Post election, NBFCs and private banks to lead upward move: Tushar Mahajan, Centrum
Any downward move will be led by NBFCs and public sector banks, says Mahajan
Compared to the pre-election run up of 2014 and 2004 and 2009, when we were recovering from the Lehman crisis, this time around there is no excitement, no buildup and no long positioning, at least in the run up to the election. Is that an indication that irrespective of the market verdict, the market will not swing?
This is a function of the fact that markets are clearly undecided as to what the election verdict is going to be. We have seen a fairly sharp correction in the last 10 days or so and lost about 6% in that timeframe. Part of it is obviously attributed to a global worry, but the fact remains that at this point in time, market participation overall is very low, positioning is very light and that gives us some cushion on the downside.
But it also means that if there is a favourable verdict, markets could have a fairly quick run up on the upside. We will probably have to live with the uncertainty for another three days before the first set of exit polls come in and impact us on Monday trading.
Let us look at both the scenarios. If markets get positively surprised, what happens to the short sellers? If markets get disappointed, do you think the lack of liquidity could crunch the market down because in a weak market, a little bit of selling could have a very high impact?
Absolutely. Currently, what the data is pricing in or what the market is pricing in is a 5-5.5% move post the election results. From the current levels, we are around the 11,200 market. You are talking about probably 11,800-11,850 on the upside and on the downside, you are talking about 10,700. That is really the range of the market which it is predicting and which we see from data as of now.
But what does it mean in terms of market move? You are absolutely right that given the lack of liquidity, if there is a selloff, the down move could be fairly well exaggerated because of lack of liquidity.
Similarly on the upside, while positioning is light, the guys who are short would have to make a quick scramble because you are going to open up with a gap on Monday which is post their exit poll levels. Post that, you would have to move your positions to cover at any point in time.
In that gap whichever side it may be, upside or downside, on Monday morning after exit polls, where do you see the move happening? Would it be banks which actually lead the market or would NBFCs, PSU banks and corporates manage to stick out?
Clearly given the way the index is structured and the high weightage that we have on the banks, it will be banks. I think what has happened is that over a period of last few months, we have also seen a fair amount of volatility and action even in the public sector banks. Across the entire financial space -- be it NBFCs, private sector banks or public sector banks -- combined together they would lead the move.
On the upside, my sense is that both NBFCs and private sector banks would lead the move and on the downside, public sector banks and NBFCs would do so. So NBFCs will participate on either side of the move with the election verdict. Having said that, post the election, given how things move, on the upside you could also see some kind of participation coming from those stocks that have relatively underperformed in recent times. This would include both auto and the consumer space because if there is a favourable outcome, amongst the first things that the government would do would be to do something to spur up the consumption demand. You could probably see these names participate on the upside. If you had to say that, the markets from the current levels had to rally back let us say to the 11,800 levels and my bet would be that banks, autos and consumers would lead that charge.
Within the banks, could you just break it up a little bit more.
Like I said, the upside will be effectively triggered by the private sector banks and NBFCs and it is going to be high quality. You will probably see HDFC Bank and Kotak participate but I would think that that spread gets extended over to ICICI and Axis Bank as well to lead the charge on the upside along with the likes of Bajaj Finance, HDFC in the NBFC.
You will probably see higher quality names lead the charge on the upside and I would also guess on IndusInd Bank as well to move on the upside. The stock has been fairly beaten down and it could be a good catch-up candidate to play on the upside. On the downside, you could see ex of SBI, other public sector banks which have had a run up and have given up their gains.
If the outcome is not favourable, there could be worry that a lot of the good work done on NPAs in the last few years could get eroded and you will see the non-SBI PSU banks lead the charge on the downside along with your standard housing finance companies, etc, as well.
Would some of the sectors like real estate, construction, housing be on your radar?
At this point in time, given that we are looking at a sharp event, these are really high beta names. I would rather play them post clarity on the elections and these are more candidates to participate if the outcome is favourable and if you think that the government is going to spur up some kind of demand in this space. But I would not touch them right now before the elections and try and pre-position myself on sectors like real estate and infra for sure.
What within the broader market? What about something beaten down like the small caps and the midcaps which are far from recovery? Would they move higher if the exit poll indicates a market-friendly verdict? From Monday, are we going to see the midcaps turn around faster than the large caps?
Well frankly as bold as it may seem, I would definitely think that we are past pretty much a lot of the pain on the midcap stocks. Even in the last 10 days, a large part of the midcaps have started outperforming. It was probably only the day before yesterday that we saw a sharp down take on the midcap space as well. What has also been triggering a lot of this fall is the concentrated flow from foreigners into a select names and when they start pulling out, you see selloff in names like Reliance, Levers or the IT biggies.
If there is an adverse election outcome, probably FII outflow will continue and that will not impact the midcaps too much. On the upside, if you see a resumption of flows as well, midcaps again would benefit from the fact that you should probably start seeing resurgence of flows on the domestic side as well and return of the large part of the HNI local retail population. The case for midcap stocks to stop underperforming from here on is fairly strong.
How should one maximise or minimise the risk on the election volatility? What should be a prudent strategy?
If you have to play out on risk, then remember there is going to be a gap up or gap down moment. At that point, the critical levels from all kind of data setups that we see show that 11,000 is a strong support on the downside while 12,000 is a strong upside resistance. Markets are pricing in that, in case of an adverse outcome there could be a move beyond the 11,000 points or something like that.
I would recommend that if one were to go into trade, carrying some positions on Friday night to play for the upside, you are better off playing a spread trade on the puts which is you buy 11,000 puts and sell the 10,700 puts. You minimise your costs on that and you start making money the moment markets gap down to 11,000.
On the upside, 11,700-11,800 is a fairly strong level. You could probably on an upside range buy calls for about 11,500 and sell 11,800 calls. You are basically playing for a spread for the markets to move down between 11,000 and 10,700 on the downside and you are playing for the markets to kind of gap up and trade in the range of 11,500 to 11,800.