Investors have become cautious, as September’s volatility has been reflected in the markets of India and around the globe.
The focus will shift to the US Presidential Elections, even beyond the Federal Reserve meeting on September 17-18, where the central bank may slash interest rates. This is expected to maintain volatility.
After reaching the 25,000 mark, India’s benchmark Nifty index is now flirting again with the figure, reflecting volatility.
The SME IPO frenzy has been a major theme on the Indian stock exchanges. Over the past eight months, 165 SME firms have raised Rs 5,894 billion, compared to 99 companies that raised Rs 2,589 billion in the previous year.
Overvaluation is another dominant theme in mid-caps and small-cap stocks.
COINPAPER interviewed Sneha Podar, Vice President of Research, and Wealth Management at the renowned Indian brokerage Motilal Oswal Financial Services, to learn more about how the market is currently performing, to better navigate volatility and to identify reasonable investments among the overvaluation. Excerpts edited:
Invezz: The Fed is almost certain to cut interest rates in the second half of this month. What will the impact be on Indian markets?
Rate cuts are being anticipated. The Fed may decide to cut rates by 25 basis points, despite the fact that earlier hopes had been for a rate reduction of 50 basis points.
The event will have played out if 50 bps is received. Profit booking will then occur. If 25 bps arrives, it will result in disappointment, volatility, and possibly a correction.
Volatile months of September and October
We believe that September is going to be a volatile month. Profit booking is already taking place and this trend will most likely continue in September. The trading would be in broad ranges, with many ups anddowns.
The US election will be held at the start of November.
After this (rate reduction) has played out, the focus will shift to October’s US elections. The markets will be again influenced by volatility.
Both September and October will be volatile. Already, it is beginning to unfold.
The market will have experienced a decent correction once these two events, the US Fed Meeting and the US Elections are past. We may even see a recovery after that.
From November, the market should begin to improve.
Invezz, what is your advice to investors in such turbulent times regarding which sectors they should stick with? What kind of opportunity does this new phase offer?
Investors can be divided into two categories: traders and long term investors. My advice to traders is to trade with caution and be a bit light. Do not make aggressive or overly risky decisions.
Volatility is an opportunity
This is a great opportunity for investors who are looking to invest long term. In days when there are sharp corrections one should look for the opportunities and consider investing from a longer-term perspective.
We don’t perceive any risks in the Indian market. Global factors are causing the volatility.
There are some major elections in India, but they won’t have much of an impact.
The India story is still intact. Corporates are capable of delivering decent profits. Recently, global agencies have upgraded the GDP growth rate.
These corrections are a great opportunity for investors to get into the market, or the stocks or sectors that will do well in the coming four or five years.
Since the market will be volatile, you should stick with haven types of sectors.
For now, avoid commodity stocks and instead invest in FMCG, IT or pharma.
Avoid investing in sectors that are volatile or those which have a strong link to commodity prices, as they will be subjected to many ups anddowns.
FMCG, IT and Pharma are among the sectors that have a higher level of safety. Insurance can be added to the list.
The insurance industry hasn’t performed well so far, but in the past month, the figures have improved and their outlook has become more positive.
What we are seeing in IT is that there is at least some green on the horizon. As we progress, things should get better.
It is a space that has experienced a rise, but we believe the recovery just began and the road to the runway has a way to go.
The FMCG sector has seen a volume increase in the past two quarters. Now that the monsoon is quite good this year, you should see rural recovery kick-in, which will support your volume update.
The festive season and the staples are both good reasons to be optimistic.
Ganesh chaturthi has started the celebrations. Then comes Onam followed by Navratri and Diwali. Finally, the wedding season begins.
The FMCG industry has also been very positive in their comments, particularly Q1, and this should continue into the second half.
The numbers in pharma were good in the first quarter and it looks like the future is looking quite promising. These are therefore the areas we feel positive about.
Indian markets have a high valuation at the moment. Which sectors’ valuations are justified by their fundamentals? And which sectors have a large mismatch between the fundamentals and valuations?
In terms of valuations, large-cap stocks aren’t overpriced. The large caps are priced fairly because the earnings projections for one year in advance of large cap companies is around 20-21 times.
If you take a look at long-term trends, they also tend to hover around the same level as 20-20.5.
The mid-caps and small caps are the ones that have been priced aggressively. Then, it’s best to be more cautious and focus on a specific stock.
There are pockets of opportunity, but I am not saying there is no room for growth. If you’re building a portfolio, large cap stocks should make up 60% to 70% of your holdings because they still have room for appreciation. Mid caps and small caps, on the other hand, are overvalued.
They are either concept stocks, or are experiencing a sharper increase in growth. This is why they justify the higher price.
You should invest more in large-cap stocks than small and mid-caps because of the volatility that will occur over the coming months.
Mid and small cap stocks are the best for alpha production. However, they should only make up a very small portion of your overall portfolio.
Find fair-priced stocks in a market that is overvalued
There are only a handful of sectors that have the comfort level in terms of valuation but lack the triggers.
Auto, for example, has corrected slightly and is now trading at a discounted price to its long term average.
In the auto sector, we are seeing a slowdown in growth. Over the past few years, this sector has seen a rapid rise. The base effect is now also present.
The overall growth rate has also slowed a bit. If we look at a particular segment, the SUV and four-wheeler segments are still performing well. Other pockets have seen a decline.
The two-wheeler segment should perform well if purchased during festivals or wedding seasons.
We can therefore look at the auto industry selectively. However, it is not advisable to go overboard because of the slowdown in growth.
The banking sector is not expected to perform well with rate cuts. We have also seen some decent corrections in the banking sector, especially with PSU banks.
We do not suggest banking for clients at this time, even though the stocks are currently trading below their value. However, long-term investors may want to accumulate these funds during a stock correction.
We do not recommend banking for investors who have a medium or short term horizon.
Oil & Gas, NBFCs and Insurance are all fairly priced
NBFCs have not yet participated in the rally, but the comfort level of valuation is still there. The rate reduction will benefit them as well, because they will have a lower cost of borrowing. This will boost their growth.
We are now turning the corner on NBFC.
We’re very positive about the insurance sector, as I said.
Retail is also not performing well. Footfalls at stores have not improved, so the concern persists.
The management comments are not encouraging either.
Trent’s valuation is high because it is an outlier. Trent is the only player in the retail market that has any involvement.
The price of oil and gas has a slight overprice, but it is not excessive. OMCs, a segment within oil and gas that can be focused on at the moment because oil is currently trading at its lowest level in 18 months.
This is a big comfort for the marketing margins. We are therefore pushing OMCs on our clients.
Why is the demand for SME IPOs in India so high?
India is also an exception in terms of IPO interest at a moment when the IPO markets are down around the globe. SME IPOs have been attracting a great deal of attention…
The IPO market is closely related to the secondary market, which has been booming in India. Market is at a record high, and mid-caps as well as small-caps have experienced a rapid rise over the past year.
Unlisted companies are also interested in the good times when markets perform well.
The majority of IPOs we observe are in the midcaps and smallcaps space, because everybody wants to profit from high valuations.
If the market is dim, then they can’t demand very high prices. Only in a highly active market can you demand a premium, and the people will be willing to pay.
You will get an excellent listing, regardless of what happens after the listing.
Some companies are even listed at 100% more than their original price. When the market is doing very well, valuations are not as important. Investors are not very rational.
The strong bull market we’ve seen over the past year is the primary reason for the success of the Indian IPO Market.
If the profits booked, which have already begun, continue for a couple of months, then the IPO will also go down, and investors will begin to delay their IPO.
India can expect more record highs by the end of fiscal year?
Invezz Can the Indian stock market reach new highs before fiscal year ends?
It’s hard to say. All depends on how earnings are delivered in the second-half.
The US Fed is likely to cut rates, but the focus of the markets will then shift towards if and when RBI cuts the rate.
The RBI is not expected to reduce rates this year. People expect the RBI to start cutting rates next year.
This will play an important part. We have also crossed the 25,000-mark, so we are slightly more optimistic about valuations.
Currently, the visibility required to get markets up to 26,000 or 27,000.
By the end of the fiscal year, it is possible that we will be back to the recent highs.
Fed rate cuts and MSCI weighting likely to attract foreign direct investments
Invezz : Will a Fed rate reduction lead to a higher inflow of FPI?
It is clear that the FII’s selling activity has leveled off. Some days are better than others, and they may sell more or buy more. But at least they have moderated their selling.
The rate cut will undoubtedly push FPIs to enter the Indian market, but the intensity of the flow is still to be seen.
It’s not something I expect to happen with more intensity in the next couple of months, at least. I believe people are going to be waiting and watching until there is some clarity on the US election front.
After that, it is likely the flow will start to kick in.
The MSCI index has also increased the weighting of India, which can lead to an increase in FPI flow into India.
Message for long-term Investors
From November, I think we will see the markets recover. I want to tell long-term investors to take advantage of the next two months.
This will bring a lot of volatility, so you can use it to build a portfolio of high quality that is well-diversified between mid-caps as well as large-caps. If mid-caps or small-caps experience a big correction this will present a great entry point for retail investors. They are often more interested in investing in smaller firms than the larger ones.
The mid-cap and small-cap firms will also benefit from the rate reduction, compared with large-cap companies.
This will prove to be an asset for them. One can then do his homework, and build a portfolio with a well-chosen stock.
The following interview: Poddar, Motilal Oswal’s Poddar suggests that investors could be changed as the updates unfold.
