Won’t be surprised if some bank stocks hit new lows: Biju Samuel

In a report, you talked about how India is currently in an unconfirmed bottom situation. We are seeing support coming in from global players and that could help the market bottom to be less adverse than one would have expected. Keeping this in mind, given that everyone is sort of second-guessing whether or not we have reached the peak with this endemic, what exactly is your assessment?

The strongest observation right now is that we have mostly seen bottoms in major global markets, and this is very powerful indication starting with the US. And then global markets, especially the emerging market universe, has been showing a similar trend. That way, we have had a very conducive global turnaround. When I compare India with global markets, some of the merits were not that strong for India when it comes to finding the final market bottom. That is a open to debate, but within a very strong constructive background of long-term bottom for the US markets and other global markets, any downside in India will be kind of limited. Now, I actually wrote that report about the unconfirmed bottom situation for India about a week back. But India has started showing some merits in the last few days; especially April 8 proved to be a game-changer, when a large number of stocks broke above their short-term resistances. This happened in most global markets on March 25. So we have got it done on April 8. Some of the market breadth characteristics have also improved for India in last few days.

Late March we had a situation when we would see one-day buying and that would falter the next day. This time we are holding around that 9,000 mark on Nifty, It seems the market was tackling some supply and is actually managing to hold there, which indicates that we might strengthen more any chances of the market retesting the bottom arise.

With respect to stocks, you have alluded to the fact that stocks that give investors least heartburn are where they find comfort. One sector where I see a lot of concentration is pharma. Given the way things are evolving on the fundamental front, where is it that you find comfort within pharma? What about the overall valuation metric? Is that a bit worrying?
I will mainly look at it from a sectoral perspective. Pharma is most likely showing signs of the beginning of a long-term bull market actually. As a sector, it has been underperforming most other sectors over many years and that picture is drastically changing, especially if you compare its relative performance with banking. So there could be a situation like some of the jewels of past few years — like banking and financials. They are giving away while pharma is actually kind of taking that space. So pharma is definitely starting a multi-year bull market cycle from here. Pharma stocks are the ones which have been most resilient in this meltdown, and they have been the first to show positive breakout characteristics the moment the market created a semblance of normalcy. So I think pharma is in for a serious sectoral reversal.

What is you take when it comes to some of those beaten-down infrastructure or capital goods names? As things stand, it seems the capex cycle is going to take a long time to revive. We have got IMF slashing growth estimates for India and these sectors are so closely linked to the actual economic revival. Do you think it is going to be a long time before there is meaningful recovery in sectors like infrastructure, real estate, capital goods?
Right now, the market is most likely going to bottom out, but we are unlikely to get into a bull market. Between the bottom and the long-term revival, a considerable amount of time is going to be lost. So these sectors are like the harbingers of the economic tide changing. As of now, they are not showing any bullish characteristics. So my sense is that a new bull market in India is some time away. On an average, the average price on the Nifty could be around 10,600 and we saw about 30% cut. So in the 10,500-10,600 area, a lot of investors would be waiting to lighten positions. There will be a lot of supply waiting there. So a bull market will start once all the supplies are absorbed, and that I would say will take eight to 12 months. Till that time, these particular sectors could be doing a kind of basing process. The auto sector, for instance, is one of the beaten-down ones and it has been in a long-term bear market. We could be entering the last stages of that bear market. The bear market could mature. I think that accumulation process is left for many of these sectors.

It’s earnings season yet again, and it is definitely going to be a challenging quarter for companies across the board, perhaps not this quarter but the next. What is it that you are pencilling in from India Inc in terms of profit growth, revenue expectations as well as where you might see certain hits or misses?
Most of my analytical framework is based on price behaviour. The fundamental framework is not there in that. So, I do not have the answers for these things. What I would say is that the biggest challenge for the market in India would have been if the US market gets into a bear market. That was one threat looming large when the onslaught was going on. Because if the longest bull market peaks out, significant risk appetite is going to get killed globally for a long time. In India, the situation is already weak; we are in a bear market kind of situation since 2018. So, our situation would have been rendered very tough. But that worst-case scenario has been averted. So with the indication that the US is actually sort of resuming the bull market, it is not a very gloomy situation for India that way. But a lot of work needs to be done around the bottom for a large number of individual stocks. We might have a couple of mini bull runs going back to the 10,500 levels on the Nifty over the next 8-12 months, and then things will again slip. In that fashion, we might be building the base and that can become the launch pad for a long-term revival.

This time when the market fell, it was predominantly driven by the index heavyweights. And a heavyweight-driven selloff is usually the last stage prior to a long-term revival. What we saw during this collapse was actually a selloff in heavyweights, especially banks, and things like that. So in terms of the narrative, this is the last stage of a bear market.

I want to get your take on what you describe in your report as basement dwellers, those that have seen investor attraction since 2017, but they have given major negative returns and investors really seem to have burnt their fingers or continue to remain stuck. I would not get into stock names. What is it that you are advising investors to do with some of these sectors or stocks where they are badly stuck at a time when we are looking at a lot of volatility?
One particular observation I have highlighted is that a lot of investor appetite in India towards mutual funds and such investments heightened since the demonetisation. For incremental entry of investors, late, 2016 and 2017 was a watershed moment. So these ‘basement dwellers,’ as I call, are stocks where incrementally investors were actually getting over-exposed over the past two-three years. They have given very sharp negative returns at current prices. So they are investor heavy, and investors are losing big. When they realise three months down the line or four months down the line that these stocks are not actually reviving, or they are not able to recover their money, that is when there will be a reset of investor strategy. They will start switching away from them. But this is three, four months away. So I guess these investors will then switch towards the new leadership that emerges and there is going to be a reset of strategies from these stocks and these sectors. Some of them could be in the last stage of a bear market, like as I mentioned autos. Not every beaten down sector is going to be a problem. For example, much of the autos are not there in that category because the investor switch has already happened there in a big way.

So when you say we are in an unconfirmed bottom situation and that we could potentially see a revival of risk appetite globally and the US in particular, what is it that you are advising investors to do at the current juncture?
It is a major bottom, or near-bottom situation for the markets. That is what is getting confirmed from the US market. Also the kind of smart money moving into the emerging market universe in last seven, eight days, gives a sense that it is an opportunity, it is a long-term inflection. We are close to it or we have already done it. So from an investor’s perspective, it is an opportunity to buy into the current levels. It is very difficult to predict exactly where the absolute low will be, but that low may not be significantly away from what we have already seen. And a lot of stocks could have already made their lows. But I would not be surprised if some other stocks, let us say many of the banking stocks, go to new lows. It is possible, but a large number of stocks could have already bottomed out. So there will be some exit from these top 10 stocks, which have been in focus since last two years and which could create buying interest in a large number of other stocks. So market rallies will be broader and declines will be narrower going ahead, which is a completely different scenario than what we have seen in last two years.