Is it time to buy, sell or hold? What you should be doing as an investor
The stock market is likely to remain flat till Diwali. For long-term equity investors, this is an opportunity to accumulate at low prices.
But in the 86 trading sessions since that day, the Sensex has dipped by more than 10%. Last week alone it lost more than 1,000 points. The mid-cap and small-cap indices suffered steeper declines. What happened? Several factors have contributed to this mayhem. Corporate earnings have been muted. The monsoon is looking iffy. Crude is up again and could fuel inflation.
The rupee has weakened. And though the RBI has grudgingly cut interest rates, it has hinted that there will be no more cuts this year.
Ironically, all this is happening when the country’s GDP has registered a good growth rate of 7.5%.
ET Wealth reached out to a range of experts to know what is in store in the coming months. Their verdict: things could worsen in the short term because there are several risks, but after 2-3 quarters, growth will come back.
Weak quarterly numbers
The last quarter of 2014-15 was not good for the corporate sector. The aggregate revenues of 3,159 listed companies fell 4.93% but the aggregate net profit fell 14.84%. The silver lining was that the aggregate operating profit moved up by 2.67%. But experts believe things are looking up now. "The worst seems to be behind us, but the improvement would be slow and take another 3-4 quarters," says Chandresh Nigam, Managing Director and CEO, Axis Mutual Fund.
"The earnings cycle can expect support towards the second half of 2015-16," says Rashesh Shah, Chairman and CEO, Edelweiss Group.
High interest rates are the other major negative factor weighing on the markets.
The RBI cut the benchmark rates by 25 basis points last week but also hinted that there won’t be more cuts in the near term. The RBI said it was "front loading the cut" and the next cut would be "data dependent".
In other words, if inflation flares up again, no more rate cuts. That’s a distinct possibility, given that the meteorological department has cut the expected monsoon from 93% of the long-term average to 88%. After hitting a low of 3.27% in November 2014, inflation has inched up a bit in recent months (see chart). The RBI has revised its projection of inflation from 5.8% to 6.4% by March 2016. Either it is worried about a poor monsoon or is goading the Government to prepare a contingency plan.
However, the experts are not much worried on the inflation front. "We expect consumer inflation to be at 5% by March 2016 versus the RBI’s forecast of 6.4%. Based on our inflation trajectory we still maintain that the RBI could lower rates a further 50 bps by March 2016," says Nandkumar Surti, Managing Director & CEO, JP Morgan Mutual Fund.
Damocles sword of US Fed
Another threat to the Indian markets comes from the US Federal Reserve, which is expected to raise interest rates this year or early next year.
The Fed rate hike is a Damocles sword hanging over the market. However, some experts think that this may not happen in 2015.
“I don’t think the US economy is in any shape to merit a rate hike. Look at the last GDP numbers: it contracted by 0.7%," says Shankar Sharma, Vice-Chairman & Joint Managing Director, First Global.
The dollar has stabilised between Rs 60 and Rs 65 (see chart). If the US Fed hikes rates, the US dollar will strengthen and push the rupee down. Experts are not overly worried about this as well.
"The RBI has been following a robust policy to reduce volatility in currency. A limited depreciation of 3-5% is healthy because the Indian inflation rates are higher than global ones," says Sankaran Naren, CIO of ICICI Prudential Mutual Fund. Will a rate hike in the US impact the Indian market in a big way by disturbing the FII inflows? Not really, says Saravana Kumar, CIO (Equity & Debt), LIC Nomura Mutual Fund.
"Since this is an event waiting to happen, any shake up or sell-off effect will be short lived. FII (foreign institutional investor) investments will continue to flow to India because of the expected economic recovery," he says.
The domestic funds flow should neutralise any short-term blip in FII inflows. "The downside is also protected due to inflows from the EPFO and other domestic investors like mutual funds, insurance companies and individual investors," says Nilesh Shah, Managing Director, Kotak Mahindra Mutual Fund.
Even so, all the experts we spoke to expect the markets to remain weak in the short term. While corporate earnings will take a few more quarters to recover, the clarity about monsoon and the US Fed actions will emerge only after a few months.
"The upward momentum is broken, so we are on the negative side now," says Nilesh Shah. "Since there is no leadership in the markets to take it to higher levels, the Nifty should remain range bound (between 8,000 and 8,500) in the coming months," says Andrew Holland, CEO Equities, Ambit Capital.
So, what should you do now?
"While short-term investors should stay on the side-lines for some more time, long-term investors should use the current consolidation to buy into the market," says Nilesh Shah. "The sharp fall of 1,000 points in two days shows the nervousness in the market and long term investors should use it," says A. Balasubrahmanian, CEO, Birla Sunlife Mutual Fund. However, instead of buying in large quantities, they should slowly and steadily build up their positions. Mid-cap stocks have rallied in the past one year.
They have corrected a bit in the current bear phase but still remain ahead of the large caps (see chart). However, this may change if the correction continues. Mid-cap stocks are richly valued, which makes them vulnerable to steep corrections.
The BSE Mid-cap Index is quoting at 22.26 times its trailing EPS, compared to the Sensex PE of 19.29. The problem of pledged shares is also more among the mid-cap counters.
On 3 June, Unitech crashed by 52% intra-day and closed the day 35% down due to worries that pledged shares had been sold in the market. However, good quality mid-cap stocks can be very rewarding. “Select midcaps should do well when the economy picks up, so investors should not desert that space,” says Balasubrahmanian.
Sectors to buy
The correction has not affected all sectors uniformly. We looked at how various sectors performed during the Modi rally between 26 May 2014 (the day the NDA government took office) and 29 January this year (when the Sensex touched a high). Several sectors such as metals, sugar and realty fell even when the Sensex was climbing during this period. But when the Sensex stopped rising and correction set in, these sectors did not bounce back. Instead, they fell even more (see chart).
On the other hand, sectors like teleservices and pharma, which gained handsomely till 29 January, continued to gain even during the recent correction. This shows their inherent strength.
The hawkish comments by the RBI have hurt rate sensitive sectors most. Companies with very high debt clocked the biggest losses. They may continue to be under pressure till there is uncertainty with regard to next rate action by RBI.
Their only hope is that the transmission of previous 75 bps cut by RBI will slowly happen and reduce their interest costs in the coming quarters. Banks also suffered. While the private sector banks will continue to perform better, most PSU banks are facing asset quality issues.
However, most of this is already priced in, which explains why private banks are quoting at significantly higher valuations than PSU banks.
Another rate sensitive sector, automobiles, is expected to do well despite the deferment of rate reduction by RBI.
"The auto sector is seeing a cyclical upturn, so is a good bet now," says Balasubrahmanian. Commercial vehicle sales have already picking up.
Other cyclical sectors are also facing challenges. There is speculative pressure due to the expected rate hike by US Fed and global overcapacity and therefore, oil and gas stocks are structurally weak.
The postponement of the Fed rate hike is good news for the global equity markets. But the reason behind it (the slowdown in US) is not.
“The IT sector is expected to remain weak in the coming months due to global slowdown concerns,” says Holland.
Be stock specific
Don’t buy a stock only because it has come down drastically from its previous highs. Most of the top losers from the BSE 100 since 29 January have also lost heavily during the upmove of the broader market till that date. Instead of looking at the absolute fall in percentage terms, examine the reasons behind the fall.
For example, the recent crash in the Nestle share is because the company decided to withdraw its flagship
Maggi brand after the controversy and ban on sales. In addition to the impact on sales, the stock crashed because it was already overpriced and therefore, warranted a correction.
So, instead of getting in because the stock is down 15%, investors should avoid this counter for the time being.
ITC is another FMCG counter that has got affected because of the ban on loose cigarettes imposed by the Maharashtra government. While the loose cigarette ban may impact ITC, its impact is not very big and therefore, investors can continue to bet on ITC.
-- with Sanket Dhanorkar