Scrappage policy big positive for auto sector, will boost demand: Nirali Shah of Samco Securities

Market Outlook

Nirali Shah, Head of Equity Research, Samco Securities, has given a thumbs-up to the vehicle scrappage policy the details of which were shared by the government on March 18. The policy is good for the auto sector as it will boost demand for new vehicles and reduce the cost of components that can be recycled, she says.

In an interview with Moneycontrol’s Kshitij Anand, Shah says markets can continue to remain volatile in the financial year 2021-22, which is barely 10 days away, over fears of a second COVID-19 wave in India and the movement in bond yields will be another factor to watch.  Edited excerpts:

The selling pressure that started on March 12 continued this week, pushing the Nifty50 below 15,000-14,800. What led to the price action?

The US 10-year treasury yields surged past 1.70 percent and rising COVID-19 cases are some of the reasons why teh Nifty50 witnessed selling pressure throughout the week.

To add to it, higher MoM retail and WPI inflation also took a toll on the market sentiment. Inspite of the Fed’s comments that they will not retreat from zero interest rates or their bond purchase plan any time soon, Indian markets failed to sustain positivity and witnessed profit booking.

This indicates that even good news isn’t cheering bourses and most of these positives were already factored in.

A spike in US bond yields has spooked markets. Do you see this as a sign of caution or an opportunity for investors sitting on the sidelines?

Currently, bond yields are dictating the sentiment on equities and with rising inflation and demand, there will be a slow and steady increase in bond yields in the coming months.

However, it is still not a major concern given the monetary policy support in global markets and India. For long-term investors sitting on the sidelines, this would be an opportunity to add quality stocks in their portfolio.

Despite a muted price-performance, FIIs continue to remain buyers, so where is the selling coming from? FIIs are net buyers of nearly Rs 8000 crore in the cash segment of Indian equity markets.

While FIIs were net buyers in the cash segment, DIIs and retailers have been selling in this market after being spooked by the rising 10-year treasury bond yields and rising inflation.

In fact, there is more of retail speculative liquidity building in the markets. This is visible through the exorbitant amount of funds being allocated just for the subscription of six IPOs this week by retail investors.

The FY21 is coming to an end, what is your market outlook for FY22?

With FY21 coming to an end, markets can continue to remain volatile given the fear of the second wave of COVID-19. The new year could be dominated by the movement in bond yields.

With a mild rise in inflation, equities can see upward momentum but if the MoM rate of increase in inflation is steep, then markets can witness pressure. Any change in the Fed’s dovish stance would also be a key indicator for the markets in the coming year.

The vehicle scrappage policy is finally out. What will be its impact? Stocks that are likely to benefit the most?

The vehicle scrappage policy is a big positive for the auto sector as it will lead to a boost in demand for new vehicles and reduce the cost of components that can be recycled.

However, the actual policy details are awaited, which will be important to understand its impact on the industry. Ashok Leyland and M&M are expected to be the biggest beneficiaries of the scrappage policy.

Any investment ideas for the next three-four weeks?

Markets are currently undergoing a sector rotation and laggards from the previous few months could be new themes to play. Stocks that have undergone a correction in the recent pressure could also see buying. FMCG and pharma can see good momentum going forward.

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