Deepak Jasani, Head of Retail Research at HDFC Securities says the auto sector should be avoided over the next 1-2 quarters due to supply shortages, the unknown fear of electric vehicle (EVs), high fuel costs among other reasons
He feels PSU sector is on the verge of a breakout, and the realty sector still seems to have some steam left as consolidation across the sector gains momentum and unsold inventory falls further.
Jasani, a market veteran of over 16 years, is a Chartered Accountant by profession.
Edited Excerpts:-
Q: Market are at record highs and recent dovish Fed stance lifted sentiment. Is the rally sustainable from here on to add another 10-15 percent on the benchmark indices by FY22-end?
Equity markets keep rising aided by a lot of tailwinds. Low interest rates, lack of alternative attractive investment avenues, encouraging Q1FY22 numbers, return of FPI inflows are some of the reasons for the bullishness in the markets. Macro numbers lately are also encouraging. Government policy measures are creating the ground work for good growth over the medium term.
Nifty is overbought on an extremely short term basis. Hence a small correction is due. However the overall mood is still mildly positive and stock specific moves may continue. Advance decline ratio needs to improve sustainably for improving the sentiments even further.
India’s valuation trajectory seems to have changed as global investors seem impressed by the way India has tackled Covid and improved its macros under difficult circumstances. When compared to other emerging and even some developed economies, India stands out.
Sentiment spoilers can emerge in the form of deficient rainfall in India, third wave of Covid spreading fast in India, faster-than-expected exit from monetary stimulus by global central banks, geo-political developments, global growth remaining under question due to the logistical hindrances etc. If these occur, small correction can be converted into into an intermediate correction.
Q: Is it the time to be cautious and wait on sidelines for correction or should one keep buying in the hope that the rally can continue going ahead?
While the possibility of corrections cannot be ruled out, one needs to maintain the asset allocation in equities. In case the equity allocation has risen due to equity values rising, then appropriate profit booking may be done to bring the asset allocation back in shape. For investors who are underweight in equities a SIP strategy needs to be followed so that entry prices can be averaged out and they do not miss out on upside from equities.
Q: Can you name the sectors where you have bullish view and why?
PSU sector looks to be on the verge of a breakout. Government’s measures to push for divestment could result in breakout and outperformance over the next few quarters. Realty sector still seems to have steam as consolidation across the sectors gains momentum and unsold inventory falls further. IT stocks look good to add on the next correction. Capital Goods stocks could continue to run up as the capex cycle in India picks momentum.
Q: What is your investment mantra for stock/sector selection?
For long term buys, sectors that look to be on the verge of a long uprun due to demand dynamics having changed materially in favour may be accumulated. As far as stocks are concerned, decent financial ratios, fast CAGR growth in sales and rising margins over the last 6-8 quarters need to be tracked to shortlist stocks.
Q: What are those sectors/stocks where you have underweight call and should one avoid those sectors/stocks now?
Auto is one sector that comes to mind to be avoided over the next 1-2 quarters due to supply shortages, the unknown fear of electric vehicle (EVs), high fuel costs, large base of 2 wheeler population and likelihood of a deficient monsoon.
Q: What are the great lessons you have learned from Mr Market in your journey of the stock market?
Most investors either do not do their own risk profiling or do it incorrectly with the result that they either get in too late or exit too early or take exposure to either too safe but slow moving stocks or to very high risk stocks. This is why they can make the most of bull runs. Also they preach long term but act short term. They are patient with loss making stocks but take profits too early in future compounders. Investors should have a strategy which needs to be scrupulously followed and this has to be formulated after doing a SWOT analysis of their own abilities and weaknesses.
Q: What is your advice to new age investors who have been pumping money in the equity market in the absence of FIIs?
New age investors have had it good so far as markets have seen a one way upmove from March 2020. When market undergoes an intermediate correction, they will realise that the gains made by them are not entirely due to their own smartness or skills. They need to realize that luck plays some part in your success. They need to form money management rules that they should follow including the per scrip exposure, trailing stops, maintaining weights across asset classes, taking profits at intervals etc. They need to develop stock analysis and picking skills by reading a lot and experimenting with small positions. Which stock can they hold for the long term will be learnt by them over more than one market cycles.
Q: Banks have not participated in the current rally that lifted market to record highs. What is the reason behind it and when do you expect major participation from banks?
Banks are facing some headwinds. These include asset quality fears in times of Covid, rising competition from new entities (including SFBs and shadow Banks), sluggish credit growth, threat to fee income from TPP sales due to regulatory changes, Fintechs entering their territory etc. Markets are in a mood to reward anything that is tech backed or tech enabled irrespective of its current size, stature or financials. In such times traditional Banks, even if they transform digitally will struggle to get valuation expansion.
This situation can change when the credit growth picks up rapidly and asset quality fears ebb.
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