It is no longer a buy anything market. It is a very selective, choosy buying market that is playing out in front of us, Vinay Khattar, Head of Research and Investment Advisor, Edelweiss Financial Services, tells ET Now.
How are HNIs viewing the fact that some of the parameters that were weighing down on the markets are beginning to improve now? FIIs for the first time in many months have turned net buyers and crude has cooled off, Would the temperament of HNIs also change with improving dynamics?
Let us look at what has happened in the markets. Crude is down almost 17-18% from the top and that is a pretty sharp drop and we are still short of November 4 Iran deadline. But the news which is coming around is that America would waive off any sanctions on India if it was to buy oil from Iran. India is one of the largest consumers of Iran oil. In terms of demand-supply mismatch, it will ease off certain problems which is reflected in the price of the crude.
Similarly, the valuations have corrected significantly. The froth is out of the system. FIIs have been terrible sellers. October-November saw close to Rs 28,000-29,000 crore of FII selling. That has now been bottoming out probably and you may see some positive inflows happening there.
So valuation is coming back. The macro headwinds are slowing down and that is the broad trend which is playing out in the market.
Second, between the largecap and midcaps, midcaps have corrected significantly more than the largecaps. Consequently, you find that the savvy investor set is coming back into the market. There is a kind of averaging happening on a lot of their top bets where the prices have corrected significantly.
Some degree of switching is also happening from stocks where earning visibility or the business model strength was lower into stronger business models or stocks with near term higher earning visibility.
So, a degree of switching and averaging is happening. Leverage is really down. These are the broad trends that savvy investors are perusing at this point in time. It is no longer a buy anything market. It is a very selective, choosy buying market that is playing out in front of us.
Are investors are still worried about the macro situation or is the worst trade behind us with the easing in oil prices and stability in currency?
A large part of the bad news is behind us and it is factored in the price. But looking at the overall trend, even if on the domestic side, the valuations have corrected quite a bit, the concerns on oil remain, given that the global supply is not going to be inching up as much as what the demand is going to be inching up. So, that concern remains and that is predominately driven by the fact that a lot of shale oil which is getting pumped out in US cannot move into the global markets.
There is a serious infrastructure bottleneck problem in the US. From the Permian Oil Basin, almost 3.6 million barrels of oil evacuation capacity exist in terms of pipeline and that cannot go up till at least middle or end of CY19 and then probably CY20. A large chunk of oil supplies begin to come out only at that particular point in time. So, oil does remain a concern and with recent Trump commentary that probably he will want to do to Venezuela what has been done to Iran in terms of sanctions and all, that will take out another a million barrel or short of million barrel supply out of the oil market.
The second big factor which is playing out is what happens in the US market. The bond yields have been inching up in US markets. The yield curve is flattening and the risk in US markets are emerging. So you find the FAANG stocks are all down between 25% and 35% from the top. Generally, the risk-on in the US market is going to be a big factor on how things play out in Indian markets.
As a house, what are you are recommending to the HNIs? Where are we seeing concentrated buying?
In terms of stocks, the broad sectors where buying is taking place is in the chemicals or paper space and within the chemicals space, our top pick has been Deepak Nitrite. There is a very large acetone and phenol capacity coming online. It has started producing from last month and the plant is stabilising.
Given the overall value migration thesis which is playing out in the chemical space, we have seen large volumes of capacities shifting from China to India and this trade has been on for last four, five, six years. Deepak Nitrite has been one particular beneficiary where the prices in the entire space, even in the commodity chemical space has picked up. With this new capacity coming in, he will be replacing 100% of import demand, This segment is fulfilled only by imports and their initial response in the market has been very good.
Deepak Nitrite is one of our top picks. Our sense is that valuations have been reasonable. The stock has not really corrected as much in the last few weeks despite many other midcaps correcting significantly. But the upside still stays intact. Can you make 30-40% over the next 12 to 18 months in a company like Deepak Nitrite? Our view is yes.
Another of our top idea has been on the paper side. Paper demand continues to be very robust. Now with rupee depreciation, imports of paper are going to drop even more. Already there was a price mismatch between domestic and the international markets because of which imports were coming down. The rupee fall will have further impact on that. Domestic supply is very constrained. Prices are going to be moving up. New capacities will probably take a couple of years to come in. So paper industry as such will be very interesting space to be in for next one to two years and JK Paper remains our top bet in that particular space.
Are you also advocating ICICI Bank and Axis Bank as a twin trade to your clients?
It is an interesting space. Both the banks have undergone management change. Both of them have been tagged as corporate lenders. From this point forward, the slippages will drop. ICICI reported about Rs 3,000 crore slippages, one of the lowest numbers that they have reported in many quarters. Their normal run rate has been close to about 7,000 to 8,000 crore. There is a general tendency in the market especially with what has happened on the NBFC side to shift to private sector corporates wherever the liability franchises are strong and these two have reasonably strong CASA flows as well as strong liability franchises. The corporate cycle is picking up. IBC resolutions are going to be happening at a faster pace over next 12 to 24 months and there appears to be a lot of good news in this particular segment. Given the valuation for ICICI Bank, it could be a very interesting bet if this trend continues.