3 big themes to play in the current market

Stick with metals, industrials and normalisation trade, says market expert Ajay Bagga

What do you think is the main concern for the market right now? Or is it just that there has been a very steep rise and we saw profit taking last week.
It has been profit taking. Nothing fundamentally has really changed. The issues that were there and the positives remain. Earnings have got discounted and now the market is taking a pause. That is a healthy sign. The cause for concern would be that we have met most of the targets for the year already and we have seen the growth. A lot of brokerages had a 15,000 Nifty target for December three months back and we nicely crossed it. It went much higher as well.

The market will probably take time to digest this move and wait for the next catalyst. The next catalyst will come globally one way with the US stimulus whether it is a $1 trillion or $1.9 trillion but the day of the stimulus will see the next leg up.

Second, the market will look for some domestic announcements on the PLI and reforms front.

The third big trigger for this market really will be how do flows hold up. The dollar levels saw a lot of shorts in the dollar which got taken out over the last two months. It was a counter-intuitive move or strengthening in the dollar despite the kind of debt levels that the US government has ratcheted up over the last one year. That trade will reverse now and it will give the next leg to the Indian market rally because a weak dollar correlates to a stronger Indian market performance. So a lot will depend on FPI flows, on the dollar levels, on the US yield curve and finally on the US stimulus coming through. Global factors will mostly determine the future pace and direction of this market.

What do you sense would emerge as a strong buying opportunity? Is there anything particular on your radar because now we are looking at the midcap index down 2%?

I would say since November I have been talking about cyclicals and industrials coming back and really now the consensus is commodity super cycle taking route. A lot will depend on the Chinese economy continuing to grow but the rebound trade, the reflation or the renormalisation trade. Those are the key areas to be in — the cyclicals, the industrials. The renormalisation will include hotels which have already done well but will do better; airlines which have already performed very well in India. Globally also, we are seeing some interest coming back in airlines. Then came smaller companies like cinema halls. In the Chinese lunar year, they have blockbuster box office collections. So revenge shopping, revenge consumption is taking place. People have got huge savings, the affluent classes have got a huge saving built up because the discretionary spends did not happen for nearly 10-12 months and that money is now coming back into the markets.

In the US, retail grew by 5.3% and we are not in March or June or May where you can say there was a base effect. So revenge consumption is coming through. In India, we have seen the way durables have grown in the last six months. There has been nearly 25% growth in sales of air conditioners, washing machines, microwave ovens. Utilities are being bought a lot as well. So those are the sectors.

Overall, there are three big themes; a) there is a commodity super cycle and so stick with metals; b), the renormalisation trade so the sectors which underperform, basically the services like restaurants, hotels, cinemas; and c), industrials given the focus of the government on infrastructure building and that will lead this economy higher. In industrials, whichever company is supplying into the infrastructure build-up will benefit. Of course, banks as the funders of all these will naturally benefit and we foresee banks going up further from here.

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