This on-going rally, is termed as a liquidity driven one and not sustainable in the future. We agree to that point on a short-term basis, as FII inflows jumped hugely from November onwards. More than that we need to also consider the fact that India is getting much better inflows when compared to other EMs, as there is inherent value in our domestic economy. There are many other positive factors, on which the market is buoyant, like upcoming events such as fiscal and monetary packages in the US, Brexit deal, vaccination, union budget and high double-digit earnings growth in 2021. We believe that the optimism of the market will be retained on a medium to long-term basis. Of course, at the same time, due to high gains made in the ongoing rally, which has led to supreme high levels, it is vulnerable to a shortfall in any of the above events, and drop in the volume of liquidity. Despite this, we do not expect a big correction, but acknowledge the risk and anticipate a consolidation. At the same time, we suggest buying on dips as an opportunity to add equities.
Since the March low, the market has been doing well, due to many factors, starting from the quick and market-friendly policy of central banks, continuous fiscal stimulus announcements, reopening of the economy, monthly improvement in economy data, fall in financial risk due to easy money policy to industries, positive US election result, quick development of vaccines, near-zero interest rate policy, high amount of liquidity in the market, continuous accommodative policy and reforms in India. These factors will maintain the buoyancy of the market, due to long-term benefits. But it is also important that the retail investors know the risk of the market, in the near-term, since the large and small indices are up by 80 % and 100%, respectively.
Major risks are:
* Margin of Safety is low due to rich valuation. Valuation has become just a number and lacks fundamental value.
* Fiscal position of the government is weak, which can impact government spending and 2021 Indian union budget.
* Second wave attack, grim news from Europe, and effective distribution and efficacy of vaccine will be a key factor in 2021.
* Redemption happening in domestic institutions and possible hike in global volatility can trigger selling by FIIs. Both these factors can have a heavy impact on the market rally.
In this context, we have been bombarded with many queries. I shall address this through Q and A as follows:
Will the liquidity driven rally fallout and when?
During October to December 15th, FIIs net inflows were Rs 1,15,000cr in equity market while Domestic Institutional Investors sold equity worth around Rs 95000cr. MFs sold Rs 62,000cr during the period, due to redemption pressure. Clearly, the recent rally is driven by FII money which could slowdown and have a double whammy effect on Indian market since DIIs are under redemption pressure due to profit booking from risk-averse retail, corporate and HNI investors. This cautious view is expected to continue due to economic uncertainties and quick reversal of the market to above Covid level. On a tactical basis, mutual funds and investors can turn positive if there is a consolidation in the near future, in price or time basis.
Is high valuation the biggest risk in the market?
From its March low, the main index has rallied by 80% and small cap index has rallied 100%. Today, valuation is just a number, which has lost its rationality given the situation of low earnings and high liquidity. It is at historic new highs: P/E is 34x and 22x on trailing basis and one year forward basis, respectively. This number was and is destined to increase as the momentum is decided by the availability of funds and improving future outlook, which is getting better on a QoQ basis and is likely to remain positive for the next 4 to 6 quarters. It is also very important to note that, comparing the valuation with historic trend may not be fair at this time. The valuations are expected to stay high for the time being and will stabilise by the latter half of 2021 as the situation normalises.
PSU banks did not rally in-line with the market. Is there value in PSU stocks? Any stocks that can deliver solid returns in 2021?
Yes, but on a short to medium-term basis while on a long-term basis we continue to believe in more value and growth in private banks. PSU banks have corrected well factoring asset quality and market share loss, trading at close to 50% discount to last 3-year high P/B of 1x (current P/B 0.46x). There is some value in PSU banking stocks, as NPA concerns are expected to be lower than anticipated and credit growth is expected to rebound in 2021. We have a positive view on SBI, Bank of Baroda and Indian Bank after considering the Q2 results and fund-raising plans.
What would be your biggest thematic bet for the next year?
Digital and Healthcare will be the biggest beneficiaries from the pandemic. This is expected to further improve in the future. IT, Pharma and Chemicals will be major beneficiaries even though they are highly valued today. Cyclical and interest rate sensitive like Metal, Banks and Auto can also benefit in 2021, as the economy continues to revamp. Lately, cyclical sectors like PSUB, Metals, Reality and Building Products are doing well. Such stocks and sectors are more risky on a short-term basis but would perform better on a long-term basis.
Which are the few stocks you would be watching in 2021 and why?
As mentioned we are more positive on IT, Pharma and Chemicals. Our top picks are TCS, Biocon and PI industries, which have strong business models and therefore stand to gain from new demand. In growth-oriented sector, banking is our top pick, due to reopening of the economy, ease in valuation and structural plans. We foresee opportunity in Kotak, Bandhan and IDFC First. Auto sector is highly valued today; can underperform in the short-term due to slowdown in demand. On a long-term basis we suggest Tata Motors as a high risk and high return idea.
On Nifty50 index, which are your best stock ideas?
Our top pick in Nifty50 are TCS, Divis Lab, UPL, HDFC Bank and Reliance Industries, respectively.
What are some good small cap stocks?
Three small caps on which we are very positive are Suven Pharma, Mold-Teck Packaging and Healthcare Global. Please visit our trading platform Selfie for full details and reports. Their current market price may have reached our target price, but that is not important as we have a very positive view on them as a multi-bagger ideas. We shall update on a continuous basis.
The performance of the FMCG sector has been good in 2020. What about its prospects in 2021?
Initially, FMCG hugely outperformed the market due to stable outlook, supported by growth in essentials like packaged food and staples, which constitutes ~57% of the overall FMCG market, and rural demand. Rural demand was due to good monsoon, record high Kharif season, reverse migration, government’s rural initiatives and low unemployment rate. With progressive opening-up of the economy, discretionary categories such as personal care also revived. This improved the sentiment of urban market too, which accounts for 62-63% of the market. FMCGs can be expected to trade positive and at premium valuation, but may underperform in the coming year.
Do you think small IPOs are in for a good time?
Yes, because liquidity in the market is strong and the IPOs are offering great businesses with good brand value in niche and upcoming segments. This is providing variety, diversification and growth for investors. These companies want to exploit the listing benefits, exit opportunity for PE investors and promoters and to strengthen their balance sheet to capitalize from business growth when the pandemic is over.
