FII money will come and go depending on the overall outlook or overall money flow situation globally, says Founder, Carnelian Capital Advisors.
Are the markets assuming that economic activity will rebound?
In every crisis, whether it was the global financial crisis or demonetisation, there is this kind of sudden sharp markets sell off in a big way and that time both the quality and non-quality stocks go down and everything gets sold off because the market starts hypothesising the worst. And as that uncertainty starts getting lowered or some sort of clarity starts coming in, you will always have a combination of short covering, new fresh buying and new capital coming, and that is what you will always see.
Having said that, in the short term, it is always going to be difficult. There will always be some sort of bounce back in the markets. After every big fall after a crisis, there has been a bounce back and then some sort of convergence to reality happens. So, of course, markets are cheering that the economy is opening up but things are not going to be as easy. It will take time. We have had both supply side and demand side shocks. So it will take three to six months for the economy to settle back into where we were.
I would not say that markets are back to good old days and we should start cheering. Of course, there are trading ideas and opportunities and people do short covering. If you look at the global financial crisis, the market recovered almost 20%. So after a crisis like this, there is always a second order or third order effect that happens and I do believe nobody can guess the second order or third order effect; like oil prices going negative was the second order effect, Franklin Templeton funds going down was a second order effect. Can we have some more of them coming down in some time? If that were to happen, you might see markets again deliver. One has to be very careful in terms of looking at these markets and I do not think these are back to normal. This is just a small recovery rally but one should be very careful.
Over the last few weeks, we have seen FIIs selling and DIIs putting in more money. Do you see that trend continuing? Also, do you think the reality will catch up and we are going to see a dip soon?
Let me correct you. FIIs have been of late reasonably good buyers. They have not been sellers. They were, of course, big sellers in the month of March and after that in May there was good buying happening. A lot of recent transactions have also brought good amounts of flow. There is a lot of capital; so a lot of FII money has come into the market and the good part is that on the DII side, a lot of SIP flows which markets were fearing will slow down has not happened. So I think in some sense, domestic money has matured a lot. Even in the times of panic, money continues to come in.
FII money will come and go depending on the overall outlook or overall money flow situation globally. We have a lot of global events still lined up. We have the US elections this year. We are already seeing development of tensions between the US and China. So a lot of those things will drive the FII flows. Unfortunately very often it is made out that when we get FII flows, India looks good and when we do not get FII flows, India does not look good. So there is also a lot of global context by which flow comes in and goes out. But I think domestic money is here to stay and that is here to support us. The alternative returns for alternative asset classes are very low. So I believe that the flows into Indian equities will continue. It is just that in the short term, we will have to pan it out. Even if the flows are there, we might see next three to six months of volatility given the convergence between the markets and the economic reality. Market consolidates for three to six months after a major crisis and before it resumes its bull market or final journey. So I believe that one should look for a good consolidation phase before we start looking at any new trend.
So what are the spaces that you would bet on at this point? Are there any spaces which will respond to the pent-up demand or are there some sectors that look completely uncertain for some time now, which you would avoid?
In times like this, you have to stay invested into good companies with good balance sheets and typically with market leaders because those are the ones which will survive this uncertain period. The big will become bigger; so this is just a clear trend one should look at.
Secondly, the India story per se does not change. We have a fairly large consumption story. We have a fairly large investment story. So I think banking, financial services will do very well once the crisis starts receding. The sector will come back because there is no economy which can come back without banking getting fixed or banking doing well.
Consumption, especially discretionary consumption stocks, we have seen a huge amount of correction and that will come back. We will even see automobiles coming back very well. There could be a very good chance of metals players doing very well once economic recovery starts happening. But in all these things, there are lots of sectors which will do well. Pharmaceutical is looking very-very interesting but in all those things, the overriding thing is to stay invested only in good quality management and good quality balance sheets. That is the one which will come out as winner.