Has the much talked about time-wise correction in the market actually kicked in because one is not quite seeing any signs of a buy on declines just yet?
Hard to say that. The general philosophy that we follow is that predicting the markets is a losers’ game. It is more important to understand, bottom up which stocks and sectors are going to do well and take calls accordingly. These sort of falls in the markets can happen anytime in a bull market and one has to be geared for that and has to have the stomach to bear such volatility. But over a period of time, if you have got the right stocks, if you have got the right sectors then it all evens out and one participates in the rally.
In general, the leveraged positions in the markets as also the margin positions are very benign at this time. It is also evident from the cash futures spread which used to be 5% high till a few months back, just prior to the extended margin requirements that Sebi came up with. Today that spread is 3.5-4%, which is quite benign. That tells us that these markets are not stretched, at least not on the margin funding or the leveraged front. But the short-term moves in the markets are not very easy to call and it would be better if one keeps a longer term time horizon and biased quality names to participate in these markets.
Would you be tempted to add positions anywhere in this fall?
If the top 1,000 companies are analysed by market cap and their results as of the December quarter, we will notice that there has been acceleration in earnings growth from the previous quarter. The earnings growth is north of 20% on a year-on-year basis. The commentary that the companies are giving for the year ahead is also not subdued in any way. The commentary is actually quite aggressive on growth in the coming year.
Bear in mind that while the Nifty and Sensex seem to be at all-time highs, the broader markets and particularly the small and midcap indices are still barely touching the peak 2018 levels and hence there has been a significant correction in this period over the last three years in the small and midcaps part, which has gotten reverse corrected meaning they have moved down since March. Now, earnings are catching up in these broader segments of the market. If earnings support the stock prices, then this may be a good time to add on to equities with a one to two year time horizon. In that context, corrections may be opportunities to buy in those names and pockets.
We are seeing earnings picking up across a wide range of sectors and the commentary and guidance for future growth being quite robust, the corrections maybe opportunities to buy.
Are there any particular pockets where you have been looking to buy on dips?
Yes, we do believe that there are a few themes or pockets where one will find opportunity in the coming year. These are home improvement and real estate related segments where a general uptick in home buying will lead to a raising of the wave for that segment and so anybody who is in that wave from plywood to tiles to cement to other home improvement sub segments, will be the beneficiaries.
As regards their capacities and current utilisation levels, there is a whole lot of room to go in. These are highly operating leverage oriented companies which means as volumes go up, margins also start moving up and in that context this segment looks quite attractive.
The other space which looks attractive is the China plus one strategy. The world is seeking to buy from countries where they can substitute their supplies from China and there are certain sub pockets where India will be a beneficiary. These will be chemicals, electronics, auto ancillaries, pharma. We see tailwinds in these segments going into the next year and further beyond.
Finally, there is the home consumption theme and the best way to play that is through the financials. Financials look attractive in pockets. They have rallied in the last three, four months but there is still opportunity in financials where the catch up trade has yet not played out.
So we are seeking opportunities in these spaces that I just mentioned and we do believe that growth in these segments is here to stay for some time.
What is your outlook on some of these large caps?
What we are seeing is that the cash future spread is not what it used to be. The spread used to be between 40 and 70 bps for a month and on an annualised basis 5-6%. That spread has come down to about 30 to 35 bps today. In general, that contraction of spread tells us that there are no leveraged positions in the markets and in that context whether this market has froth and can have a meaningful prolonged correction. At least on this count, it looks unlikely. Even if you speak with 10 people, 9 will tell you that the markets are stretched and that they would wait for a correction to buy into the market. If that is the psychology of the markets, then there is a lot of money waiting on the sidelines to come in and buy with each bout of correction and that gives some sort of support to the markets.
Tying both things together, it seems that while there can be volatility in upward trajectory, one can’t say that this is a reversal of trend. In all probability, this is a speed bump in an upward trajectory of the markets. Having said that, if we go back to past cycles like 2008 and prior to that 2001 and also cycles prior to that, we can see that whenever there is a turnaround in the markets after a deep correction, in the first instance, largecaps do very well and thereafter the broader markets take over and start outperforming the largecaps.
In fact, even in 2014, after Prime Minister Modi took over, there was a huge rally in the markets. Thereafter in 2015, we witnessed a pause in the frontline indices with the broader markets taking over. I suspect we are in that phase today where there may not be so much of a secular upward trajectory in the frontline index but sector rotation within the index along with the broader markets taking over and starting to outperform the frontline indices. That may play out over the next 6 to 12 months and that is how I would construct the current standing of the markets.
