Sensex set to test 90,000 by year end; IT, banks and discretionary top bets: Sunil Subramaniam

"A Sensex target of 90,000 by the year-end, I think, is quite a possibility", Sunil Subramaniam said.

Sensex is well-placed to make a dash at 90,000 by the end of the year, as large-cap shares have significant amount of catch up left to do with mid-caps, and foreign flow coming back should aid this upmove, Sunil Subramaniam, veteran market voice and former Managing Director of Sundaram Mutual Fund told Moneycontrol.

"As you know, the mid and smallcap indices are trading at a record premium to the large cap. So there's a lot of catch-up rally on the large cap. A Sensex target of 90,000 in a few months by the year-end, I think, is quite a possibility", Sunil Subramaniam said.

Here's an edited excerpt of the interaction:

Q: Sensex has clocked a major milestone of 80,000. Do you think we will end the year around somewhere around 90,000?

A: I do concur with that because I think by and large this Sensex rally so far has been driven by domestic flows. FIIs have been blowing hot and cold based on anticipated election results, various news flows and all of that. Now, with the government settling down, all those concerns are away. There's an expectation of a strong, robust reforms process now, and I think that the monsoon also has come in advance. That's good news for us. So, I think overall, FII flows coming back would definitely take the large caps higher. As you know, the mid and small-cap indices are at a record premium to large-cap indices. So, there's a lot of catch-up rally. A Sensex target of 90,000 in a few months, by the year end is quite a possibility.

Q: HDFC Bank has seen a good uptick as the foreign headroom has gone up, and it has the potential of weight increase on MSCI. There are expectations of $3-4 billion worth of inflows. But do you think the stock will see a major upmove ahead of this event?

A: I would agree. I think that there's no problem with the quality of the bank. By and large the merger process with the parent has been handled well. I think one of the reasons there was selling pressure was the fact that people who were holding independently HDFC Limited and HDFC Bank had to consolidate, though some grandfathering portion was allowed. So, with all of that settling in, I think the quality of the bank remains supreme in the Indian market. I would say ahead of a weight increase in the MSCI index, people, operators would generally come in and buy. I do expect this rally to sustain for quite some time, because quality, I think, at end of the day will prevail.

Q: Shifting focus to the SEBI circular on transaction charges. Nithin Kamath recently said that they may look at ending their zero brokerage structure. How are you viewing this move? Do you think it will hit volumes going forward and how does it bode for deep discount brokers?

A: Obviously, for them, now with this severe ruling coming in, the differential pricing to make money will take a hit. So, their business model got to re-adjust. Zerodha has already built a huge customer base. So, I think it's a very short-term, negative thought as the business model realigns itself. I think post COVID, enough investors opening demat accounts, and trading in F&O have gotten into this habit of dabbling in the stock market. I think what Sebi wants to do is to create a level-playing field. The business models will take time to re-adjust, but in the long run, I don't see it impacting the absolute profits. I don't think in the long run it is going to impact these brokerages.

Q: What's driving the IT rally? Recently most brokerages have been turning positive, but on ground there seems to be no improvement in the discretionary demand environment. Is it the fact that revenue may have bottomed out and guidance may not be cut further?

A: Two things. One, a lot of passive flows are getting allocated into India and IT gets its share from being the index heavyweights. So, with money is coming in and despite not so great growth prospects, you still see buying capacity.

Number two, I think in an era of uncertainty around the world, and this is a heavy election-bound season for the rest of the world too, there is a flight to safety. I think Indian IT represents a very strong safety pack because while you will not see strong growth upwards, you're not going to see a cyclical downturn in the IT. With that reallocation of capital towards safety and as more FII flows come in, I do expect IT to continue to see buying support. I think it's just reverting to its pre-COVID days of being a stable, strong, resilient, safety-oriented pack, which is the right place for IT to be in.

Q: The gap between value and growth is narrowing and with Sensex at 80,000, that gap may have narrowed even further. So if one has to really look for comfort, safety, value, which pockets would you identify?

A: I would actually place my bets on three spaces. One, IT, because like I said, that's the safety element and I think there's resilience. The second space would be banking. There, you know, the indices haven't really gone up, but I believe the future of banking is very robust. To me, consumer discretionary is the story which I believe has some legs to run. So, I think that these three would be where the markets' attention has not been there as much. I'm literally playing contrarian here and saying that these will also play catch up, so these are elements of safety in the overall valuation pack.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.