How do you think the markets have shaped up this week as some of the variables on the fundamental side have been fairly encouraging. The FIIs have returned to the market and are continuously buying and the crude oil prices as well have come off to the pre-war levels. Are the signs looking encouraging in terms of the overall setup?
Absolutely, the setup is quite good and if we see a lot of negative catalysts did come in especially this week with the Nancy Pelosi’s visit and the Chinese armed drills right off the shore of Taiwan, but still we saw the Taiwanese market going up nearly 2%.
A year back if we had told someone this is how July 2022 will look like I do not think anyone would have been positive on stocks.
So what exactly has been happening is that more than fresh flows it is short covering globally that has been playing out. If you look at the top 50 most shorted stocks, those are up 31% in the US over the last three weeks.
In India we are seeing FII flows returning. We saw a positive number for July and August has also been positive.
So what we are seeing in play is that from 1st October we lost about $33 billion in terms of outflows by FIIs till June 30th. The market came from 17,500 on the Nifty to a low of 15,200 odd and then it has rallied very well. Basically on a 10-month basis we are today sitting near to the breakeven point on the market. So not very great performance if you see across a 12-month or a 10-month period but not bad either seeing the number of stock markets that went into correction or bear market territory this year. So clearly things are looking better.
Are markets in the grip of some euphoria? Not at all. There is a lot of skepticism. With the 50 basis point hike by the central bank, we saw a good rally in the market till profit booking came in the last half an hour. Overall the market gave a good response to the RBI raising the rates which would have been unthinkable even four months earlier.
The first 12 months after the rate hike cycle normally the market tends to outperform, maybe that is what is catching up. If we look at the Fed the first three months the market falls quite badly and then over a 12-month period the market tend to give a very good return, maybe we are in that zone.
What’s your stance when it comes to picking out stocks within the entire banking space given that the sector is fired up. Which large cap quality banking names would you pick that are expected to make smart returns in the long haul?
The top four-five private sector banks is what I would stick with. Public sector banks usually flatter to deceive. This time around there was a lot of chatter that we would see a bill in the parliament where the government would reduce its holding to 26% and retain control while going ahead with a lot of divestment. Now that has been ruled out for now. So we keep on seeing these kind of catalysts on the public sector banks but I would say stick with the quality in this scenario.
We have seen treasury losses even for the best of the banks where normally we did not use to have trading losses of this magnitude. But overall the credit dimension is improving. The year on year credit growth is coming back and the retail books remain quite strong. The NPAs are within very manageable level. So as growth picks up the banks will be the first go to place. So I suggest you should not look at turnaround stories and should avoid the public sector stories.
What are some of the top stocks on your radar for the long term?
Again the top sectors would be banking and auto. Auto is normally a preferred sector but we have seen some minor correction in them. The two wheelers will not really pick up until the rural demand comes back which I am expecting in the festival season or post the harvest this time around.
Then I would pick the capital goods sector especially after the RBI macro story of 75% capacity utilisation that is a pointer that over the next two-three years we should see a lot of capital goods offtake.
My eternal contra bet of IT has been the worst performing sector for the last one year and has been heavily sold by the FIIs. But looking at the US recovery coming in the growth stocks and irrespective of where the yield curves are pointing these tech stocks tend to be evergreen. So as a contra bet IT would be one sector to look at.
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