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Last Updated : May 12, 2019 09:50 AM IST | Source: Moneycontrol.com

Stay away from leverage play as VIX could climb to 36-38% levels on election day

Underperformance for OMCs could continue in the near term given the recent recovery in crude oil prices whereas gas companies are likely to continue to outperform due to increase in demand for cleaner fuel.

Kshitij Anand @kshanand

India VIX already at 25 percent signals higher volatility compared to 2014 scenario and that might peak at around 36-38 percent on the day the election event i.e. May 23 unfolds, Jayant Manglik, Retail Distribution, Religare Broking Ltd, said in an interview with Moneycontrol’s Kshitij Anand.

Q) The S&P BSE Sensex lost by about 1,500 points in May while major indicators such as Supertrend and MACD have given sell signal on Nifty. What should investors do now ahead of election results?

A) As we head closer to the central election outcome, the indices could continue to exhibit high volatility. Further, global uncertainties especially concern over deteriorating US-China trade relations and on the domestic front, corporate earnings could also keep the markets nervous.

Under such a situation, investors should be selective in stock picking. Cherry picking in a phased manner can be done in quality counters (large-caps/mid-caps/small-caps), which are attractively valued and hold a promising future.

Further, we feel investors should have less exposure to high beta counters, a correction in these stocks could be severe in the event of unfavourable election outcome, leading to faster erosion of investors’ wealth.

Q) Do you think the equity market is pricing in an adverse outcome in the upcoming election results?

A) Markets have witnessed a decent correction from the recent highs of late, after a strong up move. While this could be largely attributed to cautiousness ahead of the central election outcome, others factors like lackluster corporate earnings, global uncertainty (especially increasing trade tensions between US and China), peak valuations and concerns over rising crude oil prices have also contributed to the recent fall in the index.

Corporate earnings of many companies remain muted due to lower demand, a slowdown in consumption driven companies and margin pressure across sectors. This has raised fears of continued earnings downgrade.

Q) How have FIIs placed ahead of election results given the fact they have pulled out nearly Rs 2,800 crore for Indian equity markets in May? What does the positioning tell us about their strategy in terms of F&O positions?

A) The FII outflow in May is not very significant as compared to Rs 62,000 crore invested by FIIs into Indian equities during February-April 2019.

Hopes of improving macros (steady GDP growth, moderating inflation and prediction of normal monsoon) and stable government at the Centre has attracted FIIs to the Indian markets in 2019.

We believe selling in May month may be a short-term blip resulting in consolidation, led by profit booking in the backdrop of lingering US-China trade war and weak corporate earnings.

Given India is one of the fastest growing economy in the world, we expect healthy inflows from FIIs in the long-term.

Inflation trajectory, monetary policy, economic reforms by the government, pick up in capex/investment cycle are likely to be the key triggers which will increase FII’s confidence in the Indian equities.

As regards to the current F&O positions, the long Nifty futures that rolled into May series 11,600 average price were all squared off in the last 3 days of correction.

The net positions in Index are now more of long Put options than Call options. The ratio is around 3:1 for Puts vs Calls.

Such an option strategy is generally made for transiting on both sides. With India VIX already at 25 percent, it signals higher volatility compared to last time (2014 scenario) and that might peak at around 36-38 percent on the day the election event (May 23) unfolds.

Q) Considerable selling was seen in oil & gas, and metals. Should investors avoid these two sectors as of now?

A) The overall performance of the oil & gas sector has been a tale of two stories. On one hand, the gas companies continue to do well with healthy demand growth and increased the government’s focus on increasing its natural gas mix.

Contrary to this, refining and oil marketing companies continue to witness pressure due to volatility in crude oil prices.

Going forward, we believe the underperformance for OMCs could continue in the near term given the recent recovery in crude oil prices whereas gas companies are likely to continue to outperform due to increase in demand for cleaner fuel.

However, from a longer-term perspective, both these sub-sectors are a good investment opportunity.

The metal sector has had a volatile ride over the past year due to rising concerns of a global economic slowdown. Further, the recent trade war concerns between US-China has further aggravated concerns of a possible economic slowdown.

Hence, the sector has underperformed. Going forward, we believe the sector could remain under pressure until the trade tensions ease between the US and China and there are meaningful signs of revival in global as well as Indian economy.

While the sector has promising growth prospects in India given low per capita consumption of metal and government’s increased focus on infrastructure, however volatility in metal prices (globally) and high debt levels in the industry could lead to underperformance. Hence, currently, we would recommend avoiding the sector.

Q) The tussle between the large-cap and midcap continues. Does it make sense to invest in beaten-down midcaps if someone is looking at a time horizon of 5 years or so?

A) The BSE Midcap is down more than 20 percent from their lifetime highs and has considerably underperformed the benchmarks which recently touched new highs.

The correction in the Midcaps over the last 16 months has been a result of rich valuations not supported by earnings growth as well as SEBI’s re-allocation mandate for Mutual Funds.

This underperformance has led to narrowing down of valuation premium of midcaps over large-caps, thereby resulting in many good quality midcaps falling into comfortable valuation zone.

Hence, given a five-year investment horizon, select midcap counters with a reasonable valuation, improving earnings prospects, prudent management, and healthy balance sheet can be considered for fresh investments.

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

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First Published on May 12, 2019 09:50 am

tags #markets

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