Market sometimes finds a reason to correct and currently there are plenty of factors — the PayTM IPO debacle, reversal in farm law and Reliance has decided not to go ahead with its proposed demerger — which could be the dominant factor why markets are correcting. Has the market lost its near term inertia? Has the train stopped at the platform now?
The simple reason why markets are correcting is because prices had run up a little bit ahead of fundamentals and yes the train has stopped and in fact taken a slightly reversed direction so that people who are standing on the platform can board the train. There are many factors which have contributed to the correction, but my feeling is the primary reason is that the market was running ahead of its fundamentals. It is taking a breather so that fundamentals can catch up.
You are saying that the market train has paused for those waiting on the platform to jump in, the point is what compartment do you hop on to? Are the same stocks and sectors going to move up? Or do you think when the selling abates, the market texture is going to change a little bit?
Broad markets have not corrected as much, individual stocks have corrected significantly and there are some great opportunities emerging in some of those stocks. So if I have to divide on a broad basis, there is a red zone in the market where I still believe there will be bigger price corrections. These are penny stocks where there are no business fundamentals but thanks to social media push, prices had run up significantly and distribution was happening.
These are all limited floating stock concentrated holdings companies where valuations are sky high. Avoid this red zone even at this point of time. Within the green zone, there are many stocks which have corrected reasonably well, they are now available below their historical valuations and where growth opportunities look better. So avoid the red zone, try to invest gradually into the green zone. If I look at it from a sectoral point of view, we still believe capital goods/industrials, home improvement and select financial services will offer outperformance in the market apart from technology.
India is one of the few countries in the world wherein the interest rates are still positive. Until now, RBI has been very supportive of growth. Inflation is pretty much under control. We can see a change in stance by the central bank because that is something that the market is sure going to react to going forward?
So in a very lighter way, RBI is batting like Rohit Sharma and Virat Kohli together, balling like Jasprit Bumrah and Mohammed Shami together and fielding like Ravindra Jadeja now you really cannot expect more than this from the Reserve Bank of India. They have been managing growth, inflation, interest rate, the government’s borrowing programme, massive inflows from foreign exchange market and the fair value of rupee.
In the last 18 months, they have done an exceptionally brilliant job and today we are in a position where Indian inflation is actually lower than US inflation. Now when people say we are in a high inflation country, I wonder what they are going to say about the US. I never hear them complaining in the US that the US inflation is higher. There they support the Fed. Here they are saying that inflation is out of control. We need to trust the RBI. They have been managing an excellent balance between growth and inflation and I am sure they will change the gear at the right time to ensure that growth also get supported and inflation does not go out of control.
Why are financials not leading from the front? Capital goods companies borrow capital to do well. For the economy to do well it would need the support of borrowing. But banks have failed to be leaders. Why is that?
There are a couple of factors coming into play over here; one is this whole disruption being caused by fintechs. Now fintechs are getting access to capital; they are able to disrupt things and there is a model where on the top of a bank, there is a fintech which is luring customers and they are able to lure customers because of their technology platform and because of their ability to reach out to and retain customers. The market is keenly watching. Will banks remain in the business of lending and borrowing or will they end up giving up control of their customers to such kind of fintechs?
This is one broad play and banks which are reinventing themselves will do well. Not all banks have similar kinds of technology platforms or customer retention power. A bank which will be able to sell many more products to their customers through technology will continue to do well. The boys will be separated from the men.
The second thing related to the banking sector is credit growth. Credit growth has remained subdued as many companies have deleveraged themselves. We are waiting for the start of the capex cycle where companies start borrowing money from banks and that will probably happen over the next two or three quarters. As credit growth numbers start improving, we will see banks outperforming. Here also men will be separated from boys. Not all banks have the ability to evaluate credit appropriately, there are some which are taking higher credit risk and hence will generate future NPAs. There are some banks which will know how to manage credit risk and hence they will do well. So between fintech and credit growth, there will be winners within the banking system.
Does a reversal like Paytm remind you of what happened to Reliance Power? I know it is unfair for us to compare Paytm and Reliance Power, but could the sequence of events that happened after Reliance Power debut, happen to PayTM also in terms of market positioning?
We are not allowed to talk stock specific, but I do not think the IPO market is dead. Yesterday, we saw one IPO getting closed. It almost scored a century plus and this is despite the fact that previous IPO’s money have not yet arrived. There are many more IPOs in the pipeline and my feeling is that the primary market response will be positive. It would not go into slumber like in 2008.
Compared to 2008, 2021 is slightly different. In 2008, valuation was across almost the bulk of the market and very few parts of the markets looked reasonable. In 2008, the entire pharma sector’s market cap was comparable to just a couple of infrastructure companies. This time in 2021, there is a red zone. There are some limited floating stocks and concentrated holding companies where valuations are sky high. But in the bulk of the market, valuations are fairly priced and with this correction, they will become attractive. So compared to 2008, I do not think in 2021, we will see that kind of correction either in the primary market or secondary market.
Will Budget be the next trigger? Will the earning season be the next trigger? What is that one big trigger which we need to look forward to?
There will be a couple of triggers from the global side and obviously many more triggers from the local side. Globally, the market is watching the FOMC movement. Yesterday, US markets went up thanks to the re-nomination of Jerome Powell as Fed chairman. There will be continuity in the Fed. Now people will be looking forward to his guidance on the likely increase in US Fed rates and also whether the taper tantrum amount will be increased or not.
The second thing will be what kind of steps are taken by China and whether people will go for China plus one policy, not only in terms of foreign direct investment but also in terms of foreign portfolio investment.
The third could be global oil prices as well as the Covid-19 situation. In some sense, oil prices have corrected once Covid-19 cases started surging. What happens over there will also have an impact on our market. These are all transitory factors. They impact our market temporarily. What impacts our market long term is how our corporates are performing.
Certainly investors will be looking at the Budget. Hopefully, they will be looking forward to a Budget like last year which accelerated growth in the economy, pushed reforms and which improved tax compliance. So, the Budget could also be a trigger. The December quarter results also could be a trigger if they are as good as September 21 quarterly results. Then certainly there is a limited downside in the market.
The Prime Minister has announced the repealing of the farm laws. The markets are not concerned that this will impact the reform measures going forward. Your view?
Undoubtedly people will be watching developments. Farm laws were really good for India’s agriculture sector. It would have supported a higher contribution from the agriculture sector but we are a democratic country and here we have to build consensus and then move. Fortunately for listed corporates, agriculture is not a bigger play and rural India is not entirely dependent upon agriculture. Now agriculture contributes less than half of rural GDP.
So markets will undoubtedly be looking forward to other reform measures like divestment. In terms of the fiscal space which the government today enjoys, how are they going to spend money on it? So yes there is a disappointment on repeal of farm laws but that is not necessarily the reversal of the reform process. Continuation of divestment, spending or using fiscal space for boosting infrastructure will also support the market.
Is the US dollar index also a concern at the moment? The way it is moving, can it prompt outflows? Is it going to come at the risk of an outperformer like India?
We will have to see how foreign portfolio investors react to it. As of today, there has been some amount of selling in November, but there is a fair amount of active interest in the primary market. The data reported only include secondary markets, it does not include primary market investments.
If I include both primary and secondary then outflow is fairly marginal, it is not material. Second, we are now sitting on $640 billion reserves. We are one of the few countries in the world where forex reserves are more than forex debt and hence taper tantrum will not have that kind of impact on the Indian market as it had in 2013.
