Stay light ahead of the elections; defence, engineering, railways, infra look overvalued, says Jimeet Modi of SAMCO
Jimeet Modi, founder and CEO of SAMCO Group expects high volatility ahead of the General Elections. He advises investors to stay light and diversify portfolios into gold and debt.
Jimeet Modi, founder and CEO of SAMCO Group expects high volatility ahead of the General Elections. He says Investors must stay light ahead of the election and may even consider diversifying their portfolios into other assets like gold and debt. In an interview with Mint, Modi said there are pockets of overvaluation in defence, engineering, railways and infrastructure segments while defensives like pharma and FMCG sectors offer considerable safety in terms of volatility. Edited excerpts:
Why are we witnessing high volatility in the market? How do we navigate this volatility?
In the wake of major events already priced in and markets expecting announcements of dates for General Elections any time soon, the volatility is expected to be the order of the day at the market.
Indian markets are likely to trade range bound for the next few days and Nifty may move from 21,500 to 22,200.
A clear trend will emerge only after the market breaks out on either side of this range.
One can maintain a stock-specific approach and pick stocks that have delivered good quarterly numbers in the current earnings season.
Contrarian investors can look for opportunities in private banking stocks which have not participated in the rally so far.
What is your short-term outlook for the market? Should we be concerned about the valuation?
As mentioned earlier, we expect the volatility to shoot up with the announcement of the dates of the General Election.
The entire poll process, which is expected to spread over six to eight phases and as we get closer to the election results, till the formation of the new government at the end of May 2024, the markets are expected to remain volatile.
Investors must stay light ahead of the election results and may even consider hedging their portfolios or diversifying them into other assets like gold and debt to limit their risk.
We believe that there are pockets of overvaluation, especially in defence, engineering, railways and infrastructure segments.
On the other hand, defensives like pharma and FMCG sectors offer considerable safety in terms of volatility.
Do you expect more correction in the mid and small-cap space? What should be our strategy for these pockets?
Sensex to small-cap ratio is currently placed at a 16-year low.
This means that the Sensex or large-caps stocks are underperforming small-caps drastically.
The year 2024 will be a year of comeback for large caps. Mean reversion will be the name of the game in 2024.
Large caps as a group are trading close to their average valuations.
These could bounce back. On the other hand, small and midcaps that are trading way above their historical valuation will be pushed down to their mean.
In the wake of this possibility, investors having exposure to small and midcap stocks should switch over to defensive large-cap stocks in Banking, Pharma and FMCG stocks.
What sectors are you bullish about at this juncture? Is there more steam left in the PSU stocks?
The main cause of the rally seen in the PSU stocks recently has been a low floating stock in the market as the majority of it is owned by the Government of India (GoI).
Low floating stock coupled with the undervalued PSU sector stocks was the classic case for accumulation at lower levels.
In addition to this, the Union Government’s move to push for the infrastructure sector with huge outlay added fuel to the fire.
This deadly combination triggered interest in PSU stocks ranging from road, infrastructure, railway stocks and banking sector (PSU) stocks.
The continuation of the up-move in the PSU stocks solely depends on the government’s policy push.
Markets have already factored in the third term for the current dispensation.
If the present government returns to power and carries on further its policies towards the public sector, we may see the engine move ahead.
However, it is always advisable to book profit at regular intervals to preserve the capital and plough it back into the market.
Is the worst for the Indian IT players behind? Can investors look at midcap IT stocks also for investment?
Indian IT sector was expected to do better in 2023 and was expected that Nifty IT would pick up in the second half of CY 2023.
The Nifty IT did pick up and yielded 25 per cent last year, but we are yet to see the momentum gathering pace.
Despite Q3FY24 being a seasonally weak quarter for Indian IT companies, they have showcased resilience by delivering a robust performance.
This resilience is further underscored by the significant rally witnessed in the Nifty IT index since the anticipation of US interest rate cuts began building up post-December 2023.
The sector's ability to weather the storm and rebound strongly indicates a growing sentiment in the market that the worst may indeed be behind for Indian IT players.
Moreover, the exceptional Q3FY24 numbers reported by mid-cap IT companies further bolster confidence in the sector's overall stability and growth potential.
The promising performance of mid-cap players indicates ample room for growth and investors can consider adding mid-cap IT companies to their portfolios for the long term.
How do you see the prospects of large private bank stocks? Should we bet on them for the next one to two years?
The banking sector has underperformed by 12 per cent in 2023.
It was expected to get traction in the second half of the previous year but that did not materialize. This disappointment has continued in 2024 too.
However, we believe that banks should start performing soon.
Private sector banks are currently trading at decent valuations and offer a margin of safety in a market where several pockets are trading at lofty valuations.
Foreign Portfolio Investors (FPIs) are selling Indian equities. When can this trend reverse?
FPIs have been sellers in Indian equities as US 10-year bond yields have spiked after a higher-than-expected US inflation rate of 3.9 per cent triggering concerns of delayed interest rate cuts by the US Fed.
It is worth noting that yields and equity markets are inversely correlated. Any upmove in yields is not good for stock markets.
The level of 4.3 per cent in the US 10-year bond yields is crucial.
If the yields cross above this level, then we might see a selloff gathering pace in Indian equities by FPIs.
Also Read: India to become 3rd largest economy by 2027, market cap to hit $10 trn by 2030: Jefferies
The US Interest rates have topped out and the US 10-year bond yields which represent the cost of capital for corporates and consumers across the globe, are trading around 4 per cent off from its highs of 5 per cent.
This is good news for equity investors. First, bonds compete directly with equities.
Falling yields mean equities become more attractive compared to bonds.
Second, falling yields lead to lowering the cost of capital for corporations and consumers.
This leads to an increase in corporates’ profitability and more liquidity in the hands of consumers.
It’s expected that the US interest rates will be reduced by 75 bps in 2024 which will have a downside pressure on the yields.
These factors will lead to positive fund flows from FPIs in India in the year 2024
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Disclaimer: The views and recommendations above are those of the experts, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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