Market too volatile, don’t risk dipping your toes now: Ajay Bagga

“What we like, we are holding. We hold the quality stuff but I was holding more cash for sometime and I am sitting on that again as I find it very difficult to time the market,” says Ajay Bagga, Market Expert.

Where do you see the markets headed in the near term next?
There is so much volatility, it is very difficult to watch this market. One cannot really blame the markets if Putin and Biden do not know whether there is a war coming or not. It is easier for us to just sit on the sidelines, this market is very tough market.

I would not recommend getting into the markets apart from the regular monthly investments that somebody might be making. Otherwise this is not a market to be indulged in at all. We had been more concerned over inflation and the Fed rate hikes and then all of a sudden this geopolitics came in. Historically, these kinds of geopolitical movements do not have much of a staying impact on the market.

During Crimea in 2014, there was hardly a 1% movement in the S&P 500 and in five days, it had recovered. Europe was down less than 2%, emerging markets MSCI was down less than 2% and in five days it was back to positive. It was the same in 2008 in the case of Georgia where it hardly took five days for the market to recover.

Normally these kinds of moves are very sharp, shallow and transient. But this time around, the sharpness was so accentuated that it has shaken the markets. I would say, be very cautious right now. I think the best case scenario is if Ukraine remains equidistant from the West and the Russians and becomes the Finland of this century. This is a win-win for everybody. Otherwise, Biden needs a crisis to take peoples’ attention away from the mess he has made in Afghanistan and the economy. Putin, being the strong man, needs some facesaver before he withdraws and Ukraine needs to survive. I think Europe is muddled, Europe just needs its energy and wants to live life without having to fight for those principles. So it is a tough situation.

The market has taken the worst case scenario. It has factored in that all the commodities of Russia would not come to the market. They have also factored in seven interest rate hikes by the Fed. Neither of those will happen. Even if there is a war, China will buy the Russian commodities, there will be other players buying the Russian commodities. The commodity complex is overpriced. Seven rate hikes are unlikely. If the rate is hiked seven times, the economy would not be growing at all by the middle of this year.

So, the market is very conservatively positioned and there is very high volatility and too much event risk to really dip your toes into this market.

You do not want to dip your toes in this market but what is it that you have been selling or profit taking at least?
What we like, we are holding. We hold the quality stuff but I was holding more cash for sometime and I am sitting on that again as I keep on saying that it is very difficult to time the market. Nobody can call the markets but what will work right now is what works in inflationary times. So, cyclicals and banks are the first and in that, there is cement, real estate. REITs are also good because rentals will go up in this kind of a scenario with the economy recovering and the companies carrying out capex. Those are some of the players that one can look at.

What is not working out is companies which do not have pricing power or which are on the wrong end of the commodity cycle. Energy will do well, but we do not have a pure play energy company even though we have ONGC. The pricing is at $60-$65 and not at $95. One really does not get rewarded in the Indian upstream companies. There is not much choice and one can probably buy an American energy ETF that will do very well. Last year also, they did very well. look at Exxon, Shell and BP’s 5% dividend yields and spectacular amount of free cash flow coming through.

The US Shale guys are hugely profitable. If you can buy energy internationally, that is the best place to be in. Unfortunately in India, we do not have that luxury.

What is it where you would have a very strong conviction within the broader markets? Some of the companies have managed to deliver margin expansion for three consecutive quarters despite the raw material price concerns.
Whichever company is showing pricing power, we have to go with that. Real estate has turned and there will be demand for real estate. Consumption in India will recover over the next six months with the steps that are being taken. Inflation with the base effect will get milder and that will lead to better work happening.

One area that I see recovering is the commercial vehicles and there is some part of the CNG play also in it. The replacement cycle has got very elongated this time. There ate trucks which are 8-9 years old. In Delhi, NGT has put up a very strict ban on 10-year diesel vehicles being taken off the road. Passenger vehicles are still facing the issue of semiconductors and that will last another two quarters. In two-wheelers, we have not seen the rural demand coming back yet. People are waiting to see the EV offerings rather than put down money.

But commercial vehicles within the auto pack are looking good and the replacement demand should catch up. Second, among cyclicals, I am still very positive on banks. Over the last few months, we have seen an inordinate amount of selling by FIIs and given the role of banks in our indices and being an overweight sector, bank stocks corrected. Otherwise the macros for banks are looking very good and the pricing is right now. Even a rate hike of about 50 bps across this year will not have much impact on the treasuries because most of those bonds move to maturity to the HTM segments and are not assets held for trading.

So within auto, commercial vehicles and energy segments are looking good and the cyclical plays which are the beneficiaries of the government’s infra push will do quite well. Another area that I like is metals. Given the Chinese expansion, given the Chinese stimulus coming back, sounds very positive for global metals. Those should also do well.