Recent selloff no cause for worry; look for sectors that have the potential to beat the index, says this wealth manager

IT has the potential to deliver alpha

Indian equity markets have experienced a welcome relief rally following a taxing six-day streak of relentless selling. Remarkably, the previous week saw the Nifty and Sensex indices endure their most substantial weekly loss since February.

This week we have a weighty agenda to contend with, as quarterly earnings, the pivotal interest rate pronouncement by the US Federal Reserve, and the evolving developments surrounding the Israel-Gaza conflict are poised to be the guiding forces steering the market's course. Notably, Indian equity markets presently hover approximately six percent below their historic highs.

Consequently, the paramount question that hangs in the air is whether this buoyant resurgence should be interpreted as a mere "dead cat bounce" — a transient rally preceding further declines — or if it signifies that the market has withstood the storm of its recent selloff.

In an exclusive discussion with Moneycontrol, Feroze Azeez, Deputy CEO at Anand Rathi Wealth, offers a perspective that implores investors not to be unduly alarmed by the recent turbulence. The following are select excerpts from his insights.

We saw a rebound on Friday after six days of incessant selling. Do you think that was a dead cat bounce or is the worst of the selloff behind us?

Yes, like you rightly said, we have six successive days of market correction. But if you look at it, it was also the month-end expiry on October 26, when you saw the kind of carnage in the market on consecutive days you would also like to see what kind of rollover cost happened in that expiry. If you see the rollover cost, November futures ended at a premium of Rs 120 which is marginally more than the cost of carry from a treasury bill perspective. So that automatically showed that we were oversold, which is why we saw the bounce back on Friday. Secondly, when it comes to the market, people generally digest the gains that have come in the past. We are just about 6.6 percent lower than the peak. If you look at the last 22 or 23 years of history, the drawdowns every year on an average have been 14 percent with 4.8  percent being the minimum. So, I don't think this is a correction that is substantive enough for a person to be worried from an investor's standpoint. Because if you're looking at the average of the last 22 years, leaving the global financial crisis, and the Covid years, which were exaggerated years, there's a 14 percent drawdown from peak to trough each year. And if you include them, then the drawdowns go to almost about 17 – 18 percent on average a year. So I think we are not in any zone of a sensible correction because 6.6 percent from the peak is not such an exaggerated move from a profit booking standpoint.

What’s your assessment of the earnings season so far, Feroze? Which one is worth a look at the current juncture? Between IT which was not such a major disappointment as the street was already factoring in a weak set of numbers and banking, for instance, where margin pressure was something that the street was factoring in?

Personally, I think IT was oversold. If you look at a few months back, despite bad results in the previous quarter, stocks managed to do well. A clear indication of being in the oversold territory is bad earnings resulting in some degree of upmove. So that's a great sign of reversal. I think the slowdown in IT spending especially in Europe has already been factored in. Thirdly, I think that IT has the potential to deliver an alpha of 4-5 percent over Nifty in the year to come. It's very important to have targets in terms of the differential performance with Nifty, especially for a major sector like IT. The sector has underperformed the Nifty over the past month, but I think on a three-month basis, it has outperformed the index. All your sector calls if they can add up to getting you 3-4 percent alpha on Nifty, that's when the game becomes interesting. And I personally think banking as a sector is a high beta sector and, therefore, you have to be very choosy in such sectors from a business model standpoint because everybody has different USPs and strengths. And especially in the year preceding the general elections, I would be very choosy in the high beta sector, especially given the fact that that sector holds about 34 percent weight on Nifty currently.

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What about the auto pack? I think we've seen stellar numbers coming in from Maruti and you know auto sales have also been picking up given the fact that the festive season is upon us. Do auto names warrant a buy now?

In another couple of months, I think auto would be a great bet because rural spending is going to go up. The government will scale up capital expenditure and finish most of it in this calendar year. So, I won’t be bullish on the auto sector at this stage because if you have to beat the Nifty, you have to tweak the weights.

What about sectors that are over owned by the FII community? Any sectors that are an avoid, aside from metals for one, given the fact that we've seen quite a bit of drubbing when it comes to this basket.

Yes, you're absolutely right. FIIs have a large role to play in a specific sector depending on their ownership and the cash flow. FIIs have sold Rs 6,000 crore worth of stocks in the last 10 days. They were largely positive for the first five months except for August and September. I think they have been marginally negative - Rs 6,000 crore is not a large number. DIIs have outdone them by Rs 10,500 crore of inflow in the same period of the last 10 days. Like you said, I would say metal is the one sector that is reasonably cyclical and I would stay out of it. I would be bullish on pharma and from a long-term perspective. I would be very, very bullish on pharma because I think most investors don't find it easy to get in and get out of the sector because it's incidental that you give the advice to exit as well. So I think some sectors which you can hold for a long period of time would be a sector like pharma.

Lastly, is there anything you like in the electronic manufacturing space? This is one pocket that the street is very bullish on - the likes of Dixon Tech have reported a great set of numbers. And what about the capital goods sector, given the fact that we are entering an election year?

Yes, I am very positive about the capital goods space but won’t be able to comment on the electronic sector. Capital goods, I think, will give you that fillip because it's also a high beta sector. And I think increased capital expenditure will result in several infrastructure teams and capital goods doing very well. Of course, you have to buy it not on the positive side. You have to buy things that are tough which takes more courage because you have to be contrary when you're wanting to pick sectors and have active weights on sectors with the objective of beating an index. I personally think courage becomes a very important investor attribute. So any sector which has done not so favourably over the last couple of quarters is the one which comes on the annual for a choice.

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