The first half of this year has been a rewarding one for investors. Will the second half be a draw or belong to the bulls?
It depends on the third wave. The market has discounted the second wave. The belief that it is a short-term impact made FPIs and domestic MFs buy consistently. That is the reason you are seeing the highs in the market.
Now what is the overhang on the market in the second half? The overhang is of the US economy’s recovery leading to a higher inflation, stronger dollar and higher interest rates. All of them will have an effect on liquidity and could impact our markets. But if the vaccination story in India picks up dramatically, the monsoon story continues to be good, then the domestic demand around the festival season will pick up. So I expect a counter play.
The second half would be a very fascinating period for the market. However, you need to watch out for inflation and RBI’s stance. If the RBI continues the liquidity support and the accommodative stance, the domestic demand picks up and the third wave is reasonably under control, there should be a huge pent-up demand as the unlock comes into play.
If the domestic revival is on the anvil, then the market can touch new highs. Even if there is a going to be a third wave, it is going to be a short one.
It is a very good time for long-term investors to keep buying. But in the short-term, I would say look overseas, whether it is east or west. It is that data which is going to determine the fate of the Indian market over the next 6 to 12 months.
If there is no third wave, then what happens to the market?
Domestic investors have already started coming back to mutual funds. Domestic investors are sitting on money. SIP inflows continues to be strong. So domestic mutual funds are going to be buyers across the broad market. The international news will mostly affect largecaps, larger midcaps and safety-oriented plays, which is where the FIIs tend to put their money. If there is no third wave, then the growth of BSE 500 and BSE Midcap index would far outstrip that of the largecaps. If there is no third wave, bet big on India and go down the cap curve.
In terms of sectors, where are the newer opportunities and avenues? 11 IPOs are going to hit the Street this month alone. Do you think valuations are not going to be a benchmark because just everyone would want a piece of Zomato IPO?
Private equity investors see this as a very good time to cash out their investments. So there is going to be a healthy supply of IPOs in the market. There is going to be enough investor interest but the question is that how many of these IPOs are going to make it into various indices in the next 3-6 months. So I would argue that this is a brilliant time to give money to mutual funds because it is a brilliant opportunity for the return of alpha. Stocks outside the index are going to appreciate and have much more investor interest. These stocks will make its way, but it will take time for them to come up to the index.
There is enough interest in IPOs for them to be reasonable successes. Companies like Zomato are futuristic companies and so they are not going to have traditional valuation models. They are the Amazons of India. Look at the way Amazon has traded in the US. It has nothing to do with its P&L, EPS, valuation, etc, as we traditionally know it. It is about the growth potential, the PEG ratio as as they say, and what rate of multiplier growth it can achieve. So if you use the traditional valuation models, you are going to go wrong. See what potential big-ticket investors are looking at and then try to copy or at least understand what they are doing because that is where you will make your money.
