The equity market seems to be in a broad trading range oscillating between Nifty 8400 on the upper side and 7900 on the lower side. RSI is approaching from deep oversold zones to neutral levels, indicating some more potential to go up. However, the velocity of ascent is slow, indicating profit booking should be expected at higher levels. That being the case, what should investors do – should they delve into the stock market right now or stay on the sidelines hoping for further corrections in the markets?
“Whatever be the case, demonetization coupled with various global headwinds are likely to keep the markets under pressure in the near term. However, it is uncertain times like these that are ideal for building an equity portfolio,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Hitesh Agrawal, EVP & head–retail research, Religare Securities Ltd, believes that investors should wait for short-term corrections. “Notwithstanding the expected near-term impact on various sectors, the economy in general and consequently the market, we believe that short-term corrections in the market provide good opportunities to buy into stocks with better entry points. Market leadership, brand recall, earnings growth / quality, etc. are some of the important parameters that should be considered during stock selection,” he says.
Some market experts are of the opinion that one should buy stocks not without taking into consideration the impact of demonetisation and Trump on the stock markets.
“If anyone has to comment about markets after 9th November, it can’t be complete without mentioning Trump and demonetisation. Demonetisation will play a huge role in lowering government borrowings in the coming years, which is huge positive in lowering bond yields as well as fiscal deficit. Though demonetisation is a longer-term positive for the country and economy, in the shorter term consumer-facing businesses will take some kind of hit due to cash crunch,” says Jimeet Modi, CEO, SAMCO Securities.
Trump also spoke about his “mega infrastructure plan” in his first speech after winning the presidential poll, that led a huge shift from tech or new economy stocks to erstwhile or old economy stocks and money flows started shifting from emerging markets to developed markets.
However, an old saying goes — “If you want the market beat growth, then you must beat the market first.” Therefore, the simplest way of outperforming the market is to buy quality stocks when there is panic in the market. “As time will pass, the market will factor in all the negative impacts and move forward. So, this is a great time for building portfolios as prices have dropped quite heavily from recent tops for many good-quality stocks,” says Modi.
However, even if this is a good time to build one’s equity portfolio, the question arises: which sectors are ideal for putting one’s money?
According to Modi, banks will be the biggest beneficiaries of demonetisation. “India’s banking sector heavily dominates the retail payment system, which will be a clear beneficiary of the cashless state of the country. This development will increase the banking penetration throughout the country compared to what they were before the demonetisation scheme. Majority of citizens will come in the main stream financial market,” he says.
NBFCs and autos will face negative impact in the short term as the rate of loan default may increase and because of demonetisation, demand in the short term will be impacted, top line may see some kind of tiredness. But it’s definitely positive in the longer term as percentage of cashless transactions will go down.
IT will also be one of the biggest beneficiaries of the Trump victory as right now IT companies are trading at mouth-watering valuations, and the Trump victory will have replication of 2000 as this will be replication of “American values Indian costs,” says Modi.
SAMCO Securities is also contrarian positive on real estate. Though resale real estate market will take significant hit due to demonetisation, new construction will nor have a big impact as 98% of sale in new construction companies happens through cheque and not by cash.
Agrawal of Religare Securities believes that in the near term, the consumer discretionary space is likely to get adversely affected following the government’s recent currency demonetization move, with sectors like FMCG, consumer durables, home improvement space (plywood, paints, tiles) and auto taking a backseat. However, once the cash-crunch situation on the ground normalizes over the next few months and the consumers adjust to the new normal of a larger cashless economy, the pent-up demand may start getting reflected in FY18. Good monsoon and Seventh Pay Commission payouts are also expected to support discretionary consumption revival. Thus, the above sectors remain good sectors to consider investing in.
Further, “post the recent correction, banks which have diversified retail book and limited exposure to major corporate NPA-related issues look attractive to us. Also, with no direct impact from demonetization, the continued order placements and increased tenders from Power Grid, NTPC and other state utilities are likely to keep the trend positive in the utilities sector,” he says.
Kapur of Invest Shoppe believes that demonetization would certainly lead to big-time disruptions. “There would be some industries which would see rampant change and many unorganized and smaller players would be wiped out. At the same time organized and large players would gain as competition would become less and playing field would be fairer. At the same time government tax collections would get a boost and more money would be spent on infrastructure and social sectors,” he says.
In view of the above, it is best to focus on sectors like power, capital goods, defense and infrastructure. In these sectors it will be best to go with well-established companies which get a sizeable order from the government. Public sector companies in the above should be preferred as their order inflow would be more certain. Cement would be a sector benefitting from a boost in infrastructure spending and should be a good hunting ground for stock pickers.
Apart from that organized companies in sectors like paints, home furnishings, furniture, hardware and certain segments of textiles where competition from the unorganized sector is immense should be preferred. “Any disruption leads to great new businesses coming up. We expect the same to happen over the next few years. So keep observing changes happening in our economy and society over the next few months and years and try spotting the changing trends early,” advises Kapur.