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Despite strong up move, India underperformed global markets: Vipin Khare
Moneycontrol.com  |  March 29, 2019

Kshitij Anand Director- Research William O'Neil India

With improved credit growth and higher project activity, PSU banks are likely to benefit. Private banks have shown resilient growth along with acceptable NPA ratios, he said.

 

Last three out of four general elections saw strong pre-poll rallies. In those years, benchmark indices rallied more than 10 percent on average in the two months before the general election, Vipin Khare, Director- Research, William O'Neil India, said in an interview with Moneycontrol’s Kshitij Anand.

 

Edited excerpt:

 

Q) What are the factors that are driving the rally in Indian market? Can we expect a record high ahead of elections?

 

A) The recent rally has been global in nature. We have seen strength across the market. In fact, despite a strong upward move, India has underperformed in key global markets over the last three months.

 

While the Indian market did pick up over the last month, it still has some catching-up to do in terms of overall performance.

 

The foreign institutional investors (FIIs) have infused Rs 23,000 crore ($3.3 billion) so far in March, which is the highest in the last two years. This has given a lot of support to the market, despite selling by domestic funds.

 

Low inflation, increase in PMI, and room for rate cut have offset the modest IIP numbers. Election is a country-specific affair for us but international factors like Brexit and US trade stance are likely to remain key drivers for global markets in the second half of 2019.

 

Q) Recent MF data suggests some sluggishness with respect to equity flows. Do you think the trend will reverse in upcoming months?

 

A) Mutual fund flows were sluggish in February. This can be attributed to the sharp correction in Indian market in the second half of 2018. However, we believe that it could be short term in nature.

 

In the last one month, markets have reclaimed strength. Mid and smallcaps have also participated in the rally in March. Over the last year, DIIs were selling assets when FIIs were buying, and vice versa.

 

So far in 2019, DIIs have sold only half of what FIIs have bought, which is a positive.

 

Q) Can we call this euphoria ahead of elections?

 

A) The last three out of four general elections saw strong pre-poll rallies. In those years, benchmark indices rallied more than 10 percent on average in the two months before the general election.

 

It appears that markets do tend to move higher, pre-empting the election results. Apart from that, macro indicators have also favoured the ongoing rally in India.

 

De-escalation of geopolitical tensions, modest inflation, and rising manufacturing activity have helped the market. But, if you compare with other markets like China, US and Europe, India’s gains have been modest and, in our view, the rally can hardly be classified as euphoric.

 

Q) What is your call on the PSU banking space? Are they still attractive bets?

 

A) Barring one or two large PSU banks, we have not seen any major breakout in the sector. Our portfolio is still heavy towards the large, leading private banks and a few midcap ones.

 

Both PSUs and private banks have shown improvement in the balance sheet in Q2 and Q3 FY 2019 results. However, private banks have, without doubt, recovered faster than PSUs.

 

With improved credit growth and higher project activity, PSU banks are likely to benefit. Private banks have shown resilient growth along with acceptable NPA ratios. Banks with strong and clean balance sheets would be a good pick in this market.

 

Q) Any sectoral rotation trend which you witnessed recently? Where is the smart money moving?

 

A) The banking and financial services sector has emerged as a clear leader in the last two to three weeks. Good traction in retail business and improved fee incomes are making private banks attractive.

 

With improved construction growth in IIP, a handful of sectors have benefitted.

 

Real estate stocks have participated in the rally in the past few weeks. Housing finance companies and cement stocks have also seen some interest.

 

Q) What is making investors so bullish in the real estate space?

 

A) Growth in construction goods has remained above 7 percent over the previous two months and liquidity concerns have eased.

 

Listing of a real estate investment trust is also a step in the right direction for the sector. With expectations of interest rates moving lower, rate-sensitive sectors are well positioned to benefit.

 

Moreover, a lot of favourable policy initiatives have been announced for the real estate sector over the last few months.

 

Measures like government investments in affordable housing, roads, transportation, capital gains for two houses, and the recent GST rate cut are expected to improve demand for real estate and its peripheral sectors.

 

Q) Should investors stick to stocks that are hitting high rather than hunting for values in beaten-down names?

 

A) We believe that a stock touching its 52-week high does not necessarily mean it should be avoided. Similarly, stocks hitting 52-week lows can get cheaper and may not always be a bargain purchase.

 

In fact, good quality largecap stocks breaking out and making new highs every day is a good indicator for the broader market. We believe investors should go for quality names that are leading the current cycle.

 

We have seen large private sector banks contributing well to our portfolio, whereas it has been challenging to add stocks from the auto sector. Bottom-fishing should be avoided in this market.

 

If a stock is beaten-down but has good fundamentals, wait for its technical profile to improve before taking a position.

 

In addition, there should be good buyer demand and the stock should retake its key moving averages before it is added to the portfolio.