Suddenly there is a lot to worry about in the world — be it the suspense around US presidential outcomes or the surge in Covid-19 in terms of coronavirus.
The good news is interest rates continue to be low for three years running in the US. The US election uncertainty has been there for a while. I do not think any recent news has troubled it. Biden continues to lead and the market has factored that in. There is a second Covid-19 wave in Europe and a possible third wave in the US. All that is a little worrisome. But exports is where the challenge is going to be and secondly liquidity flows. Whenever this concern comes, there is a risk-off trade and that is why in markets like India where the growth potential is beginning to look up, the liquidity comes down because of the risk component.
We will be in for choppy times and this choppiness will be seen in a good part of the market because any selloff by the FIIs is going to be in the polarised safety spaces in IT and healthcare. . Domestic mutual funds have remained consistent sellers through this. It is not that they do not have money. New fund offerings have raised close to Rs 5,000 crore over the last two months. There is money in the domestic mutual fund basket but they do not want to buy the polarised stocks when they fall.
When the mutual funds enter to buy, the recovery will be more broad-based. We see the baton being handed over from safety to risk. There will be congestion in the market for sometime while India’s numbers come out. The focus has now shifted to the second quarter GDP number. We expect a 10% negative GDP growth in this quarter. The focus has to shift to domestic factors over the next few months.
The tone of earnings this time around has been decent yet the market reaction has been neutral. Are most of the stocks already pricing in a good economic recovery and do we have to wait for two quarters before valuations align with the earnings?
The market has priced in the recovery to a certain extent. But for aligning valuations and earnings, one quarter should be enough. If the Diwali numbers surprise on the upside, that is one potential upside. The second one would be a good kharif crop which typically comes out in the first two weeks of January. A very good harvest with agri GDP going to double digits would mean that overall Indian GDP will turn positive. The market has factored in a Diwali bounce back in consumer durables and auto and the rural economies expect a record kharif harvest yield. Positive surprises could advance the recovery, but if they turn out to be as per expectation, then two quarter pricing it in is probably right.
“If there are good quality stocks coming cheaper then I would step in and buy. Otherwise, at the current valuations, it is not the time to go out and buy.”
In Chennai, when they opened up the silk store, it was overflowing with people. People have money and are willing to spend but the danger is there is the virus out there and a second wave could break out. There is pent up demand, and when it is released, there could be surprise on the upside.
I would rather wait for the data to see how that pans out.
As you await data, would you build positions in some of these pockets which have been looking upbeat on the back of pent up demand?
I will wait and see. It is not that I doubt the numbers, but if the international fund flows go out and there is selling in the stocks and sectors that I am bullish in, then I will step in and buy. For me it is about buying this growth. Buying it a quarter earlier or later does not matter. I got to buy at the right price.
In addition to tracking the growth numbers right, I would also like to see the risk-off situation in international markets. If there are good quality stocks coming cheaper then I would step in and buy. Otherwise, at the current valuations, it is not the time to go out and buy. We are already holding all these positions. I would rather wait for some corrections to step in and buy with the incremental cash that we hold.
What could be the dark horse in this market?
We expect financials to pick up because lending still has not happened, transmission has not happened fully. The financial system and the good quality NBFCs are increasingly accessing cheap money from the banking system. The upside on the lending side on the financial services is a good play. Consumer durables, auto, all are linked to borrowing. If you see consumer durables and auto demand picking up, automatically you are going to see the loan books pick up. That is definitely a positive play.
The other thing is I still expect the government to announce some kind of a fiscal stimulus and that stimulus would be directed towards the rural population, towards the middle class to get the demand scenario going. I would still say that there is some juice left in the consumer durables, especially from the rural areas. So that will be the second space.
The third space will come up when the government will bring in a lot of reforms. I expect a lot more FDI related liberalisation which would set off the capital goods cycle and there will be an interest from a valuation perspective as well. Order books will take time to come, profits will take time to come but there could be buying interest in the broader capital goods, industrials, EPC contractors based on certain announcements. The government has the ability to drive a lot of reform given the situation is right and that is something that the rating agencies would also welcome. Any fiscal stimulus has to be accompanied by a reform announcement to cushion the impact. The rating agencies then say there is reform which will lead to future earnings and we can look kindly at whatever fiscal deficit slippage that is happening. I remain optimistic about that.