Experts have warned of a 5%-6% correction in the stock markets in the weeks to come even as the Sensex and Nifty slowed down after hitting record highs over the past few weeks.
On Wednesday, the Sensex ended 1.6% lower at 43,828 while the Nifty dropped 196 points to end the day at 12,858.
Independent market analyst Ambareesh Baliga believes that fresh lockdowns coupled with a drop in retail demand could see investors panicking resulting in deeper correction in the markets. "One clear big risk is that if fresh lockdowns happen, they'll surely have an effect on the economy as and when those are announced.
"At the same time, we have been quite gung-ho about various data which are becoming. The question again is, was this the pent-up demand plus the festive demand which one got bunched up together in those two-three months resulting in us seeing extremely good figures? The last six-eight months, about 50 lakh new investors have come in. In case they panic, I think you could see a much deeper correction."
With encouraging news coming on the vaccine front, Neeraj Dewan predicts a change in how portfolios will be restructured with IT and pharma stocks likely to see reduced investment. The Director at Quantum Securities believes that the entertainment, chemical and retail sectors will see increased investment in the immediate post-COVID era.
"There are stocks which would benefit once we are back to normal like the entertainment sector. You have stocks which are anyways benefiting because of shift from China. So chemical companies are benefiting and when things come back to normal, they will get further demand which will boost their profit line going ahead. The retail segment is totally dead or really not growing. They will also start coming back and what has happened in the last six months, is that everyone is trying to get their cost low. When they come back, adding that cost will take a lot of time. So, the profitability in the initial stages, whenever things come back to normal, can be higher than what they were doing pre-COVID," Dewan said.
Excerpts of the interview follow
Govindraj Ethiraj: Is this a breather? Is this a pause before it goes up again? Or is this something that investors, particularly retail, should be worried about? Ambareesh, we spoke only a few days ago and you did warn that there was there was a bit of a hiccup coming and coming quite soon. So is this that one?
Ambareesh Baliga: I would frankly say that I don't know whether this is that one or not. Because what we have seen in the recent past, in the last seven-eight months is whenever there has been a correction, there has been buying coming in from the retail investors. And now we have seen a fire buying also. But then again, we should remember as to what are those big risks which are around the corner. One clear big risk is that fresh lockdowns happen, although they could be partial, they'll surely have an effect on the economy as and when those are announced. We already had something in Gujarat, MP in couple of other locations. But in case that happens in Bombay, I don't know as to how the markets would take it. Surely negatively.
At the same time, we have been quite gung-ho about various data which are becoming. The consumption story, their real estate is doing well, white goods have been selling extremely well. We've seen even passenger cars and LCVs being sold well. Our GST numbers were improving month on month. But the question again is, was this the pent-up demand plus the festive demand which one got bunched up together in those two-three months and we are seeing extremely good figures? Because whether that will sustain over November, December, January, I don't know. So that's another question mark. So, I think in case any of these negatives play out lockdown negative plays out. And in case we have a decent correction beyond 5%-6%.
What correction we saw was much smaller. In case it is beyond 5%-6%, will the retail investors hold on or whether they'll start panicking? Because the last six-eight months, about 50 lakh new investors have come in. So, in case they panic, I think you could see a much deeper correction. So, whenever we see a correction, I think it'll be a very deep one.
Govindraj Ethiraj: So, 5% to 6% is your benchmark for a deep correction. Neeraj, what's happening from your vantage point?
Neeraj Dewan: I agree with Ambareesh that you know, whether this is the correction we've all been waiting for or this is not that correction. Timing the market is something which is very difficult for everyone. So, we should leave that and let's see how things pan out as far as the market is concerned. What we've seen is that there has been tremendous gush of liquidity the likes we never seen in so many years. But that is what is driving the market right now. And this is one of the best rambles I have seen the last 14-15 years. So, we never got this kind of liquidity and this kind of movement. Some days back, we were looking at market trying to cross 12,000 and today we were past 13,000. It happened so fast that a lot of people who are sitting on the side-lines, who wanted to put in money, they were also caught by surprise and they also tried to join in the party.
So, there had been some selling happening from domestic institutions which were waiting for a correction, seeing this kind of liquidity, they also tried to jump the market. And that is why we started seeing some broader participation. So, whenever we see this kind of a broad participation and stocks which are not even fundamentally deserving to be at this valuation start moving up, and that's what we start seeing now. There can be corrections, of course, there will be correction, because we've seen this kind of liquidity gush but I don't think there will be meaningful correction till we see something fundamentally changing. Maybe the liquidity which has been coming, dries off and some money starts going back. That is where we can see it turn around the market in a deeper correction. But till that time, they will be correction. And there will be correction, which will be bought at a lower level.
Govindraj Ethiraj: One of the news elements that have been driving this market, particularly in recent times, is the vaccine. The vaccine is now in sight at least for the So, Western world, which is driving liquidity markets. The other is, of course, whether this rebound is sustainable. How are you aggregating or disaggregating it?
Neeraj Dewan: Basically, the fact that vaccine is now visible, and it may start coming in the next couple of months, you may have some health workers and senior citizens starting to get the vaccine. So, there will be some changes. Earlier, we were investing looking at the lockdown, work from home, dependence on Information Technology, dependent on communication. A lot of these things that we were looking, at will change. So, the way now the portfolio will be structured, we'll be looking at how once the life is back to normal post vaccine, how will the growth come back and what are the sectors we will look at the growth?
I would still be looking at opportunities, but then the opportunities will change. There'll be structural change in the in the kind of stocks we were looking at the last six to eight months and the kind of stocks which we should start looking at going ahead. Some, of course, will remain the same, because there are certain stocks, which are evergreen stocks. So, you will use any opportunity to invest into those stocks. But otherwise, you will have some change, some money will flow out of IT which has done so well in the last few months and some pharma stock which for more towards the cure than the vaccine or not into normal health care. Those stocks will may also take a breather, so there will be some changes.
Govindraj Ethiraj: If we were to, in some ways, deduct what we've seen in the last eight months, the rebound, where are we then? Is it going to be different from what it was before March? Or is it going to have some elements?
Ambareesh Baliga: The way we live and work, I think that is completely changing, and has already changed to a very large extent. So, I think that will be a new normal, and because of which, a couple of sectors or industries would surely be doing much better. For instance, telecom and IT - that is one space, which I think will have a much larger role to play as compared to what it was earlier. But I would just like to mention a couple of other things. Today, what we are seeing is a sort of a bubble creation. Because the sort of valuations which we've seen now is much, much higher than what one can logically reason out. And at the same time, if you're talking of economic growth being sustainable, I think all the sectors and people across all the strata need to actually be there in that economic growth, which I'm not really seeing.
For example, I'll give you the cement sector. In cement sector, what we have seen is that the growth or the consumption has been lower than what was last year. But the top three companies have shown better performance than last year. This clearly shows that the bigger boys are becoming bigger, and those who are suffering are at the lower end of the pyramid. You really can't have a sustainable growth.
Govindraj Ethiraj: One of the points that maybe we have to remember is that when things come back, the fact is that the economy as a whole is still down, -minus 8% to -10%. Does that mean anything at all when it comes to the markets? Or do the markets have their own motivation and drive and they'll keep going?
Neeraj Dewan: Markets will not really keep going like this because somewhere down the line, evaluation has to match what kind of growth we're seeing in the economy. We're not sure whether this is the correction. There's definitely going to be some correction down the way if there are lockdowns, or if there's going to be some delay in the way vaccine is going to be transported or logistically provided to everyone. There can be delays down the line. So, there will be correction down the line and the economy not doing well really matters. Just the fact that we are -8% or -10% is something which will matter. And the kind of inflation that we've seen right now, is also worrisome.
So, if inflation continues and the growth is not happening, there's going to be a combined effect which is going to be troublesome for the market in the medium term. Whenever you get correction down the line, those corrections will be used now to invest in different kinds of stock than what we were doing earlier. So now we've been looking at stocks for the benefit that whenever we are back to normal, what would be good for the market. So there definitely is going to be correction and market will be worried about what is happening. The ferocity or the So, duration of the correction will depend on how things are panning out and how things will come back to normal.
Govindraj Ethiraj: What is this new bucket of stocks or sectors looking like?
Neeraj Dewan: There are stocks which would benefit once we are back to normal like the entertainment sector. You have stocks which are anyways benefiting because of shift from China. So chemical companies are benefiting and when things are coming back to normal, they will get further demand, which will boost their profit line going ahead. Whether it's chemical, whether it's entertainment. Then there's the retail sector, which is totally dead right now. People are not going out and shopping. So, retail segment is totally dead or really not growing. They will also start coming back and what has happened in the last six months, is that everyone is trying to get their cost low. Whatever, wherever they felt there was a little bit of flab, that they're cutting it. So, when they come back, adding that cost will take a lot of time. So, the profitability in the initial stages, whenever things come back to normal can, be higher than what they were doing pre-COVID. These are kind of sectors, you know, we'll be looking at whenever there is correction or opportunities coming down the line.
Govindraj Ethiraj: Do you see retail investors panicking if we see a 5% to 6% correction?
Neeraj Dewan: Definitely. They will be panicking because a lot of the investors are new investors who jumped into the market in the last 8-9 months. Those are the people who have not really seen decent correction. We saw a correction coming in when the market was 11,800. It came down thousand points on the Nifty very fast, but then you got that buying coming back and it was supported. But if there is a 6%-7% correction now and you see stock correcting, people who came into the market in the last eight months may not have seen that kind of correction. So, they will definitely panic.
Govindraj Ethiraj: Ambareesh, what's your new bucket looking like? Or what could a new bucket of stocks or sectors look like as you look ahead in this?
Ambareesh Baliga: I'm in the bucket, which I'm looking at now is a combination of what I was looking at, say about six-seven months back and some new ones. For example, real estate, I think, is coming back. And when we talk about real estate, I think it's going to be only affordable housing. Quite a few of the listed entities are out because most of them have a luxury real estate. But affordable housing is actually bouncing back especially in the last three months. In consumption, the lower is value FMCG, that is where there is still extremely good demand because a lot of people are shifting to branded than the local level FMCG produce.
And at the same time the old bucket which continues, is speciality chemicals which I think would be an extremely good position as far as India is concerned. And the other new bucket which is there is export-oriented home textiles. I think that is one where there is a huge opportunity because I think China would be losing out as far as US is concerned.
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