Disclaimer
Nothing you read here, should be construed as investment advice. I do not know your circumstance and so please treat the below as nothing more than what my thoughts are, which are subject to change without notice. Please do your own work and consult your own financial advisor.
In the last post we had discussed the possibility of Nifty attempting 18k.
That seems to have played out, well almost. Nifty made a high of 17992, before pulling back. What’s next?
Global.
The key global markets remain set to continue to be in a turmoil lead by Germany (DAX) and Nasdaq.
This is the YTD returns with Nifty (at the top), followed by SPX, DAX and Nasdaq.
All these is led by two key factors: Inflation + Fears of Recession. And both of this on the face of rising rates.
These are in-fact exactly the three factors that the markets hate the most.
Markets don’t like inflation.
Markets don’t like recessions.
Markets don’t like rate hikes.
At the Jackson Hole meet a couple of days back the Fed has made it amply clear that they will fight inflation i.e. keep raising rates and get inflation back to target rate 2% from the current rate of 8.5%, even if it means pain in the short term. This is very bearish for assets that benefit from low interest rates i.e. leveraged and/or unprofitable companies which is what is likely to reflect in Nasdaq and also in venture capital valuations over the next few months.
I won’t be surprised if Nasdaq (and especially smaller unprofitable tech stocks) make a dash for the recent lows.
While this is going to be painful for now and possibly next few quarters, it is no doubt great for the long term health of all markets. Fed is finally going back to a normal monetary policy and this should bode extremely well for it to face the next big crisis. The price for the excesses of 2020 has to be paid and that is the transition we are going through and none of what has happened so far should surprise people who have been around for multiple cycles.
Crypto
Crypto should track the nasdaq broadly. There are only two things here worth tracking for the common investor: BTC and ETH.
The common investors in India can’t even do anything meaningfully in crypto given the exorbitant taxation and more importantly absence of a legitimate exchange, which people can trust. What’s happened at WazirX is shameful for the nascent industry to say the least. Trying something new and failing is normal in tech and commendable but laundering money and defrauding your customers deliberately is not acceptable.
In my opinion there is no way a common investors can do anything meaningful in crypto in India right now. It’s caveat emptor all through.
Anyway, it’s a fun asset class to track as its driven by pure demand and supply and a whole lot of psychology.
BTC, the supposed leader is now underperforming ETH. The reason likely is the ETH merge that is coming up in next few days. That’s a very very big event for ETH as it moves to proof to stake. The next few weeks are likely to be very volatile for ETH.
I will reproduce what i said last time about crypto:
India
Back home, we are one of the best performing markets when compared to to broader markets. The only reasons i can think of:
Persistent FII selling throughout last year has absorbed a lot of supply and persistent SIP flows means when FIIs return there is too much demand and too little supply. The urgency of the rally in the last couple of months is a testament to this.
RBI is ahead of the curve right from 2020 - they are anticipating, acting and course correcting - not reacting like other central banks are.
India is a beneficiary of the global inflation led closures and world’s growing mistrust with China and Russia. This is leading to some incremental benefits if not a lot of it. This incremental market share capture is large as our base is low.
India is likely to be an incremental beneficiary of western flows also esp as China and Russia allocations decrease.
No major policy errors from the government. Infact several masterstrokes whether it was the vaccine or the recent crude deals.
Very little leverage in the markets, thanks to SEBI.
Corporate earnings are robust - Q1 was incredible in my view. Typically Q1 is the weakest quarter but the results this quarter have been extremely healthy for most pockets. In most sectors we are much above the pre-covid levels.
While any correction in the global markets will no doubt impact us but because of the above factors i think our out-performance should continue unless something drastically changes.
Sectors in Play
Almost all the sectors that were discussed in the previous post are doing well. A quick update to check if anything new is coming up:
Capital Goods - continue to do well and remains a leader of this rally. If you do not own capital goods in your portfolio you need to think about them.
Defence - This is a new theme that has emerged led by the Govt’s push for both indigenization and defence exports. A lot of PSU defence names are coming up. Being PSUs one cant take a very long term view on these but there are other smaller names which supply to them which may be better bets. A theme to keep an eye on.
Autos and Auto-ancillaries - This is another repeat sector that continues to do well. Whether its 4 wheelers or 2 wheelers - everyone seems to be doing fairly well. While the earnings of every company do not show as much promise as the prices except a few - i think its last 2-3 year’s underperformance and under allocation being corrected.
Chemicals - This is another sector which has done extremely well thanks to both the supply chain disruptions globally and the inflation led higher realizations. They are in a sweet spot but one needs to be careful of peak margins here.
Power - Power companies and their ancillaries have been coming out with exemplary numbers - this is another sector along with capital goods which should be on every investor’s radar.
Financials - This list is primarily tier -2 names right now except for a couple of large private banks. Most of them have undergone the Covid clean up and primed for the next credit cycle. A good play for the next 2-3 years i reckon.
Special Situation
The one special situation everyone is talking about is Piramal Enterprises. They are finally demerging their amazing pharma business which all these years was bogged down by its volatile financial business.
Although it’s too well known a special situation to do well right away - i think if one holds this for long enough and is patient, there is some juice here. Check it out.
Disclaimer
Nothing you read here, should be construed as investment advice. I do not know your circumstance and so please treat the below as nothing more than what my thoughts are, which are subject to change without notice. Please do your own work and consult your own financial advisor.