

(iv) In the last three, four months, the private equity VC inflows into India which were primarily tech sector focussed, have throttled off quite significantly. It has happened around the world. In Silicon Valley itself, tech funding is drying up as a result tech funding coming into India is tapering off. We had something like $35 billion money coming into India from overseas sources over the last 12 months, that money source is I think drying up quite quickly, with a lag that is going to hit us badly;

(v) Government capex, which in FY16 was 21 per cent, this year the budgeted growth for the central government is 4 per cent and the state governments are also not going to grow government capex. So again, halfway through the year we will see the government capex cycle peter out and in the second half we will again be looking at a downturn in the capex cycle.

Saurabh emphasized that in these circumstances, we have to be “cynical and circumspect” and not get carried away with the bullishness of the other Gurus.

However, it is noteworthy that Saurabh has now become bullish about cement stocks. He pointed out that “things have turned materially” and that “Both in volume and in pricing, the cement sector situation has improved”. He added that a plethora of construction projects, government projects, state government projects across the country are driving the secular recovery in the cement sector.

Saurabh is also gung ho about auto stocks. He emphasized that over the last 50 years, “The only sector which outperformed in every single market in every decade is auto”. The logic for this is that as the per capita income increases from, say, $500 or $1000 more roads are built and people buy more automobiles and trucks. “Auto is a very powerful sector at this stage of development and it has to be a central part of your portfolio” Saurabh opined.

Amongst the auto stocks, Saurabh singled out Ashok Leyland as his “favourite play for the last three years”. He opined that though the stock has surged from Rs 10 three years ago to Rs 150 today, it deserves to be bought because it is a well run company with consistent improvements in operating margins and will go from strength to strength. “You just buy it and sit on it for a few years. It will make you lot of money” Saurabh added with supreme confidence in his voice.