Markets in resting phase, be watchful of correction in momentum stocks: Samco's Umeshkumar Mehta

Momentum has been shifting from many stocks across small-, mid- and micro-cap. All those stocks that had a fantastic rally have now entered a no-go zone. Many stocks have already given a ‘sell’ signal and a good part of our money is also in cash. We are watchful at this time. The market is in a resting phase ahead of the election and is not in a hurry to move up or down. A lot of money is being taken out from the secondary markets, which can further accelerate the correction. Sectors that have moved up sharply will now correct. On the other hand, money can still come into the markets as liquidity is very fluid.

In this scenario, it is better from a risk-adjusted perspective to stay out of the market for those who have already done well. But at the same time, the market has various pockets where there could be value. We have exited all high-moving momentum stocks, but we are still getting some ‘buy’ signals from the large caps such as oil and some pharma names.

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Do you see any pockets of opportunity in the small- and mid-cap space?

From a momentum perspective, I think there is a sharp slowdown in the entire space. The mid- or small- or micro-cap indexes have also started falling and a good part of those shares are also mimicking those indexes. In correction, two things can happen: either this could last longer and go deeper, or it could be a time-wise correction. But in both instances, there is a risk of drawdown. We are trying to protect that, but we can also build positions again in the market if needed.

Which are the spaces where you are getting buy signals?

Oil, pharma, and some PSU banks.

How are you looking at segments like defence and railways at this point?

Railways and some of the defence stocks have had a sharper deceleration in momentum. Defence is bound by government contracts, and I think going forward those will not happen or may slow down (as this is an election year). Some of the stocks are still reasonable. Largely defence as a trend is on an upward trend and a good part of defence stocks are still correcting, but are still in the buy zone.

So, are these long-term plays?

No, not really. Corrections are the best way to identify stocks that are on the stronger and weaker side. We need to place ourselves in the strong stocks for massive outperformance in the next leg of the rally, whenever it comes. We need to get out of weaker stocks, which is where the momentum as a strategy is giving a ‘sell’ signal. Such stocks may have a deeper correction, but those stocks that have fallen less will rise faster.

Has there been a negative impact on investor sentiment because of the discussion around the MF industry?

When we analyse markets over the last 40-50 years, whether in India or the US, at any point in time, there will be a set of thoughts that will create fear. Currently, this set of thoughts is creating fear — valuations are high, stress test, etc; whereas the other set of thoughts is that India is a great story, it is resilient etc. As a result, some will buy, some will sell.

But at times, the negative narrative could be a little stronger and may make investors a little fearful, but that does not change the inherent trajectory of the market. What changes the inherent trajectory of the market is when the fundamentals of the market weaken. However, that is not the case now.