Markets are poised to rise, driven by short covering and a positive outlook for the second half of the capex cycle, said Vikas Khemani, Founder of Carnelian Asset Management and Advisors Pvt Ltd, in an interview with Moneycontrol on November 25.
Khemani believes the market will be buoyed in the coming days, helped by the Maharashtra state election outcome. He also expects the capex cycle, which slowed in the first half, to improve significantly in the second half. Additionally, Khemani said he sees continued sectoral rotation, with banking and IT likely to perform, while certain infrastructure sectors may face ongoing challenges due to past excesses.
Edited excerpts from the interview:
How do you think the recent Maharashtra election results will impact the markets?
So, I think this election is essentially about building Maharashtra, a very important state to get the investment cycle and projects going. It also emboldens the government to carry out some pending reforms which might have been on the back burner. Secondly, there was a fear in the market that if Maharashtra was lost, the central government might turn more populist, announcing more freebies. This outcome might put such worries to rest.
More importantly, there were a lot of short positions in the market, and we might see a lot of short covering taking place.
A combination of these factors will likely keep the market buoyant for the next couple of days. After that, we will all return to focusing on earnings and liquidity, as usual.
Read More: Maharashtra election win to boost market sentiment in the near-term
Capex spending is down about 17 percent year-on-year in the first half. Why are we seeing this sort of throttling of public capex?
This is typical around election cycles. It takes time for the government to get back into action. Additionally, we had two to three back-to-back elections that were crucial in determining the direction. I believe the capex cycle in the second half will be far better than in the first half.
Are you concerned about earnings trends?
I'm not overly concerned. One or two quarters of slowdown are normal. Pharma is doing fine, IT is stable, and private sector banks—except one or two—are performing well. PSU banks are also strong. When you have the entire BFSI sector (except for a couple of players), pharma, IT, and manufacturing doing well, I don't see any major structural weakness in earnings.
I believe there will be a rebound in earnings. I don't see a deep structural fall in the market. Markets are resilient, and whatever outflow we saw due to China stimulus is now largely behind us.
Read the latest updates on Maharashtra election here.
Have we formed a near-term bottom, or do you think there's more pressure ahead?
I don't think so. Shorts will be forced to cover their positions today and tomorrow, so a near-term bottom seems likely. That said, markets are not going to run away in a hurry. I expect the market to consolidate over the next three to six months. Time correction, too, can be a healthy correction.
Anything you think should be avoided? There's a sense that infrastructure push and capex spending will return, but sectors like railways and defense have corrected 30-35 percent. Do you see traction coming back there, or will new pockets emerge?
Railways and defence corrected because of excesses, so a recovery won't happen soon. It's essential to look at specific companies. We've seen sectors where excesses fade away, and they don't return quickly.
Sectoral rotation is a regular occurrence. For instance, new-age sectors and chemicals did well in 2021, but chemicals have corrected by 20 percent in the past year. In my opinion, banks will do well over the next year as earnings are strong. IT should also perform well, especially as US growth recovers. CDMO is another area with potential.
Infrastructure will broadly do well. While certain areas like railways, may have seen excesses, real estate is performing strongly.
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.
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