Speaking to CNBC-TV18 Udayan Mukherjee said that the whole era of easy money driving momentum in emerging markets is over. Markets have been resetting themselves and last night with the Fed reserve raising rates that nail got driven home with more firmness, he said.

Mukherjee said we should resign ourselves to a lower trajectory of flows and lower momentum imparted from the global side to our markets.

It might not be an inclusive period of growth globallhy, he said, adding that this time is different in that you might have to make a distinction between developed world and the emerging world.

Markets might seek lower levels in the short term and the pain is not out of the system, he said. “There are more headwinds than tailwinds now.”

The moment market has a rally, people will start to fret about earnings, he said. Between now and Budget, there is no upside in the market as it will be sold into.

He believes it will be a challenge for Nifty to climb over 8300 levels.

Mukherjee, not a big fan of IT, maintains that the sector most likely won’t deliver great returns going forward.



Below is the verbatim transcript of Udayan Mukherjee’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.



Sonia: How do you read the Fed event, do you read it as a sign of better growth for the US markets hence good for global risk assets or would you be a bit spooked by the possibility of three rate hikes in the next year?



A: I don’t think this will majorly derail sentiments in global markets. However, I think one thing is fairly clear that, that whole era of easy money driving momentum in emerging markets is over. I mean that is the change that we should come to terms with. I think markets have been resetting themselves to that kind of an era for some time now and I think last night maybe that nail got driven home with even more firmness that that whole rising tide phenomenon which we had seen in earlier global bull markets were because monetary policy was so loose that you had lot of money sloshing around in practically every commodity and every market in the world and that would lift pretty much every boat.



I think right now, that easy phase is over and if you have to perform as a market, increasingly you will have to deliver on the economic front and on earnings front. So, I think markets will now have to put up their hands and say we are good and therefore we will go up rather than because the dollar is weak, we will all go up and because the US cannot raise interest rates. So, that I think has ramifications for what kind of flows we should expect in 2017 and 2018. It is not to say that no money will come into India but we should resign ourselves to a lower trajectory of flows and therefore lower momentum imparted from the global side into our markets.



I don’t think hell will break loose but once we deal with our own problems at home, chances are that we will stabilise and we will start moving higher again. However, this time, we will have to do it on our own and not on the crutch of global liquidity as might have been the case in earlier years.



Latha: Is this the way to pose the question that should emerging markets be happy with a weak or a weakish developed market and therefore plenty of liquidity or should we prefer a growing developed market and therefore tighter liquidity but certainly growing global economy?



A: I don’t think we should go by only past precedence on this answer because it is tempting to fall back and see and turn back into history which is what we all do in what happened in such phases in the past. I think this time might be slightly different, in that you might have to make distinctions between what is happening in the developed world versus what is going on in the emerging world simply because of the fact that this time it might not be such an inclusive period of growth globally. What the US is trying to do led by its new leader, might be to make the US strong again.



Anuj: In the near term, what is your sense, do you think – in the past we have bounced back from 7,950; that is the Brexit day low and even the recently made low as well, do you get a sense we would bounce back from there again or we seek lower levels?



A: I am not a chartist but I think the market might seek lower levels in the short term. Eventually we will stabilise and bounce back but the pain is not out of the system and there are far many more headwinds than tailwinds at this point in time. I think the moment the market has a short rally for whatever reason, people will start fretting about the earnings which will come in January which will look quite ugly and probably continue to remain fairly ugly till the April season.



So, between now and the Budget, I don’t see major upside to this market. I think upsides will probably get sold into till we see the colour of much more supportive policy from the government. On the way down, I think there are challenges because technically the market is not looking great with emerging markets being on a bit of a sticky wicket at this point in time and I think this whole mood around demonetisation and its earnings impact will continue to drive us lower.



I would not be surprised if that low gets taken out; I don’t know by how much but I think more importantly the upside will be seriously restricted and I think it will be a big challenge to even climb over 8,300 in the near term for the Nifty. I don’t think 7,900 is safe.



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Anuj: IT has clearly bounced back and looks like there is a bottom in place. Would that be a risky assessment or would you agree with that view?



A: In a scenario where there is mild risk off in global markets, IT tends to outperform. In any case, IT had underperformed for such a long time and valuations had gone down to the kind of levels that they had, a bounce was never unexpected. You would have got that bounce in Infosys for example from Rs 900-1,000; that I think most traders could have seen coming. However, the moment you get a little bit higher, I think those headwinds of growth and valuations not being that cheap any longer would come into play. So, you can hide in it for the moment but I don’t see IT actually delivering great returns going forward.



As I said earlier, the next three to six months is a phase where you want to be buying good businesses which are getting battered down and not hiding in stocks which will fall less or will give you 5-7 percent up move during the course of the year. Leave that to the fund managers who have to manage NAVs; you are not going to get rich by buying IT stocks or frontline IT stocks from here on but you may get rich over the next three or four years by buying some great franchises which have fallen because of this demonetisation thing. It will probably make you poor for six months from now if you are buying or starting to buy here, but over a three to four year period, that is where you will make money and not in some of these IT stocks.



These are stocks which have played their game, maybe 7-10 years back, so, periodically they will be up 10 percent or down 10 percent but at best they are mild compounding machines. The serious money was made in this sector long back and now they have just too many challenges. So, I am not a big fan of IT regardless of the fact whether they can go up 7-8 percent more from here.



Latha: You were telling why we should not compare it to 2003, why this may not be a secular growth story when the mother economy US moves, not necessary that emerging markets (EMs) should move up?



A: There are two reasons, one is technical and one is fundamental. The technical reason is that, if you ask any serious fund manager who allocates capital globally today, he is far more focused on what he wants to do and how much money he wants to put to work in two markets. One is the US and the other is Japan and that is both in the equity space and in the fixed income space. It is akin to what a fund manager would do if there is a roaring run in the Nifty stocks. He is not going to be waking up in the morning and worrying about what he is going to do with his holding in Kajaria Ceramics or Finloex Cables. He is going to be focused on what to do with ITC, Infosys, Larsen and Toubro (L&T) and Reliance Industries.



So, I think the problem is that; we may think we are the cat’s whiskers but we are at best a midcap in the global capital space and the big boys are moving now. Look at the US, look at Japan, they are on a tear. So, every fund managers focus now is what to do with these two markets, giants which are woken up after a long slumber and I think that reallocation is taking up so much of the attention that I think emerging markets including India are at best at the back of somebody’s mind who is allocating global capital today.



The fundamental reason is that yes generally a recovering US is good for emerging markets and most parts of the world, but this time, is the US going to be better at the expense of the rest of the world? That is the way; it doesn’t seem like an inclusive kind of growth that the US leadership is playing for. It seems like an exclusive kind of growth and therefore we have to see what shape and form this US recovery takes in 2017 because it is very early days yet.



Also, on the US recovery, I think we need to be sure that this rally which is coming in or has come in before Trump comes into even the picture, actually plays out over the next couple of years. I will remind you of our own homegrown experience; in the seven or nine months leading up to the Modi victory, the market was up some 40-50 percent. Since he came into power, in the last 30 months the market has gone up at the average rate of 3 percent per annum; that is no bull market.



I hope that doesn’t happen with Trump where the market actually runs up ahead of his taking a position at the poll and then after he comes in, the market believes that we actually got too bullish and optimistic, things are actually not so gung-ho on the ground. So, the proof of the pudding is in the eating and we have not started eating the pudding yet.



Sonia: You did mention that the way to get rich now is to invest in some of the good franchises that have fallen because of demonetisation. There are plenty of stocks like that whether you look at names like Asian Paints, Zee Entertainment; all have fallen 15-20 percent since demonetisation. Are those the spaces that you would look at, many of the auto names as well?



A: With the caveat that they may not have hit their lowest prices yet, I think what we are having going through right now is a bit of a lull in the market. The first brutal fall has happened. Now, everybody is reassessing how things move from here because there are many moving parts and the market is going through a flattish kind of phase. I am not convinced that many of these high quality franchises have actually bottomed out. They have fallen a lot, valuations have adjusted significantly and you never know when the stocks bottom out. You know it only in hindsight.



Therefore I keep saying that one should start the process of buying but keep buying so that you get good average prices because you don’t know whether they fall some more later this month or they fall some more once the January results come in or they actually drag out for a bit and then they fall when the April results come in. So, this is going to be a challenging phase for many of these companies, a lot of earnings mark down will happen, they will survive this phase for sure but you want to be standing at the end of it having bought at least 10 percent of the bottom; that would be a decent average price. So, you don’t want to spend all your fire pyre right now in one shot. However, that is the place, that is the basket unequivocally that I would be looking to buy.



Just one last thing since you guys were talking about this interest rate phenomenon. I think it is an interesting phrase for us at the Reserve Bank of India (RBI) as well because we are talking about three interest rate hikes in the US while we are talking about three interest rate cuts in India into 2017; that is almost a 150 basis points divergence in where rates will be in the US and where rates might be in India. I think it will be a very interesting challenge for the central bank out here and how it steers us through this kind of divergent movement in rates. I miss Raghuram Rajan actually.