What explains this sudden panic in the market after having started off that well?
That is a difficult question to answer. Just like I could not explain why it continued to go up, I cannot explain why it has stopped and reversed direction. However, the fall is sharp. You can attribute whatever reason you like, I would simply think that the market has kind of run ahead of itself and was only waiting for a trigger to collect. You cannot have a situation where you continue to go up every day which we were experiencing for almost the entire last couple of weeks. For now, I would just attribute it to correction from where the market had reached a somewhat over-stretched level.
Do you also sense there is a lot of panic and confusion around Sebi’s new margin pledge system?
Well that is true but then that should not come as a surprise. Sebi had broadcast quite a while back, in fact they were supposed to implement it last month. But it got postponed by a whole month and so people should have gotten used to the idea. I believe that there are issues in terms of implementation, especially in terms of creating client IDs and so on. But if it is only that, I do not know whether that will last for too long and in which case you may actually use this as a buying opportunity if you still have cash. If it is simply a technical issue of not being able to sort out your margins for a few days, then the market will pretty much come back.
What would you buy at lower levels? We are still watching out for the GDP data as well. Overall nothing much has changed in terms of near term triggers. Banks for the moment are looking for clarity on the moratorium picture.
Unfortunately most of the triggers are actually going to be negative whether it is the macro or the micro. Results are not going to show you anything great. When companies tell you that they are doing better than expected, what they mean is that they are doing about 25% lower than what they were doing in the previous year, which is nothing great given that we were already on a slightly declining path going into the year even before Covid started.
If you continue to slide from there, you will actually have a situation where for a change you will have a negative GDP, something I have not seen in 30 years that I have been in the market. So most of the triggers are likely to be negative. Valuations are screamingly expensive. However, the only thing that has not been going for this market has been the foreign money coming in and the FIIs buying for the last couple of months. So long as that continues, things will come back but I have been asking people to exercise caution as much of that money comes from the US and the US itself is showing signs of possible change in guard.
If that were to happen, there would be a reasonable selloff if the new government comes in with a policy of trying to increase taxes. You have to be somewhat careful. From a purchasing point of view, your strategy has to pretty much remain where it was, which is that you buy stocks which will show you some signs of growth.
In my case, I would argue that sectors like power, etc, are likely to be better positioned because they are going at valuations which are not only cheap but actually showing as if it will shut down and this is a sector that cannot shut down and where demand can only continue to rise.
What is your outlook when it comes to sectors like FMCG and auto?
I do not see any evidence of any pent up demand in consumer goods. It was not a sector which was shut down, especially the food related items. It actually gained market share because you had to buy stuff and you could only buy it online. So organised FMCG players actually managed to gain market share. It is again a sector which is extremely expensive and the likelihood of any earnings surprise there is rather muted.
As for auto, it is a marvel in terms of how the stock market has performed, given the fact that we have a sector which has fallen about 20% odd last year and is likely to fall about the same this year and more or less will be half of what it was a couple of years back.
From there, for you to actually recover and go back to where it was two years back will take you another two years. So for the stocks to have rallied the way they have, on the basis that there will be some kind of explosive demand growth in a situation where people have lost jobs and where salary cuts have become the norm is rather being too optimistic. If at all you want to be in the market, you may have to hold on to FMCG as a sectoral play. I do not see why you should not be underweight autos.
What about some of these pharma names? Do you think the market is looking for more of an opportunity to cool off on these names?
I would think so. This has been one of the best performing sectors. It was under owned when it started moving and obviously has corrected itself very dramatically. Most stocks had almost doubled and in the frontline companies, have gone up at least 50-60%. So from here on, you have to start valuing the business for whatever it is worth and that means that you have to look at the growth numbers again. Pharma is not something that you buy because you like more of it. You buy because you have to and therefore the flip side of it is that you do not need to buy more just because there cannot be an un-sustained demand coming through on pharma especially in prescription drugs.
You will get a steady state kind of growth. This would be a sector which you want to keep overweight positions in largely because India will benefit from whatever is going around in the world but that said, you have to wait for a correction of fairly significant magnitude for most of the frontline companies barring those which have not moved very much like Sun Pharma. Most of the rest will have to correct a bit before you were to try and get in but I would still be overweight in the sector.