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    Downslope of V-trend not over for market: Sunil Subramaniam


    Big FII flow created a balloon in private banks, which is getting pricked, says MD, Sundaram MF.

    My view here is that the economy could see a U-shaped recovery over time because of liquidity crunch.

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    Looks like after a horrific March, we are not really going to have any reprieve in April as well. What is the sense you get?
    Obviously. There is a lockdown, and I would suspect the news on this health issue will keep the market on the tenterhooks. From an economy perspective, we all know there is going to be probably at least a quarter’s impact on GDP growth. I think the market has discounted that. I do not think the panic in the market or the volatility that you see is a function of that, as much as it is of the uncertainty regarding Covid-19 and how it is going to impact India.

    In the last few days, there has been a spike in the number of cases. Though that will be attributed to a specific cluster, the market still want to hear the good news that India is going to escape relatively unscathed. Touchwood! The numbers so far are not anywhere close to as bad as the rest of the advanced countries. That is the only concern for the next two weeks. The market will be waiting with bated breath for good news on the health front.

    What is it that you are advising? Do you think it is time to cash in on the correction? Because the general consensus is that if you have adequate leverage and diversification across asset classes, then it is a good time to ride out the storm. Because this too shall pass and we will see a recovery kick in. Is that a view you concur with?
    Absolutely. My view here is that the economy could see a U-shaped recovery over time because of liquidity crunch. But the market may actually see a V- or a J-shaped recovery. The only problem is that, the downward trend in the V or the flattening period in the J may not have ended yet. But when the market takes off, it will take off vertically. So if you look at it with a three-year perspective, our estimate is that we would see Nifty or Sensex double, or even the broader market for that matter. So when you talk about doubling in three years, you are talking about returning to 30%-plus kind of returns per annum. Today, Nifty is at 8,500, and we are saying it will be at 17,000 in three years. It does not matter whether you bought Nifty at 8,500 or 7,500 or 8,900. You might buy it today at 8,500 and see it go to 7,500 level, and feel ‘oh god, I have made a wrong decision.’ But in the long run, it does not matter. Because once the virus is checked, some kind of a vaccine is discovered and people actually get back to work after the lockdowns are over, you will see that sharp uptick.

    There is a little bit of uncertainty on when these three steps would happen, whether it is three months or six months, but once that happens, and things return to normal, all this liquidity that is being pumped in, all these interest rate cuts that have happened, that would find their way ultimately into the stock market.

    So you will see that sharp uptick. The question is the timing. Our recommendation to our clients is to stay invested through this and keep allocating. The danger for individual clients picking specific stocks is that they tend to go and pick that stock which has fallen the most, saying ‘hey, this is below its 52-week high or 72-week high or whatever.’ Now, that is the problem, the problem is that this impact will alter the momentum for a lot of sectors and lot of companies. It is better that you give your money to quality mutual fund managers, who will play around keeping the cash component ready to buy quality stocks as they become cheap. At the same time, reallocate money among the sectors and among market-cap curves over the next three to six months. In three years from now, you will be very happy about the decisions that you make today.

    I believe the last to recover would be some of the movie exhibition names, travel, tourism as well as aviation, because among all sectors they got impacted most?
    Yes, you could add hotels to that buffet. One thing is that the market tends to discount this ahead of time. So we are nearing a bottom there, because as soon as things get normal, these will also be the sectors which would bounce back, because with all the giveaways from the government and now that fund in people’s hands, people may want to go back to movie halls and hotels and everything else after this lockdown. It is only a matter of time.

    Aside from sectors we just discussed, autos might take a long time to recover, because they were already grappling with the slowdown in sales and BS-VI transition, and now they get hit further.
    I agree with you there. On the commercial vehicle side, we were already in the middle of a cyclical downturn, because of the excess capacity created by GST when it reduced travel time significantly. Private vehicles are part of the consumer durable space, so when people are tightening belts, going out and replacing your car is probably not the first thing on your mind. So you would delay and run your old car for slightly longer. Yes the auto sector is in for a continuing slowdown for the next quarter or so, before the drop actually creates demand pull. The next festive season would probably be the time when auto sales could pick up.

    What do you think is leading to this excruciating selling in an RBL, in Kotak Bank, IndusInd or Axis Bank? The list is now endless.
    One of the factors leading to this selloff was the rapid rise in these stocks. Over the last year, year-and-a-half before the Covid crisis led to this massive pullout, there were massive FII flows into the banking and financial services space, and India’s demographic dividend story, the fact that their competitive public sector banks and NBFCs were going through their own challenges literally meant manna from heaven for the private sector banks. There was no competition, RBI was cutting rates and they were not transmitting those and their profitability kept on growing. So everybody was chasing them like there is no tomorrow. That balloon is getting pricked now. I do not think fundamentally the business model of these banks has got impacted dramatically, as their stock prices indicate. Now you mentioned the word ‘good quality’, I think that is the factor which really needs to influence your judgement there.
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