Global situation is getting murkier, there are visible signs of slowdown in the leading economies of the world because of the US-China trade war.
With more misses than hits in this earning season, a runaway rally in the short run looks unlikely. In case the Nifty breaks below the recent lows, it can attract fresh technical selling and slip towards 10,300-10,100, Himanshu Gupta, Vice President, Research, Globe Capital Market, told Moneycontrol's Sunil Shankar Matkar.
Q: The market has been in a bear phase for more than a year now. Even largecaps have started falling. What is your view and do you feel the market is still expensive?
A: In the last one and a half years, the Sensex has gained 9.8 percent, while the BSE Midcap has lost 18.75 percent and the BSE Smallcap 30 percent. In this period, the PE multiple of Sensex has increased from 24.19 to 26.31 but that of the Nifty Midcap50 has fallen from 80 to 31. This shows that midcap and smallcap have corrected much more and valuations have also become attractive compared to one year ago.
Historically, the Nifty PE multiple has been in the range of 17-19 but at that time interest rate was in the range of 8-9 percent. Currently, interest rates are much lower that account for the higher PE multiple for the Nifty. We see markets as fairly valued at this point of time, they are neither expensive nor very cheap. After this correction in broader market, there are some pockets in small and midcaps that are looking attractive from a three to five years perspective.
Q: The finance minister recently met the prime minister and discussed job cuts, auto inventory build-up and FPI surcharge. But, there has been no firm action to revive demand. What should the government do?
A: The good news is that the government has acknowledged the problems and is concerned about economic slowdown across sectors like auto, FMCG and real estate, which may cause large-scale job losses, and is exploring various measures to spur growth. But given the limited resources, the finance ministry will see impact of any such measures on fiscal deficit before it is announced.
The government's priority should be to take steps to improve the sentiments of the domestic as well as foreign investors. It must meet all the stakeholders in various sectors and ensure ample liquidity for businesses at attractive rates, support businesses that create large-scale employment and most importantly, increase the spending significantly to give a push to the economy.
Q: What are your thoughts on the global situation? Is there any chance of equity bear market as US bond yields touch a multi-year low?
A: Global situation is getting murkier. There are visible signs of slowdown in the leading economies of the world, thanks to the trade war. The trade war is hurting global economy more than originally anticipated by not only forcing the agencies to downgrade the growth outlook but also keeping the central bankers on toes. The central banks have turned more dovish over the recent few quarters and are willing to do whatever it takes to support the growth and liquidity.
We believe that the slew of measures being taken might prevent the recession for the time being and push it further away at least one-two years from now. Having said that, the US equities are witnessing the second longest bull run on record that can and will correct someday. The yield curve has inverted for the first time since 2008, suggesting that a recession might follow but if history is to be believed, the inversion preceded the recession by several months or years, so throwing in the towel might not be a great idea at this point of time, especially when the retails sales in the US continues to remain robust.
Also as the presidential election will near, we expect trade talks between the US and China to reach some agreement, which will lift sentiment and the markets.
Q: Is this the right time to invest in the most beaten-down marquee stocks, or will you raise more cash at current levels and wait for 10,000-10,500 levels? What will be your bets then?
A: Investor should focus on quality stocks rather than finding bottom of the market, which anyways is really difficult to predict. This type of correction in the market gives opportunities to them to build long-term portfolio. Investor should focus on capex-related, interest-rate sensitive sectors, private banks with good assets quality, capital goods, power utilities, cement (proxy for investment cycle), where they can accumulate the stocks in a staggered manner.
Investors' sentiments are hurt and they are feeling uncomfortable to enter into this segment and this is exactly the time when long-term bottoms are usually made. This type of correction in the market provides good opportunities for long-term investors to build and diversify their portfolios by focusing on companies showing good earnings growth.
As far as the levels are concerned, 10,800-10,750 has offered respite to this market for now. In case some encouraging announcements are made by the government and global equities do not turn very volatile, we can expect a recovery towards 11,500 levels. However, given the more number of misses than hits in the earnings, we don't expect a runaway rally in the short run. And, in case the Nifty breaks below the recent lows, it can attract fresh technical selling and slip towards 10,300-10,100 levels.
Q: Are you buying auto stocks like Maruti, Hero, Bajaj etc, or do you believe it is a structural slowdown, so it is better to stay away from these stocks?
A: The auto sector is highly cyclical, which means that in economic boom it sees high sales and sales suffer in economic downturn. July auto sales plunged to the worst in two decades. Maruti Suzuki India posted the steepest fall of 36.7 percent in sales year-on-year, even as sales of other firms fell by 10-15 percent. Two-wheeler sales across firms fell 11-15 percent. Commercial vehicle sales were also very low, falling by about 40 percent.
Historically, when auto sales have been hit, the government has intervened to support demand and that is what we expect this time as well. Currently, the sector is going through a rough patch, as a result the stocks in the sector have given up substantial value. However once the cycle starts to turn, the sector is expected to start delivering well. We see it as a cyclical issue rather than a structural issue and therefore, investor can enter into frontline auto stocks considering 3-5 years view.
Q: Currently, insurance is a small sector with listing of four companies, and the space relatively did better than others in earnings. Do you think it could turn much bigger in the next five years?
A: Over long term, insurance stocks have the potential to grow. Given lower penetration levels in insurance sector, there is room for listed insurance stocks to grow. Each insurance player has shown strength on some parameter – bigger market share, wider distribution reach and strong product mix. Investors can hold insurance stocks in their portfolio from the long-term perspective.
If these companies are able to focus on the products required for Indian population, the demand is likely to increase further. Despite a low sentiment towards financial services sector, the insurance sector continues to grow at a healthy rate. India is one of the most populous countries in the world, life insurance penetration is only about 2 percent, so I think the scope for this sector to grow is tremendous.
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