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D-Street in ‘correction’ mode! Churn stocks as winners today may not lead next upturn

NEW DELHI: With the latest bout of selling, the BSE Sensex i..

NEW DELHI: With the latest bout of selling, the BSE Sensex is less than 1 per cent away from entering the 'correction' zone. At Wednesday's low of 33,085, the BSE barometer was off 9.2 per cent from its all-time high of 36,444 on January 29.

A 10 per cent fall from the recent high is considered a 'correction' phase.

Such corrections on the indices are not rare. Even the brisk selloff from late January to early February are part and parcel of the equity market trading. But such selloffs do lead to churn in portfolios and often the winners before the selloff and after do differ.

Brisk selloffs no oneoffs
The bank index lost 4 per cent on Wednesday, extending its losses to the sixth session, on concerns over the health of the banking sector and US President Donald Trump's trade war salvo.

A similar percentage drop was seen when Prime Minister Narendra Modi scrapped high-denomination currency notes on November 8 in 2016. The notes accounted for 86 per cent of the currency in circulation then. The surprising victory for US President Donald Trump too had a role in the flash crash.

Worries over global slowdown and easing crude prices had taken an 8 per cent toll on the headline index between February 2-11 of 2016.

August 2015 was also a period of turbulence in the rupee and a rout in Chinese markets. Global commodity prices were plunging and risks of China initiating a currency war by devaluation of the yuan were keeping investors at bay. From August 20 to September 7, 2015, the BSE benchmark had fallen nearly 11 per cent. The period included the infamous 5.95 per cent drop on the Sensex on August 24.

A brisk 5 per cent fall in March 2015 and an 8 per decline in just four sessions in August 2013 are some of the brisk spells of selling the domestic market witnessed in recent times.

Sectoral churning post selloff likely
Winners of pre-cash ban period (November 2016's brisk selling) and post demonetisation differed entirely.

Data showed that the BSE PSU index climbed 12.7 per cent in 3 months after the cash recall, compared with 12 per cent drop in three months to the announcement. For the metal index, the corresponding figures were 12.5 per cent and 19 per cent.

Similarly BSE Power index rose 12 per cent (down 16.5 per cent in 3 months to the cash ban), BSE Telecom advanced 12 per cent (down 19 per cent before), oil & gas gained 11 per cent (down 19 per cent) and BSE Consumer durables rose 8 per cent (down 28 per cent).

In February 2016 selloff, beaten down sectors drove the growth. The BSE Metal index moved up 21 per cent in 3 months from the beginning of the selloff. The index was down 8 per cent in the 3 months to the selloff.

BSE Realty rose 13 per cent (from a 14 per cent decline), BSE Auto added 10 per cent (8 per cent fall previously), and BSE Capital Goods went up 7 per cent (16 per cent drop). Many other beaten down sectors too witnessed buying interest. Note that the gains included any weakness they witnessed since the beginning of the slide.

The market remained under pressure post the August 2015 selloff and a lot of sectors reversed trend. The BSE Healthcare index, which firmed up 9 per cent in the pre-August 2015 period, was down 10 per cent in three months after the selling. BSE Capital goods dropped 18 per cent in the weakness compared with 8 per cent returns in the 3 months before.

Similar was the case with the IT sector where gains were followed by losses.

Meanwhile, the worst performer was BSE Metal that fell 25 per cent in three months to August 2015, but declined only 5 per cent over the next 3 months. The point to consider is this 5 per cent included the selloff the index saw during August 20 to September 7, 2015.

What will lead the next phase of bull run?
Pramod Gubbi, MD at Ambit Capital, said he likes IT and select pharma stocks.

"Even some of the local economy sectors may see some government spending on rural and development programmes, given a slew of state elections and the general election. Consumer and road builders could be among sectors where you will have visibility on earnings growth and hence, possibility of valuations sustaining over the next 12-18 months," Gubbi said.

Select sectors such as capital goods, infrastructure and also some pockets of agri-linked companies present good opportunities going ahead, said Aveek Mitra of Aveksat Financial Advisory.

Pankaj Murarka, Founder, Renaissance Investment Managers, expects select capital goods companies and corporate banks to register a sharp recovery in earnings over the next few years.

"There are rock-solid businesses which are pretty much secular and may deliver solid earnings growth such as retail-focused private sector banks or consumer durables firms or select pockets of healthcare, especially in the CRAM space. These spaces look pretty exciting to us," Murarka told ET Now.

Earnings are going to be high for the cyclical sectors compared with the defensive ones, particularly when you look at the next 12-18 months, said Sanjay Dongre, Fund Manager at UTI AMC.

"Once the volatility in the market subsides, one should be looking at increasing exposure to the cyclical sectors such as auto, cement, engineering and construction, banking and so on and so forth," the expert said.

A few analysts said the stocks that stand tall in falling markets are the ones which could lead the next phase of rally, post the selloff. An study on the previous such falls does suggest that the market performers differ, pre- and post-fall.

"Portfolio will go through churns. Certain sectors fall out of favour, but a lot more will emerge. Outperformers in falling markets are leaders of the next bull market and that is my base belief," Atul Suri at Marathon Trends recently told ET Now.

Original Article


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