We have taken out new highs and it had looked like there would be a strong close but that fizzled out.
The markets have been in a huge momentum and also the Indian markets have been delinked from whatever has been happening globally, especially the other emerging markets. We have seen deep cuts in many markets like Brazil, Hong Kong, China and even Korea saw a decent 5-6% cut from the top, But we have rallied 5-6% in that same timeframe. These kinds of moves normally are unsustainable because when the overall emerging market basket is going through a correction, then one market cannot continue to rally.
That presents the risk to the markets because the valuation premium also keeps on going up. So eventually the catch up happens. I believe the market, especially the people who are trading and investing short term, are in a very risky zone because the broader market has cooled off reasonably. Many of the stocks have cooled off and corrected but there are a few sets of stocks, especially on the consumer side like diagnostics or hospitals, which have been rallying continuously and valuations have become very high. I would think that people who do not have a very long term horizon, should be wary of these stocks at this point of time.
Look at the gain in HDFC Bank. That was clearly news driven. It is a big milestone day for Bajaj Finance as well. We have been talking about how financials and banks have been lagging for the next up move. That is going to have to change.
When the next move happens, financials have to perform. This time the slack in the performance of the financial sector has been taken over largely by IT in terms of the index movement. Most of the IT stocks have continued to rally very hugely and are now trading at a huge premium to historical valuations. So yes, banks will have to take the slack in the next move but that does not mean that the next move is imminent. Overall, the market needs to give up gains and the financials will also give up further gains as and when the corrective moves start.
Is there merit in being associated with the whole unlock trade? Globally 4.3 billion vaccines have been administered, which means 35% of the population of the world now has got one shot or perhaps two shots. If there is no third wave, will that unlock trade continue in India?
Yes the unlock trade has to play out, whether it happens in the next three months or in the next one year. It is a matter of what your horizon is. It is very tough to predict whether we will also get a wave like we have seen come back in the UK or the USA, where also the vaccination percentage was very high. But the next wave came about. Do we have some sort of shield because those countries have administered largely mRNA vaccines and in the UK, the wave has not gone beyond a point of time because 60% of the vaccines were AstraZeneca and effectively Covishield. Whether we will get lucky only time will tell. It is very tough for any of us to make any sort of prediction.
Much of the value now lies in many of those stocks where the earnings are not much and the valuations have not gone up so high. If we look at diagnostics or consumer stocks,, I would not be surprised that much of the prices which we are seeing now, plus-minus a few percentage points, might not be seen in many of these stocks over the next one or two years.
Is this the time to buy into auto or would you say wait till the semiconductor shortage gets resolved?
There are two issues here. One is the overall semiconductor shortage which is affecting the four-wheeler companies more, the two-wheelers not so much. The second is the overall slowdown in the demand for two-wheelers in the domestic market, which is impacting , Bajaj Auto, etc. Bajaj has its export business. They have the three-wheelers where the demand could come back as the unlock trade plays out. So, Bajaj Auto has been holding out reasonably but there also, overall domestic market statistics do not look very good
In the four-wheelers, there is
but Maruti has been talking about semiconductor shortages. Then what gets left are the commercial vehicle companies or M&M. M&M is an interesting story because valuations are not very expensive. It is in a new product cycle for its SUVs and normally in new product cycles, SVUs like its Thar, XUV700 are doing well. Typically Mahindra & Mahindra tends to outperform in such cycles and it is a reasonable value play. So I think it is a good stock to hold for one or two years.
has issues related to the availability of chips and the slowdown in the Chinese economy. A lot of demand for JLR comes from China and if that demand slows down, that could impact them. On top of that, they have their margin stress story also. So I would think even Tata Motors is not a play as of now.
