Relief rally may last a couple of days; don’t expect sustained recovery in broader market: Hemang Jani
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Synopsis
“Having seen a fall of almost 13-14% at the index level and a much higher fall in the broader market, we are seeing a bit of a relief rally and it may last for maybe a couple of days but we are not expecting a sustained recovery in the broader market.”
We have seen a very strong pullback both in India and in the US. Large part of the rally was driven by the action in metal stocks and to some extent the broader market also. We just hope that this will last for a couple of days because it is not as if we are back in the bull market.
Are you expecting banks to lead the recovery? Look what happened with the Bank Nifty yesterday. Metals were shining and stealing the limelight. One can’t keep eyes off the Bank Nifty either.
Banks have been a large part of this rally which has been short covering driven. We all can see that the flow picture is not looking that great and even the commentary from the Fed is not that supportive for the market sentiment. So having seen a fall of almost 13-14% at the index level and a much higher fall in the broader market, we are seeing a bit of a relief rally and it may last for may be a couple of days but we are not expecting a sustained recovery in the broader market.
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We do not think that even if we see a 50 to 75 bps rate hike in India, it would matter too much in terms of the core operating parameters. Of course, the treasury part is going to be hit but by and large, this sector should do well even in a rising interest rate environment.
There is gloom and doom in the world. Everybody is moving back into the US dollar. There is a reflation trade there. But the BofA fund manager survey says that the cash levels with fund managers is at the highest level after 9/11 and the world had started folding up after 9/11!
The post Fed hike developments, the way the dollar index has moved and the way the interest rates are inching up clearly mean that for equity as an asset class, it is not going to be an easy journey. We all have seen the big bull market rally in the last two years and the genesis of that rally came from the kind of money that was infused by the Fed.
Stocks Recommendations
I am a bit disappointed with the earnings. Having seen the pricing at a very reasonable valuation, we can partly attribute that to the way the markets have gone down post the issue. We think that LIC offers deep value given the overall franchise, brand recall and the way the entire positioning is. But we have to bear in mind that insurance as an investment is not something that will give a lot of excitement in terms of earnings growth and the stock price move.
We have all seen how even the private insurance companies have really not delivered in the last two years. So, a patient investor looking for a two-three-year maybe 12-14% kind of compounded story, having an allocation to an LIC or some of the private insurance companies would make sense. But if one is an active investor who is looking for higher growth, it probably would not make too much sense to go for these kinds of companies.
I am saying that for an active investor who is chasing growth, LIC is not the right fit. If one is a value investor and comfortable with two-three years kind of 12-14% compounding, definitely it makes sense.
You are saying that you have got more ideas where money can compound more than 12-14% in the next two to three years? If you are finding it boring, than I am sure you are aiming for 25% growth compounders?
Absolutely. When it comes to equity, people look out for higher growth and within that, whether growth at 15% or 18-20% is realistic is debatable and that will depend upon what kind of market phase we are in and what kind of underlying stock selection one is doing. Typically the expectations are high and as we see a big like that we have seen in the last two years. Typically, the expectations tend to inch up and as one sees a more corrective phase, those expectations become far more realistic. It is a dynamic market where one will have to peg the realistic expectations to avoid any major accidents.
Will the bigger trigger for ITC come when the individual businesses get demerged?
What we have seen in ITC is that the outlook on the other businesses like agri, paper, packaging and hotel has dramatically improved and at the same time, the cash cow which is cigarettes, is seeing a decent volume growth and cash flow getting generated.
The only pain point could be the FMCG business where because of the input cost pressure, there will be a bit of a disappointment but in the current market, people would prefer companies where the downside risk is very limited and where a boring 12-14% growth and where ITC definitely fits in and is an under owned stock because of the kind of lacklustre price movement we have seen in the last two years. There is under-ownership and that would make it a little more resilient in these kinds of market scenario.