DAILY VOICE | Stay cautious for next few weeks in the run up to US Elections: Neeraj Chadawar of Axis Securities

Neeraj Chadawar, an engineer turned equity strategist with over a decade of experience under his belt, advises investors to stay cautious for the next few weeks in the market as the US presidential elections have a bearing on the Indian market also.

At present, Chadawar heads Quantitative Equity Research at Axis Securities.

Since 2015, the correlation between the S&P 500 and the Nifty is very high. In CY2020, it is rising and the current correlation is 81%, which shows that the recent rally in the Indian market is more or less driven by the global market, he said in an interview to Moneycontrol’s Kshitij Anand.

Edited excerpts:

A) Every fall is an opportunity to enter the market and as we progress towards the US election, the market volatility will only increase. Historical election month data suggests that any resulting volatility is likely to be short-lived and the market will eventually look for the fundamentals.

It is difficult to predict the outcome of any political event but once the event is over the entire market narrative will shift towards economic recovery and vaccine development.

One needs to be cautious for the next few weeks in the market as the US presidential election has a bearing on Indian market also.

Since 2015, the correlation between the S&P 500 and the Nifty is very high. In CY2020, it is rising and the current correlation is 81%, which shows that the recent rally in the Indian market is more or less driven by the global market.

Apart from this, going forward, slower economic recovery across the segments vs expectation could hurt the market sentiments. Vaccine development is in an advanced stage, and any delay on the vaccine front or any sign of the second wave of COVID could hurt the current momentum.

A) The success of the recent IPO has boosted the overall confidence in the market which is supported by improved liquidity and the overall risk appetite which is leading the market to higher levels.

The market consolidated in the month of September and then bounced back to the 12,000 mark in the first half of October on account of improving sequential recovery in high-frequency indicators like PMI, automobiles sales, GST collection, E way bill, energy demand, and on the expectation of sequential improvement of Q2FY21 earnings.

Although, we are witnessing a sequential recovery we are still not out of the woods as most of the indicators are still below pre-COVID levels.

Further, the September inflation print surprised the market which overshoots the RBIs forecast; continued supply-side disruption in foods & vegetables led the September inflation to 7.34% which reduces the possibility of rate by RBI on an immediate basis.

We could see some profit booking beyond 12000 levels, as fundamentally these levels are not sustainable. So, we believe stock selection is a key to generate alpha at the current level rather than a top-down approach. Further, the sector rotation theme is playing well where laggards like BFSI are playing a catch-up rally.

A) IT sector is in a re-rating cycle and this trend is likely to persist over the medium term. This sector has demonstrated capabilities during this uncertain time with strong earnings performance which continues in Q2 also.

The resilient show has led the IT companies to gain by 350 bps to 15 percent by market cap in the Top 500 companies in India, compared to 11.3 percent as on 20th February 2020.

Although we had seen some profit booking at higher levels, this sector is a clear winner of buy on dips. We continue to believe that in IT space which is marked by companies with a strong balance sheet is a play on the current trend of digitization.

While BFSI space is the clear laggard and lost almost 500 bps to 21 percent by the M-Ccap in the Top 500 stocks, compared to 26 percent as of 20th February.

The sector rotation theme is playing well, this sector is gaining momentum in the first half of the month which could continue from here as the outlook for the industry is improving. Further, this sector provides valuation comfort at the current level.

A) The US elections present a conundrum from market volatility as well as dollar volatility, as we progress towards 3rd Nov, Volatility is likely to increase in the market.

We believe that market volatility is likely to provide good opportunities for Midcaps and Small caps. The recent spate of IPOs and their success clearly indicates that there is an appetite for mid and small-cap stocks.

Quality as an investment style is more likely to outperform over the medium term. We are overweight quality in our allocation strategy at this juncture.

Our case for two year rolling returns indicates that the market has turned in favour of small and mid-cap stocks which are more reasonably valued and offer greater upside potential.

Also, SEBI’s new guidelines on multi-cap funds has clearly tilted the favour in the case of mid and small-cap stocks which will keep the space in vogue over the medium term. On the valuation front Nifty looks optically expensive but fairly valued beyond top 10 names

A) Our thematic approach has seen consistent results and we continue to believe in our structural themes of IT, Digital, Pharmaceuticals, Consumer staples, Rural, Chemicals, and Automobiles.

These themes played well in the last few months and have delivered consistent returns in a tough environment. We continue to believe in our long-term themes & could result in decent returns over the next 12 months. However, stock picking will be the key factor to deliver sustainable returns in the current environment.

A) From the last few months the entire market narrative has positioned towards defensive play where IT and pharma stocks were outperforming the market, while cyclical stocks were on backstage.

Here onwards we could see some recovery in domestic cyclical sectors like banks, Infra, and cement sectors. These cyclical sectors are a high beta play that could gain from economic recovery; however, it remains to see the sustainability of the recovery. Any pickup infra spending will be positive for the sector.

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