Just a little puzzled with what is happening with the markets the last five trading sessions? Today also it has flattered to deceive and all the morning gains are sold into!
One must look at it in perspective. The Nifty was around 11,000 in September and we reached 14,700. So we had almost a 36% return just on the index in a matter of a few months. Obviously this kind of pace is not sustainable and whenever something like this happens, corrections are definitely due and it is actually good for the market. We have corrected about 6% to 7% from the top so after a 36% up move over the last four to five months, 7% correction is not a big deal.
In fact, I think it is pretty good for the market and if you look for reasons, you will notice that the FII flows have suddenly turned negative. In the last four days, we are down minus Rs 6,800 crore and you realise it is not just something to do with India, it is something that is happening across the globe. Even the emerging market index is off 4-4.5-5%. EMs that were leading were Korea and Taiwan. They also are down 5% to 7%. Also, we have the Budget on Monday. It creates short-term volatility. Of course, it does not have a very big long-term impact but I guess getting into the Budget, it is always nice if the markets are a little bit on the corrective side so that there is not too much froth.
I am not really worried for the longer timeframe. In the short term we could see more correction but it is going to be more a function of what is happening in the emerging market space and what is happening to other asset classes, especially the dollar in the US because the dollar index (DXY) has been strengthening and that very often leads to a risk-off trade — whether it is emerging markets or commodities. We are part of the correction that is happening in the riskier asset classes.
What is your reading of the dollar, is this just intermittent strength or do you think this is again a trend in the making?
The longer term correction of the dollar is down but it cannot be down every day or every week. As far as the DXY goes, the important level I would look for is 91. Until it stays below that, I do not think there will be much turbulence globally but once the dollar takes out 91, the DXY could get a little more wobbly. So what you are seeing is a short term reaction to essentially a little bit of a hardening dollar.
However, as I reiterate, the longer term in the market is higher for EMs as a whole and it can be substantially higher from where we are.
Whether this present correction will hold at 13,700, 13,800 — where we are right now or if we can go down to 13,100, is going to be a function of a lot more than what is happening in India. It is a puzzle that is happening globally and we have to fit the pieces of that puzzle.
So what is the EM index along with the dollar telling you? Could we see a steeper correction from even those levels?
I think it can. As I said, after having a 36% run, if you look at some of the sector indexes you will realise that some of the most beaten down sectors over the last few decades are up almost 30% to 40%. Auto is up 30% in the last three months. PSU banks have been absolute dogs for a decade since the 2008 top. They are up 40% in the last three months. Metals is up 30%. Real estate is up 30%. So what you really see is that a lot of the beaten down spaces, sectors or themes where valuations may be cheap and where the revival trade companies could surprise, are seeing a very big bounce.
After having such a big percentage move, it is pretty okay for the market to correct. It is okay even if it goes sideways for some point in time because it needs to digest. Otherwise the risk of bubble is there and in that sense, very often it ends very badly or tends to be sharper and for that you really have to go and see what is happening in the US. A retail versus hedge fund war is waging with short squeezes happening in penny stocks. After a big runup, a little bit of pause or correction is very important because that keeps the market healthy and light and gives it another leg up which is what I really think should be happening in the markets.
A big bunch of retail traders and investors in India joined the market during the pandemic. Can we see the GameStop short squeeze like saga in India? Do we have a proclivity towards making such risky bets?
I do not think the India situation is like what you are seeing in the US, especially with these micro caps and the short covering squeezes that are happening. It is nowhere near that. I do not think even retail collectively has reached that level of power and size. So I do not think that kind of froth is here but as I said, when you see a market that rallies one way, weaker hands come in. They get over-leveraged, over extended and that is why corrections are important because these corrections eliminate these weaker hands.
This allows the stronger hands the ability to buy stocks at lower levels and that is how a sustainable market is sort of created. If you have a lot of weak hands driving the market, even a slight correction creates a lot of panic and then the pace of unwinding becomes so sharp or so vast and many people get hurt. That really creates a lot of problems for the market.
It is like a pressure cooker, you need to keep releasing the steam at various points in time. If it does not, then very often it does not end very well. So for me personally, it is a good correction. We can correct further and the reason will not be domestic. Budget will be forgotten in a few days. What is going to be important is what is happening to the emerging markets and the dollar.
What is happening in ? It has breached Rs 1,900?
A lot of stocks that had run up a little hard earlier in the year, have corrected and taking a pause just as Reliance. In the last three months, the Nifty is up 20% but the pharma index is up only 9% and year to date, it is probably the best performing sectoral index.
So a lot of stocks or sectors that had run up very hard early in the year are correcting and taking a pause. However, I feel that these are companies with very strong fundamentals and they are here to stay and so at some point in time, you will see buying coming in.
The more interesting part in the market is not the index etc it is really the shift that is happening. Money is moving away from some of the quality maybe a little expensive stocks towards the beaten down deep value stocks in anticipation of the whole restart trade which is a work in progress. And this is not just happening in India, this is happening globally.
There is the emergence of a little bit of value buying and some money is shifting from aggressive growth towards value and that is why you will find stocks like Reliance, the pharma space and even IT stocks post numbers, have got sold. So a sector rotation is happening, themes are changing. The crucial thing for me as a fund manager is to see if it is a change in trend or if it is just the cyclicality or a new theme that emerges from time to time. So that is something that keeps me awake at night and that is something that gets me thinking about the way we sort of position our portfolio.