How mkts may move now before pre-election rally

Sandip Sabharwal, asksandipsabharwal.com, says “it is important for the froth to go out because there was too much speculation happening in too many segments and although optically the index has hardly fallen, when we talk of the correction on the largecap side the index, there is hardly any fall – 2% off the top. But the real pain has been on the smallcaps and to some extent on midcaps. I would think that valuations in that segment are still somewhat higher. I do not think the entire correction should be over as of now.”

Sabharwal further says he is still sitting on 12-15% cash, waiting to see where the entire dust settles because “we have had a correction but there could be some more way to go.”

Are we in for a pre-election rally? History tells us that markets in the run-up to the election have rallied. Will 2024 be different?

Sandip Sabharwal: It could be different because we have already had a decent size run-up, so if you look at it, one month prior to election is one thing but starting right from October till now, the markets have had a sharp run-up and globally also markets are looking a bit jittery with inflation being sticky and there have been possibilities of a global correction. I would think that the possibility of some correction is higher. Now that thesis could play out if markets correct from here till April and then rally somewhat in May, so that is tough to predict.


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Now, in next 30-45 days, we will hear a lot from the government in terms of policy, Viksit Bharat ka vision, extension to big schemes, continuation of the policy momentum, the focus could be defence, railways, solar, EVs, could that get market excited and the selloff in PSUs and selloff in some of the manufacturing names that we have seen. Do you think those stocks could regain their mojo because of the policy communication which will come from the government?

Sandip Sabharwal: The policy, if the same government is coming back, would remain more or less the same because the focus they have shown especially on the manufacturing side and getting most things manufactured in India and now this high-end EV policy also, the aim is to get as many global companies as well as Indian corporations to manufacture in India and that is an established theme now, so I do not think there is anything new which will go through there.

On the PSU side, we have had a rally which has taken every PSU up irrespective of whether they are doing well or not well, whether they are loss-making, profit-making. Post the corrective phase, we could see a distinction between the companies which have fundamentals playing for them and which could include a lot of defence names versus the others.

In light of the EV shift, the premiumisation trend, how are you looking at the growth story within this space?

Sandip Sabharwal: Some of the auto ancillary companies. One, only that much demand will happen within the country. I think the shifts will happen from petrol, diesel vehicles to EVs, etc, but the growth will remain at the trend growth rate of between 6% to 10% or 12% in very good years, so that is one thing.

The demand from one segment comes down as the other segment increases. Some companies could benefit out of that. That is something which could be played for. Then, there are companies which are supplying globally to companies and as the EV shift happens, the same companies might not be benefiting and a different set of companies could be benefiting. That is an analysis that needs to be done, but there will be some stories for sure.

When a correction comes in, nobody likes it. Everybody loses wealth. Your NAVs optically start coming down. But for the first time, when this correction has kicked in in the last 15 days or 21 days, there is a bit of a relief. Everyone is saying, thank God, this euphoria is not becoming a bubble.

Sandip Sabharwal: Yes, that is true to some extent and that is also important for the froth to go out because there was too much speculation happening in too many segments and although optically the index has hardly fallen, when we talk of the correction on the largecap side the index, there is hardly any fall – 2% off the top. But the real pain has been on the smallcaps and to some extent on midcaps. I would think that valuations in that segment are still somewhat higher. I do not think the entire correction should be over as of now.

How are you looking at the retail space in terms of performance of Trent and Aditya Birla Fashion, given that there has been a stark dichotomy in the way these stocks have moved?

Sandip Sabharwal: There is a stark dichotomy between what Trent has done and what the rest of the market has done or the rest of the businesses in this segment have done and that has stood out and that is also reflected in the valuations. Now, the key is whether we see a revival in retail demand and a lot of the demand for these companies, a lot of the sales are apparel based.

We have had a couple of years of low demand in this segment driven by higher inflation and the spike up in prices. I would think that this year we should start seeing recovery. That is what I would bet on. Stocks like Aditya Birla Retail and all despite their flawed acquisition strategies which have strained their balance sheet, at these prices look attractively placed.

Surprisingly when markets reverse, fintech and consumer tech stocks are the first one to correct because the valuations are slightly stretched by all stretch of imagination, but in this fall of Policybazaar or a Delhivery or for that matter Zomato, they have hardly corrected.

Sandip Sabharwal: They have not fallen at all and in fact in a stock like Zomato, we have seen so many sales of earlier investors which got absorbed so easily without much discount to the market price and it is reflective of the kind of turnaround that Zomato has been able to show in terms of fundamental performance over the last two-three quarters.

If that trend continues and profitability improvement continues at this pace, there is very high likelihood the stock could sustain and even move higher. Policybazaar as a business model I do not think it is a very sustainable business model long term because competitive intensity is high. I think they have also seen some sporadic improvements in profitability. Let’s see if that sustains.

Did you buy anything in last week’s carnage or are you still sitting on cash?

Sandip Sabharwal: Still sitting on 12-15% cash, waiting to see where the entire dust settles because we have had a correction but there could be some more way to go.

More ways – 5%, 10%, 15%, what is that some more way?

Sandip Sabharwal: On the mid and smallcaps, around 10% at the index level, in the largecap indices possibly 5-6%.

The bottom line is that the bull market is not over. This is like a cyclical downturn in a structural bull market. Bottom line here is that you should be buying the fall, now depending on your judgment call you buy 10% lower, 15% lower or 20% lower or you can even buy today but barring the tactical shifts, which you may do in your portfolio, should one still aim to be fully invested in this market?

Sandip Sabharwal: Yes, for whoever is owning stocks, it makes no sense to try to sell them to buy them 10-15% cheaper because like you said, this is a bull market and this is a correction in a bull market. If you were sitting on the sidelines and you had cash and you wanted to deploy that cash, maybe for that, you might get better prices over the next few weeks.

Roy Walsh

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