Let us talk about the fear that exists at the moment. If that gush of liquidity stops, what is it going to mean for the equity market?
What spooks the investors most is the uncertainty around the taper steps being taken by the US Fed. I believe if there is some clarity given on the timing and other measures at the Jackson Hole Symposium, markets will start stabilising. Yes, there will be some movements and there will be some risk aversion but I think it is manageable. It will be very structural.
The reality is, a lot of liquidity has already been pumped into the system by the world’s central banks. There is enough liquidity in the Indian markets as well. So it is not that suddenly the liquidity will go out, but the uncertainty surrounding the entire tapering issue is spooking the investors. Also, the tapering will happen when the growth will be back. So the US Fed is reading that the growth is back and there will be inflation; so they need to start tapering the liquidity. Now this is probably a good signal for the economy and also for the market in the medium to long term.
If the economy is moving and if there is mild and manageable inflation, there is nothing to worry about. It is actually a positive sign. On the other hand, the severity or the suddenness of the tapering is what the market worries about. So I will probably err on the side of caution and not take a drastic step of exiting positions. I will wait and watch. Let us see what will be the specific statement that comes out of Jackson Hole.
There is US pricing pressure, sales are weak and approvals are not coming in fast enough for pharma companies. However, it is Aurobindo Pharma that has borne the most brunt compared to other pharma stocks.
In the case of Aurobindo Pharma, it has been very unfortunate. I think all of us once in our lifetime have taken the wrong step. All analysts across the market have been bullish on Aurobindo at some point of time or the other and again and again it has kind of belied our expectations. There have been challenges for Indian pharma on the regulatory front. Most of the larger pharma companies have got their act together. Unfortunately for Aurobindo, that has not yet probably happened and they are still on the wrong side of the USFDA observations, which keep coming.
Of course on top of that, there were some murmurs regarding governance and the US pricing pressure, which kind of got translated into the results not being as per expectations. So I suspect this again is a perfect storm for Aurobindo Pharma stock and while the valuations at which it is currently quoting after all this correction does look attractive, I will wait and watch. I will not plunge headlong into buying Aurobindo or recommending buying Aurobindo at this stage.
As far as pharma is concerned, knowing what is happening in the world with the tapering round the corner, I think IT and pharma are good pockets to look for opportunities. While IT definitely is a much more secular positive story, pharma picks need to be a little selective. I still believe that companies having significant exposure in India are good bets; so I like Torrent Pharma and
Pharma. Also, on the larger pharma companies side, on the valuation front and considering their global nature of exposure is not totally skewed towards the US, Sun Pharma does look good. Even a Dr Reddy’s at current price does look good.
What do you think is in store for us next week? We have the Jackson Hole Symposium which will be watched out for. What kind of cues would you be watching out for now that we are done with the earnings season?What cues could take the market higher? What is your view overall?
As you rightly said, the Fed chairman’s speech at the Jackson Hole Symposium will be very keenly watched by the entire world. To my mind, what is most important is to get a specific pointer as well as a specific timeline. If there is specificity to both, I think the market will stabilise and will keep moving forward. So that is what the markets will be looking forward to. Uncertainty and lack of clarity will have consequences, which will result in volatility in the global markets, including India.
In the interim, from an investors’ point of view, I would probably prefer them to play a little bit safe. As far as the Indian markets are concerned, technology and FMCG are definitely good places to look for opportunities. On the technology side, I have been talking about Wipro. It still looks attractive at current valuations and on the FMCG side, some of the medium tier FMCG companies like
and Dabur are fantastic buys at the current levels. Investors can look at them and then watch for the statements from Jackson Hole.
