Banking, finance and domestic cyclicals probably is the area where we will have to focus for the immediate two-three months, says market expert Ajay Bagga. We had a happy Dussehra but how do you ensure a happy Diwali and protect the high beta pocket in your portfolio?Overall we have had a good run this year and our expectation is that the markets will end strongly at the year end given normally in India we start seeing the Budget expectations take over. November is normally one of the best months in the year and this quarter is a strong quarter in most years. So expectations are good. Small corrections are to be expected when the markets have run up so much and valuations are high. If you look at the flows, the DIIs and the domestic money has been really holding up the markets. We had a problem this month where till about three days back, we had a negative print on the DIIs numbers but the last two days of buying by DIIs have overtaken that. FIIs continue to be selling into the highs of the market that has continued. Overall, the brokerage commentary shows there are worries on the valuation levels in India. Some money is being put into countries like Indonesia, Malaysia and even China is getting re-rated by some of the major Swiss banks. Having said that, if you take a long view, the economy is turning. Fundamentals are good. We have an issue with inflation. We have an issue with the commodity price hikes which will feed into lower margins for large sections of the Nifty and the top companies. So there is a problem there. However, having said that, consumption is coming back. There are savings on the sidelines. The banks have managed to clean up their balance sheets. Banking, finance, domestic cyclicals probably is the area where we will have to focus for the immediate two-three months and that will benefit the most. As for global cues, a lot will be determined on November 3, when the Fed commentary comes out. Do they start tapering in November itself or do they announce a calendar starting from December? Has that got baked into the 1.64% US treasury rate or will there be some more coming? My personal view is that seeing a lot of reports next year, the inflation comes down and it might actually be transient though longer than anticipated. That will mean that the Fed can stay at their zero rate policy for the whole of next year even though the QE goes off. The ECB meets tomorrow. We are expecting the emergency funding to be totally withdrawn and only the normal QE to continue so that it is baked into the markets. The Bank of Canada seems to be on the tightening path. We will hear from Japan tomorrow, nothing expected there. In fact, there is a lot of hope that before the November elections, there could be one boost of stimulus coming in from the new prime minister or at least talk of some stimulus. The overall situation is a little tighter than at the beginning of the year. QE will go away in the next six months to a large extent globally and so some tightness is there in cash flows, but the consumers globally are sitting on huge balances which will flow through into consumption. The reopening trades are very much there, the recovery trades are very much there. India as a whole is on a recovery cusp and with a big infrastructure push coming, there is a lot of optimism. Yes there could be a 4-5% correction based on the valuations running very high in some segments but overall, the trend remains very positive. So staying invested in the market is the best policy right now. If your asset allocation has gone higher than what should be ideal for you, then some money can be taken off the table. Otherwise, we just wait this out and stay invested. There is another theme playing out now -- the comeback by banking stocks. How would you play this theme in the markets?Corporates have been deleveraging and so the corporate book has been going down, the agriculture book has been growing and most of the growth has come from the retail side -- both in housing finance as well as personal loan side -- that is where the bigger growth is. Secondly, within the banking sector which is growing, private sector banks like Kotak has grown 14%, Axis about 10%, HDFC, ICICI in the mid double digit numbers. So overall on the 6-7% credit growth, the private sector banks are eating more of the market share. So I would keep them as the top picks. The second would be the top public sector banks. Multiple drivers are coming back. Even the smallcap public sector banks are showing good profitability. So there is a huge turnaround. After nearly 10-12 years, we are finally seeing that the banks are able to climb the NPA mountain because they have been cautious in the last three, four years and have not built new NPAs. That has allowed them to use present profits to move those NPAs off their books and take provisions. Even the Covid provisions are excess for quite a few banks. So over the next three to four quarters, it will benefit them. Overall, financials stay among top picks in this kind of an economy where banks will be big beneficiaries as the credit cycle returns. Will the corporates be very keen? That is maybe another six months away. Right now, it is still the retail segment which will lead to credit growth. We are not seeing a huge capex announcement from corporates. So it will be more on the real estate side, the construction and infrastructure providers are the companies which might be going in for more loans. Also, companies are able to raise money in the markets and they are able to raise money abroad as well. Given India’s ratings are getting better, Indian corporates get better rates abroad. So all those competitions are there for banking credit. It will be more retail credit and housing finance which will drive this boom at least for the next six months till corporate capex starts picking up. That will happen once the output gap in the economy reduces and we see capacity utilisation going up and companies put in new plants. Of course PLI scheme beneficiaries will put in plants. They will go for capex and will go for debt to finance it. Overall, there is a constriction in the corporate loan side and I do not see that going away very soon. It will probably take two to three quarters.
from Economic Times https://ift.tt/3Grl8IV
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