Volatile times in the market could continue even as mutual fund inflows keep coming, says an expert.
Following a stupendous 2017, Indian shares are trading flat for the year, and the market could be in for further bad news, as investors take some money off the table and put them in safer pockets, according to one expert.
In an interview with CNBC-TV18, Ajay Srivastava of Dimensions Corporate Finance Services said that the flow of incremental liquidity was falling in the market.
“People were over-invested in this market and now portfolio management services and HNI liquidity are not reaching the market," he said, adding that as a result, the market would stay volatile even in the face of mutual fund inflows.
"This will play out till the time new money comes to the market when investors revise their portfolio,” told CNBC-TV18 in an interview.
"Along with this, if interest rates rise, investors could rush to banks or FDs," he said, adding that he while expects large-caps to weather the storm, "there could be frequent bloodbaths in midcap stocks".
Speaking on sectors, Srivastava said he is bullish on large private banks and believes that the crisis in public sector banks is a boon for these lenders. Additionally, he is also buying FMCG and defence stocks. Within FMCG segment, he recommends watching out for food and detergent market related stocks.
He also elaborated on a couple of stock picks. "For instance, ITC is on the cusp of a major FMCG transformation," he said, while also picking Bata for being "the best in business among footwear stocks".
Srivastava also remained bullish on the midcap IT space and highlighted that he owns stocks such as L&T Infotech. “It is the best safe bet in a volatile market scenario,” he said.
Below is the verbatim transcript of the interview.
Anuj: What is going wrong you think, global cues, politics, bank fraud, combination of all, how do you proceed, the kind of move that we have seen over the last two months?
A: Things you saying cannot go wrong or what is going wrong, I think quite a bit is going wrong but also some things are going right also in the sense that what has happened is the investors who are too heavily weighted on one side of the portfolio, which was the volatile midcap, which was the banking sector and which took a big knocking - if you look at sectorally the fast moving consumer goods (FMCG), the pharmaceuticals and the IT were much lower weightage in portfolios, they haven’t taken a bloodbath because simple is the fact that they don’t have enough firepower to sell out there.
In this segment of the market, this is true, people are overinvested, so even if you look at bargain hunting etc, that is not happening. So what is happening is the set of negative clues and there is no firepower left in the market to buy into at the bargain level. That is what is happening today.
With the amount of uncertainty that you just outlined, it is very difficult to make big investment decisions for people who are already overinvested in the market and I think that is what is hurting the market is pure liquidity not entering - whether it is HNI, whether it is PMS money - the market at this point of time. So the sellers are not able to find buyers of quality and that is why you see the price fall which is so rapid and fast.
I think this will play out for a while because till the people don’t rebalance their portfolios, till the new money doesn’t come into the market, you will see the volatility towards the lower side keep on accentuating.
Latha: The mutual fund flows in February were higher than January.
A: It is all about incremental flows. The point is that even if the flows are coming in, at this point of time – therefore mutual funds were one flow which were SIP driven. The big chunks of midcaps were picked up also by the HNIs and also by the PMS customers. That is where we see - there is a major slackening of interest, even in the last HNI sector, there is a clear slackening of interest in equities and saying, we are overinvested, market is volatile, political uncertainty is around the corner, should you want to buy into uncertainty at this stage is the question on the table, perhaps the answer would be if you were to buy 100, you buy 22 today.
The incremental liquidity flow that we saw between November to December, December to January and January to February, that curve is falling now. So it is not that the growth in the money coming in is becoming higher and higher. The growth delta is not getting lower and lower and I am 100 percent sure - give it another month or two, you will find it flattening out or even becoming negative.
As we approach the political cycle, as the economy starts not to show up, if it does not show up, serious signs of rebound, you will see lacking interest in this market. That is one.
Number two is interest rates, if interest rates pick up by another percent or two, there will be enough people wanted to put their money in bank fixed deposits and company fixed deposits and enter corporate market compared to equity markets. So the yields will be 14 percent or thereabouts in the good ICD markets, 9 percent on the FDs.
So today you are on a threshold point, at the cusp of people taking a decision. Earlier it was very simple, what is the point of putting up FD. Today there is a case for putting in fixed income securities and FDs at this point of time.
So culmination of two means that incremental liquidity is going to be much lower in 2019 than 2018 which is what will play out in the midcap sector. I will still say, largecaps will weather the storm much better and they are far better, FMCG will do much better than last year but in the midcap space, you will see frequent bloodbath and it is very difficult for a stock to recover.
You spoke about PCJ, that happened with the incident as well, news item, but that symptomizes that stock can fall so dramatically worth Rs 600 or Rs 700 to Rs 370 but the climb is going to be very difficult. So low liquidity, climb up is going to be difficult and therefore you will see that you need to focus on portfolios, re-align them lot more than you were doing last year.
Sonia: Six months back if you would have asked anyone on the streets, they would have said, wait for a 10 percent correction and then buy into this market. Now when the correction is here, you are not seeing that much interest, are you buying right now or would you wait a bit?
A: We are certainly buying large banks, private banks, we are certainly buying and decent quantity, it is not small one. We are buying decent quantity of large banks because we believe that -- let us take a step forward, with all the uncertainty and everything together is only going to help the large private banks and it is not going to take away from their value. I think what we are seeing a crisis in the PSU bank is a god-sent gift to the private banks today at this point of time.
You cannot not buy into those. So private banks, we are definitely buying. We are definitely buying a lot of FMCG stocks at this point of time and we believe that there could be given up further upright.
Pharma we bought little bit but not too much, we are still waiting it out to see where we are and we will bought some defence stocks because we believe that in the next six months, the government is going to spend more than 80 percent or 90 percent of the budget heading into the elections. So companies dependent on government are going to get a windfall money in the next six-nine months and maybe taper off in the last quarter in terms of expenditure.
So we are buying some of the midcaps in the defence sector, we have bought a lot of stuff there, we are buying – so that covers basically what we have incrementally added to the portfolios.
Anuj: In the FMCG of course there are lot of stocks, there is the classical Hindustan Lever, there are the ones we have seen recently earnings growth like Jubilant Foodworks and of course there are United Spirits where there has been so much volatility, so what part of FMCG would you be buying?
A: I am not recommending any stock but just to name it – Hindustan Lever is in our stock. We are buying back Bata again, we had sold off, we have got a lot of holdings in Britannia at this point of time beautifully positioned stock in our view. We have got holdings in Jubilant Foodworks and now we are looking at whether ITC makes some sense. ITC to me is almost like a quasi-Reliance at this point of time.
One big product with huge cash flows like petrochemical and number of children eating up the dinner at the table without contributing anything. We are hoping that some of the children on the table will start contributing to the family kitty at this point in time. So ITC perhaps timing wise, we can wait a while but it is at the cusp where you can see a major transformation of the stock in terms of FMCG.
ITC has been a problem for the mutual fund buyers also because if you look at the MF FMCG, huge loading of non-performing ITC in the last two years has led to very poor performance of FMCG funds. I think till they don’t correct it, a lot of money will flow into the stocks.
So my belief if the MF cut down the ITC weightage in the funds, you will see substantial investments of the people in FMCG. People are underinvested and therefore food market is one big market we are looking at. Detergent market like HUL is definitely going to make a serious headwinds in the market. SME sector is dead, so these guys get the advantage, so buy into detergent, soaps segments and I think you are doing just fine.
Of course, footwear, you cannot beat Bata’s franchise. So I think it is one of the franchises which is just phenomenal. It has given you price correction, go for it. Lot of my technical guys and my company advised me that the market is not giving you good buy signals but that is a difference between fundamental and technical. We perhaps will have to wait longer than the guy who works with technical who buys and sees an upside immediately.
Latha: Titan I wanted to ask you, you said you won’t talk stocks but that has been one of those consumption stocks that has done well. Any midcap IT you don’t dabble?
A: Titan – as the roman says always a thumbs up, it is never a thumbs down stock. That is for everybody, it has been for years now, it is nothing new about Titan. But I think midcap IT has done well. There is no doubt about it. We have got a holding in L&T Infotech at this point of time. We think selectively these stocks will do well because they are capturing market niches with the big guys, kind of miss out or perhaps are not able to capture. So I think midcap IT has reasonably most strength on two parameters, one of course is they are capturing the niches very well and number two the M&A opportunities. A lot of them will be up for sale in a year time, two years’ time with a lot of interest for people to buy into them globally as well as locally. So I think midcap IT is a safe bet in a volatile scenario.
Sonia: Since you are in a great mood to talk about stocks today, let me end this conversation with your view on defence. There are so many stocks there, there is BEL, BEML, Bharat Forge, L&T and this has been a sunrise sector for a long time. We all know it is going to take three-four years before they start to show fruition there, what are you buying here?
A: I cannot name the stock but these are not the largecaps. What I am buying are the midcap stories in the defence, which have large contracts with the defence companies. So I have not bought any of the largecaps because you rightly said they have got larger contracts which have got whole series of issues. We have bought a lot of smaller companies which have got different kind of contracts with them - whether it is training software or electronic software or communication systems etc – these are kind of companies we have put our money in because these are getting contracts regularly from now from the ministry of defence and the government and able to show sales as well.So these are not the multibillion dollar contracts, which L&T carries or Tata Power carries, these are smaller companies, the smaller contracts but they are all seeing orders now finally coming through. We believe in next six months there will be huge spend by the government because somewhere down the line, the government has to recognise the political reality and spend some serious money on the ground and we need to be right there where the money is being spent.