It was an interesting flavour to the week as saw banks and real estate beginning to move; IT and pharma took a little bit of a breather. Was it encouraging to see the momentum shift to a slightly broader segment of the market?
Yes, there are three big trends in the market currently.
The biggest is the US election event risk coming up. Till we get some clarity on that, I would be a little circumspect on the market and I am expecting some amount of money to be taken off the table. Where have people really made money this year? It has been IT, pharma and Reliance. And we saw all three getting sold out this week. This is a defensive move in anticipation of the November 3rd event.
Secondly, we believe the market is at the cusp of sectoral rotation, and growth and momentum have worked for the last 10 years very strongly. Going ahead, there will be a shift back to value, and the value right now is in cyclicals, materials and industrials. We saw cement stocks getting a lot of focus. Real estate which has underperformed for multiple years is coming back.
Six months down the line, we will have a much sharper economic recovery and earnings growth would come back if not by April, then by June. On a base effect itself, you will see pretty good numbers coming back. So by then, sectors like auto, IT, pharma and scrips like Reliance would have really run up a lot. I think they will be in a consolidation phase and we should be prepared for a rotation into these under owned sectors and more of cyclical plays that could come back into favour.
What did you make of the select moves that we saw across auto, ancillaries and tyre names?
In the auto ancillaries, I would be a little circumspect on the ones which are exporting to Europe. Look at the second phase of the corona infections in Europe, and even in case it doesn’t lead to a full lockdown you could see at least discretionary expenditure going down. So, we should be a little wary of the ones who are a lot dependent on Europe or the UK markets.
Auto has run up ahead of the curve in anticipation of demand revival. What we have seen is wholesale numbers picking up and a little bit of action on the retail side. Of course, the rural demand will take the two wheeler sales up but it has been factored in already. To a large extent, the two wheeler and passenger car market is already factored into the pricing. For commercial vehicles, it is yet to happen. But you must notice that tractor makers started consolidating after the initial run up and they have been on a flattish side. The auto story is overdone and the CVs will take time. Definitely, there is a lot of scope and lot of value left in the commercial vehicle makers but the passenger vehicle, two wheelers might have run ahead of themselves. So, I would be a little wary of putting in fresh money there.
You have to focus on cyclical recovery and there NBFCs are looking much better. The NPAs have come much better than anticipated. What we thought in April would be a bloodbath on NPAs has not come through. Some segments like microfinance are a hit unlike the main banking segment. We have to still see the commercial vehicle financiers as the freight has now picked up. Will the truck operators be able to start servicing their loans? I think that will be critical but otherwise the housing finance, retail NBFCs and as well as the banks are poised to do well. And again they are part of the rotation that we are seeing. The banking index is down about 25% year to date. It has been a laggard and there can be a catch up but only after the US election clarity. Until that event goes, I would not recommend any fresh longs at all in this market or any global market.