Looking at basic indicators like RSI, dollar index, FII activity, is the market in for a pause?
The pause is imminent due to several reasons. The dollar has been surging globally and that usually leads to some sort of dollar shortage going forward as it reaches into a new zone and impacts most emerging markets.
The minutes released by the RBI show that at the beginning of this year, the Indian central bank was not bothered about inflation but are very bothered now. What we need to realise is that a 1.5-2% straight hike in a short period of time definitely impacts economic growth prospects and we will need to see the impact of that going forward.
Thirdly, as I read through most of the strategy reports, I see there is a 3-5% downgrade of Nifty earnings after the current result season but markets are up 12-15% from the beginning of the result season. That by itself puts the market in an overvaluation zone.
The last point is a technical one. Last week, the market became overbought as they were oversold in March 2020, thus reducing the upside potential. There are several factors that work here and so near term, one has to be cautious.
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What is your definition of cautious? 5% correction on the Nifty, 10% correction on the Nifty or just avoid it? Could it be more time-wise correction and less a price-wise correction?
It has to be price wise. I do not think it will be only time wise given the straight line move we have had. If we get a 5-10% kind of correction, then markets will come into a better zone. Sectorally, we might get better opportunities into sectors we could outperform going forward.
September-October tends to be months which have historically seen deeper corrections led by various factors. If the markets have gone up substantially prior to that, these two months are something we need to watch out for.
Last Friday, , were down and M&M wrapped up the day a little bit muted. What is the sense that you are getting when it comes to bets within the auto space?
Auto is a divergent play. On one side, commodity prices are correcting significantly, especially the ones which these consumer and auto ancillaries consume and to that extent, there is a margin of buffer and margins are likely to improve going forward.
On the other hand, most of the vehicles are financed and to that extent, most managements are saying that the interest rate hikes so far of around 1.4% have not dented demand but we need to see if subsequent rate hikes could impact the demand. After the runup, we will need these stocks to consolidate. My preferred bets will be Maruti and M&M on any correction.
is a brand which is here to stay; it is a business which is real in terms of top line and now the management is saying they are going to be profitable next year. That is a forward looking guidance. Do you think investors should have a change of heart when it comes to investing or reinvesting in Paytm?
These guidances of profit next year are. impossible to achieve for companies like
, Paytm etc. If you look at their balance sheet, where the expenditure goes and what they need to spend to continue to grow. They have built a business model which requires continued cash guzzling to keep on growing. They were never built around a profit model. It was always a valuation model where valuations will keep on going up and they will keep on getting money at higher and higher valuation and obviously that bubble burst.
We need to see how this re-strategisation will work. It will be very tough and we should not go by management commentary on achieving profitability, we need to evaluate it ourselves based on risk reward, valuation metrics etc. and that is something we need to see. Zomato obviously will become a buy at some stage given that it operates a duopoly, it has significant entry barriers in the business in which it operates as long as it stops doing the kind of acquisition it just did and spoil the equity story for existing shareholders.
IT attrition is having an impact on margins. , are looking at delaying variable pay, I have never heard something like this before. It is not that there is a cash flow problem with these companies, they are sitting on cash. They have solid cash reserves but deferring or delaying appears strange. Is it a trend?
Yes, exactly. And that is what I have been saying for the last six to eight months that the commentary of these IT companies and what is actually happening on the ground, the results which have come out do not match at all and to that extent, the current rally in technology companies is a good opportunity for investors to trim because end of this year or next year, we will definitely get a recession in the US and there will be a cutback in IT spends.
It will impact all these companies which are suffering from margin hits and they need to travel more, spend more on marketing and sales to boost their revenue growth. We are in a vicious cycle for the short term at least and valuations have gone up substantially from the bottoms. This is a good time to trim weightage in technology companies and wait for better opportunities 6-9 months down the line.
ET Now: Is Zee worth a buy now that decks are cleared for the merger?
I do not think so because they have been continuously underperforming expectations and global trends which are getting followed in India show many large companies are now 50% into digital spends. In India, it is still maybe 10-15% for many of the companies ex of the new age companies.
I think that trend is here to stay. It is not a story which excites me. There will be rallies in between as these stocks become very cheap etc but directionally, I do not there is a story in these stocks.