The emergence of the mutant Covid-19 strain led to quite a rout in global markets. We seem to have stabilised and found our feet around the 13400 mark. Do you believe that this conviction is going to be long lasting?
The markets have tumbled quite a bit on Monday. The surprise was actually in the 3% fall that we saw just on the news of that new corona virus strain but then the recovery on Tuesday tells us that the surprise element is now being factored into the markets. I tend to believe that markets will take a positive outlook and eventually move higher and higher. I still believe that what we saw on Monday was merely a flash in the pan, a one-day dip. We will see markets recover here onwards.
What is the outlook on the aviation space? Globally, airline stocks are taking a huge knock and back home Indigo, SpiceJet have tumbled.
The airline business is such that the cash flow is very much dependent on the freedom to travel. Right now, we do not have a great deal of flexibility for domestic or international travel. There is an element of restriction imposed on such trials. Travel restrictions will mean that the revenue forecast will be tempered down and these stocks will face the first damage whenever more restrictions come into play. That has been the story thus far for airlines. The restrictions will be gradually removed and we will have real travel happening henceforth, but that is not really happening. The only good part that these airlines have is that they at least have to reckon with low oil prices, low fuel costs and that helps in their operations. Otherwise, it is becoming very difficult to forecast any form of revenue beyond a few months for airlines.
What about the fresh round of stimulus coming in? Do you continue to be optimistic on commodities, especially metal stocks?
Metal is a sector which is unduly influenced by global factors. Metal as a pack moving up has to do with the way the Chinese economy is recovering. The demand for metals is dictated by the activity in China which is a big consumer of various commodities including metal. They not only consume those metal products for themselves, they are consuming it for feeding on to the world demand. When Chinese factories buzz with activity, metals as a sector also starts going up. As commodity prices start moving up and demand for basic raw materials go up, metal shines. I would say this is a volume cum price led recovery in the sector. Volumes in terms of production volumes and prices in terms of prices of the products and that rally will continue for a while because the Chinese economy is doing really well.
Even the Indian economy with infrastructure projects coming up, will start doing better next year and will fuel its own set of demand for metals. I think this sector will continue to do well but one has to be very cautious about some stocks on the valuation front.
We have had a move in real estate space in select names. So there has not been a complete knockoff effect on realty.
Real estate is a sector which we generally do not recommend. These are not stocks which are meant for value or wealth creation for investors. There are only trading plays available for these stocks. We generally stay away from the realty sector irrespective of what is happening in terms of whether the realty prices are up or down or whether the growth in terms of sales is happening or not. It is a sector that we tend to avoid.
Smaller banks like Canara Bank, Bandhan Bank, Federal Bank have seen a little bit of buying coming in. What do you make of that trend?
Banking is a space that we like and whether it is bigger banks or smaller banks, this is the time where they would be able to expand their margins and this will be the time where despite NPA pressures, they will have better recoveries as we go forward.
The outlook is brimming with hopes for the banking sector. But when it comes to the smaller set of banks you have to be really be very choosy because some of these banks have not particularly done well in the past NPA cycle. Plus, one also has to look at the ability of the smaller banks to raise capital because very often the stumbling block to growth is capital. If they have adequate capitalisation, then one can look at the smaller banks.
Having said that, the larger banks are the ones which are receiving the majority of capital contributions coming to the market. Their capital adequacy is pretty sound and robust and therefore their outlook is better. I would rather look at the larger banks than the smaller banks because of the whole issue about capital adequacy being a little on the lower side.
