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    The more Indian market holds on in the face of global headwinds, the riskier it gets: Sandip Sabharwal

    Synopsis

    “The more we hold on in the face of significant global headwinds, the riskier the market gets. People think that resilience makes the market safer but it is actually the opposite. We need to be wary in the near term. We need to see how things pan out and it will be tough for the Indian markets not to correct if the global correction continues the way it is.”

    Short term traders likely to get disappointed post Reliance AGM: Sandip SabharwalETMarkets.com

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    “Most investors are heavily overweight on technology as well as financials. Technology being the globally linked sector, that faces the biggest risk. I still see significant downside in most technology stocks. As far as financials go, the risk is more to do with the over ownership,” says Sandip Sabharwal, asksandipsabharwal.com

    What are you tracking today? Is it the US dollar index? Are you tracking the global cues or the domestic cues? What is your expectation from this trading week?
    The key thing to track now are the global cues. where the dollar index is moving towards a new high. We also saw significant selloff in most markets including the US last week. So, India relatively held on in this entire carnage. The more we hold on in the face of significant global headwinds, the riskier the market gets. People think that resilience makes the market safer but it is actually the opposite. So we need to be wary in the near term. We need to see how things pan out and it will be tough for the Indian markets not to correct if the global correction continues the way it is.

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    So what would you be wary of? What has fallen have been the globally linked sectors like IT and metals. What has been resilient is autos which continue to outperform and some of the financials are also jumping up really well. A case in point being Bajaj Finance. Outside this space, Tata Consumer has also gone up. Would you recommend some profit taking?
    Yes, it depends on the allocations of most of the investors. Most investors are heavily overweight on technology as well as financials. Technology being the globally linked sector, that faces the biggest risk. I still see significant downside in most technology stocks. As far as financials go, the risk is more to do with the over ownership because all traders are into Bank Nifty because that is what was working.

    So, that is where we have risk, despite the fact that financials in India are reasonably well placed. In terms of balance sheet, growth prospects and even earnings growth prospects, those who hold a huge amount of government securities but still are traders’ favourites and ownership is very high. We see that there is a risk. Autos, capital goods are still relatively under owned by most investors. In case of a severe selloff, everything falls but ex of that we will actually see buy on dips play out more on that side.

    What is the view on Reliance Industries post the AGM? Morgan Stanley has said that it is progressing firmly on the fourth investment cycle. There is capex across the board in one part of the business.
    The big story in Reliance one and a half years back was deleveraging and zero debt and it has totally flipped around and they are going heavily into more and more capex, more new areas and their cash flow generation will be even tougher. In fact, most investors tend to follow news flow but if you actually follow the return matrix, Reliance used to have a ROE of 20% 15 years back. It is just 9% now and the zero debt status goes out of the window given the huge capex they have announced.

    That combined with the fact that near term most of its businesses seem to have risk associated with them – refinery in terms of profitability and nothing much happening on the Jio platform, there is no big upside in my view.

    The other scary factor is the fact that penny stocks have been rallying. Look at the last 10 days’ gains; Reliance Home Finance is up 62%, Essar Shipping has gained about 40%, Reliance Communications has gained 30%, Aksh OptiFibre, Dish TV are up 24%. How are you reading into this penny stock move?
    It is part of a global move where stocks go up randomly for no reason and then they fall. I think it is just to do with that. Since you have mentioned, I will warn most retail investors to stay away from these stocks. It looks like easy money making but look at the history of these stocks. Whoever has got into them have lost money eventually.

    I think people who are just playing with these stocks are playing with fire.

    One of your favourites is Action Construction or ACE. The stock is doing cartwheels. What is the sudden realisation here?
    The company is doing well and they benefit both because of real estate uptick as well as the uptick in infrastructure, construction and the results had been reasonably good for some time but the stock was actually languishing and suddenly now this price movement has happened. After this move, it is no longer very cheap despite the fact that margin improvement will play out for them significantly in the second quarter.

    For people looking to get in now they should possibly wait for a consolidation correction but I think if someone is holding the prospects for the next two-three years look good for them or the company.

    What is cheap and attractive in this market where valuations are below historical average and growth above historical average too?
    Valuations below historical average are tough to find now in this market because of the way the stocks have run up. So, sectors where valuations are below historical averages are much riskier like some NBFCs, smaller banks etc. where valuations are still below historical averages and may be some auto ancillaries.

    Among the sectors I track where growth prospects might be more aggressive than in the last two, three, four years, are capital goods, infrastructure, possibly some auto companies, some defence related companies where valuations are much higher than historical averages but growth prospects are also much higher than historical averages.

    I can see this word catch up being used now. Indian Hotel has gone up and now other hotels have to go higher; L&T has gone higher and so midcap construction stocks have to move higher. It is always a dangerous part because we are trying to assume that if a good market leading business has gone higher, the companies with a less dominant market share also have to go higher?
    What happens in most of these cases is that these stocks deserve to go higher but to what extent they deserve to go higher is the question we need to ask because in some industries like hotels or capital goods, if it is an overall economic cycle, then all the companies tend to benefit. It becomes a riskier strategy.

    In the infrastructure sector, there might be some companies which are heavily leveraged and to that extent, once the leader moves up and one starts buying those companies, many of those companies have got into big debt issues or even financials where it is not necessary that in an economic growth phase which benefits larger financial institutions, the smaller ones will do better because they do not have a deposit franchise to talk of.

    It differs from sector to sector but I tend to agree that in some sectors like hotels or capital goods or auto ancillaries or some other smaller sectors also, if the leader starts to benefit, then other companies also see benefits coming through.

    What is your view on the defence space?
    There is significant potential but again the question looking at today’s market is what is the value left for the short run because most of these stocks are up so much and they have gone up even during the corrective phase. Even PSUs like BEL or HAL etc have continued to move up or even smaller companies in the defence space on the private sector have moved up very significantly.

    Since it is a small sector relative to the huge funds that are available in the market, I believe that there will still be buyers in them on every corrective move. But whoever has a short term perspective will see a big knock but people should have some exposure in defence stocks for sure.

    Is it time to buy IT? TCS, Infosys, Wipro and HCL Tech are nowhere close to their pre-Covid multiples. Can I say that there is still some more scope for IT stocks to correct or they may not correct to those levels given that the rupee is a tailwind and outsourcing is going to be higher than the pre-Covid levels?
    Overall outsourcing trends have only increased with digitisation and because many of these digital projects do not need on-site presence also. But if there is going to be a US recession, it is imminent then there is no way there will not be some compression of demand and that compression of demand will lead to earnings downgrade over the next one or two years.

    That is the risk I see. Even now everyone is looking to buy these stocks on any sort of small corrections and that psychology has not really changed. Most analysts are holding on to their earnings estimates. They have not downgraded at all. So once the managements become a bit circumspect over the next one or two quarters and there are downgrades, that will be the time to buy into these stocks.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)




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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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