What is your advice for investors? Should one continue to hold on to marquee large caps and midcaps in the portfolio? Do you use this correction as a buying opportunity?
Yes, absolutely. For nearly eight to nine months now, mutual fund investors have been withdrawing money. They came in very sharply in March of last year and timed it very perfectly and after the markets recovered in four to five months, there has been continuous withdrawal from mutual funds. So there is a cash pile sitting on the sidelines in India. Some of that has gone into the Robinhood trades where a lot of millennials have become day traders. They will largely lose money because research has shown 97% of day traders make losses. We are going to see that happen and that may be two years away.
What to buy right now? Cyclical is the place and reflation or recovery trade is what we have to look at, even the very beaten down segments. Energy which lost a lot last year, has done very well in the last three months. We do not see oil prices going further and the big reason is China. It is buying nearly 1 million barrels a day of Iranian oil, nearly 17 million barrels a month of Venezuelan oil. Libya has started pumping oil again. Libya is now producing 1.4 million barrels a day. So nearly 3 million barrels excess supply has come in thanks to Iran, Venezuela and Libya. The first two are unauthorised and unofficial but the Chinese are picking it up and once it reaches Chinese ships, it becomes Chinese oil.
So clearly oil is under pressure and that is good news for an oil consumer like India. We have seen oil move down from $70 to $60 and it will stay in that range. The dollar is the other issue for emerging markets. The dollar shorting trade had become one sided and we have seen those shorts getting hammered. Somewhere Janet Yellen will intervene because a strong dollar hurts the US recovery prospects and so there is undeclared currency war. We expect the dollar to weaken and that will then lead to more flows into emerging markets. Don’t know if it is a month or three months away but even in March we have seen Rs 7,500 crore FII inflows.
I would say stay invested and buy on dips. It is not that this market is crashing. Even if it goes down further, there are a lot of strong supports for this market in terms of US stimulus four to five months down the line. Biden comes in with a $3 trillion infrastructure stimulus. They are going to talk about their Budget next week itself and all those will lift global risk assets further. So, this has been a time-wise correction. We had to digest it because the market ran up very fast and maybe it will move sideways for a few more weeks but then they start moving up again.
What is the strength in pharma telling you about the texture of the market ? Is it back to defensives?
We saw a bout of underperformance in pharma and now there is small clarity coming on the volume growth. Most analysts are talking about normalcy coming back into pharma. There is increasing offtake in rural and urban areas both and as far as the exports from pharmas are concerned, we have seen a bottoming out of the fall in the US revenues.
The generic pharma companies were hit over the last three years with the FDA actions and a fall in US revenues. We have seen that beginning to take off again. So pharma is a defensive but also what is getting EBITDA are the growth portions of pharma. As countries open up, the broader spectrum of sales will start recovering even and that is driving pharma right now.
What are you spotting within the broader markets? Are there any interesting pockets?
The India growth story that is going to come very strongly and all the sectors benefit from that. Banks right now are coming off nearly one and a half months of very strong underperformance. Bank Nifty index is down about 13-14% from its recent high and so banks will come back strongly as the economy revives. Now that the Supreme Court overhang has also gone, we do not expect NPAs to shoot up from here. Even the Fitch report is talking about 1% more NPAs over what has been declared pro forma.
So banking and financial services, housing finance companies will do very well. Second as the harvest comes in, there will be a surge in durables. A lot of liquidity will be getting into the markets post April as the government expenditure starts for the new year and the harvest comes in. So, those two would be the top picks right now — financials and durables
