The markets are poised at an interesting juncture. After the dream run in the past year, indices saw some correction recently. But is the worst over? UBS Securities is not hopeful of a repeat of the significant outperformance of the market action seen last year, at least not in the near-term. But IPOs and brisk domestic buying are definitive bright spots for the markets.
The IPO rush and the big domestic investor interest
In an exclusive conversation with Financial Express.com, Sunil Tirumalai, Chief GEM Equity Strategist at UBS Securities highlighted the huge IPO rush that we are seeing in the markets right now – “We haven’t even completed the year, and it’s surprising to see that many IPOs which were supposed to happen next year are now getting pulled forward. Of course, this is causing some strain on the market itself, because you need to find money from somewhere to fund these IPOs.”
However, he believes the strong buying by domestic investors has helped in maintaining the balance in markets to a large extent. According to him, one good thing that is really going for India, “is that domestic retail money continues to flow in. When I say retail money, I’m not just talking about people buying stocks on their apps, but also SIPs. The mutual funds eventually find their way into the markets. This has been the strongest positive factor for the markets, and it has held up despite the market correction and foreign selling. As long as this strength and support pillar for the market doesn’t crack, I think it’s okay. The market should be able to withstand it.”
The big sectoral bets now
That brings us tothe next question that what should investors bet on? Tirumalai pointed out that capotal goods is one space that he is watching out for. There has been some slowdown in government capex and according to them they are hoping that this is just a temporary blip and will pick up again. “We still like industrials, and some of the state-owned companies are the ones still doing capex in India. In our view, a lot of the developments happening in the banking space and consumption are interlinked.” With credit growth slowing, no significant pickup in deposit growth, but the gap between the two growth rates has narrowed down. “This has implications for banks and for consumption because a lot of consumption is actually funded by loans. Therefore, we will be very cautious on consumer discretionary, especially those categories funded by loans. As for banks, we are neutral, because all the concerns I mentioned are offset by very low valuations. So, there will be specific banks or stocks within that sector that we might want to look into,” added Tirumalai.
For consumer discretionary, especially those that are funded by loans, UBS Securities “would be Underweight.” The shift toward populism in government policy could help some staples according to them. As for IT services, they are “neutral.” However, “if U.S. clients of Indian IT companies see a significant tax cut, it could lead to better business for them. That said, we’ve also seen, under the Trump administration, some visa-related issues and other noises coming out that could pose challenges,” explained Tirumalai.
Big asset allocation unlikely in near-term
What’s the market set up at the moment? Has it bottomed out? “One might actually see a period of pause before big asset allocation decisions are made by global investors. India is reasonably indifferent. But for a global asset allocator, that’s a big uncertainty that we are heading into- What kind of policies will start coming out from Trump administration,” said Tirumalai.
Moreover, “India is going through a fairly soft phase in terms of the earnings cycle and economic growth. Hopefully, if there is clarity on global geopolitics and if we see some pickup in domestic numbers, that should help. But I think right now we are going through a phase of uncertainty,” he added.