Q) The Nifty50 ended the week with losses of about 1 percent. Do you think we might have made an intermediate top as RBI policy failed to lift sentiment or will there be a Santa Claus rally towards the end to take markets to new highs?
A) The Reserve Bank of India (RBI) did fail to lift the sentiment and it was very ambitious of the Street to expect another round of a rate cut even after a 135 bps rate cut so far in the year.
RBI is in a wait and watch mode and is no hurry as it needs to accumulate further evidence of the impact of rate cuts.
Secondly, credit growth remains sluggish. The bank credit growth has slowed down since January 2019, and dipped below the deposit growth rate which is not a positive sign.
Also, we are in a month when investors usually expect a "Santa Claus" rally while in the recent past we have not seen that pattern emerging specifically in the month of December, but, yes the returns following the month has been impressive if we look at next 2-3 months returns.
The market is largely in a sideways range with a positive bias where we are seeing previous all-time high being breached by a few percent while the previous swing lows are getting higher.
On the flip side, we have already added 13 percent to the rally in the last few months and there may be a higher probability of profit booking rather than fresh buying.
As far as "intermediate Top" is concerned, it would be too early to take a call specifically at all-time highs and it would not be a brave one for sure.
So, there has to be some confluence or at least some warning signal to call it an "intermediate top" or "double-top" formation.
We have a Trendline resistance which we haven't breached so far. Technically, Nifty has recorded a bearish engulfing pattern on the weekly scale, MACD is showing weakness while the breadth of the overall market is still weak -- which is a must for the upside rally to sustain.
There are multiple divergences when you look at leading indicators or lagging indicators or divergences between Indices.
So, these are a few warning signals and one should rather be cautious than being completely aggressive.
Q) Valuations of Indian equities are now trading above their long-period averages. Does this mean it is time to book profits?
A) India is one of the most expensive markets when we look in the Asia Pacific region. There is a divergence between various indices which are in a bearish trend.
There are select few stocks that are extending this run-up while the broader market is still not confirming the same. Profit booking should be done or can be seen because today’s leaders will not necessarily be tomorrow’s outperformers.
The bottom stocks are seeing a revival but it is still in its very early stages and may see recovery in Q3FY20-Q4FY20.
On one hand, the market is at an all-time high but GDP numbers have hit multi-year lows -this is a huge divergence. The series of rate cuts and its impact being passed on may push cyclical space to perform better but then it is a very select stock-specific opportunity.
The earnings revisions have not been so positive for FY20 while there are revisions for FY21 given the recent corporate tax cut and series of reforms.
Q) Any top 3-5 stocks which you think are trading at reasonable valuations when compared to historical averages?
A) Here is a list of top three stocks which we think are trading at reasonable valuations when compared to historical valuations:
Apollo Tyre is one stock from the midcap space which is looking attractive for the long-term and can see growth pick-up. We expect its EPS for FY21 to improve to 14.60 and FY22 at 17.70.
Godrej Properties & Oberoi Realty:
Another stock from the midcap space which we like is Godrej properties and from smallcap space we like Oberoi Realty.
Q) Only three among the top 10 Nifty stocks one-month return generators have been consistently among top return generators across three-month, six- month and YTD basis as well. These include names like Bharti Airtel, Bajaj Finserv, and ICICI Bank. Can these stocks continue with the momentum in 2020 as well?
A) The momentum may continue in these stocks as it is all about buying winners and sell the losers. These stocks are the leaders in their own space that are seeing liquidity coming and hence the premium that is attached to them reflects the same.
In the last few quarters, we have seen the case of Index management and a very concentrated number of stocks are performing which are taking the markets higher.
These few stocks have actually outperformed in the last few quarters by around 15 percent while the bottom stocks of Nifty50 are down about 30 percent from the top.
There is a recovery post the corporate tax but is at a very early stage. The momentum in these stocks may continue as long as investors are less willing to take the risk with profit.
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