‘Market ignoring risks; no room for unbridled optimism’

Edited excerpts:

What is happening in the mid and small-cap space? Are you worried?

The market is buoyant with a year-to-date (YTD) return of about 11 per cent in the Nifty. 

But the real action is in the broader market, which is experiencing a strong bull run. 

Nifty Midcap 100 is up by 29 per cent and the Nifty Smallcap 100 is up by 31 per cent YTD. 

There is some justification for the optimism in the broader market; but the quality of the rally leaves a lot to be desired and, therefore, is a cause of worry. 

First, let me explain the positive part. 

An impressive bull run is happening in segments like railways and defence where many stocks have shot up by more than 100, 200 and even 300 per cent. What are the factors driving these stocks? 

The 2023 Budget had allocated ₹10 lakh crores for infrastructure development, of which, ₹2.4 lakh crore was for railways. 

The Defence Production and Export Promotion Policy (DPEPP) has an ambitious revenue target of ₹1.75 lakh crore by 2024-25. 

Unlike in the past, massive public spending is happening in these segments. 

The expansion and modernisation of Indian Railways have resulted in massive orders for railway wagon companies like Jupiter Wagons, Titagarh Rail and Texmaco Rail.

Thanks to DPEPP, ship manufacturers like Cochin Shipyard, Garden Reach and Mezagoan Dock have received big orders.

Many stocks in these segments have shot up hugely in hopes that these massive public expenditures and government orders will translate into bumper profits soon. 

This hope is driving the hyperactivity in these stocks. While there is some economic rationale for the optimism, it remains to be seen whether the hope will translate into reality. 

In the case of segments like shipbuilding, it will take years for the order to be executed and reflected in the bottom line of companies. 

The real worry is that many small and micro caps of doubtful quality are also participating in the bull run, driven purely by emotion and momentum. In this segment, a crash is inevitable.

Why have we seen a strong influx of retail investors in the market? How is it impacting the domestic market?

The Covid-19 outbreak and the work-from-home (WFH) policy led to a spurt in new demat account openings. 

The one-way rally in the market which took the Nifty from the March 2020 low of 7,511 to the October 2021 high of 18,604 enabled the newbies to make a lot of money. 

The FOMO (fear of missing out) factor attracted more newbies into the market, and this trend has revived after a lag when the market corrected and consolidated. 

The ongoing rally in the broader market is attracting more retail investors and mutual fund investors into the market. 

The total number of demat accounts has shot up from 40.09 million in March 2020 to 126 million in August 2023. 

A healthy trend is the steady increase in SIPs: ₹15,814 crore in August. This is impacting the market positively.

Please share your views on the banking space. Is there more steam left in the sector?

Despite the recent run-up, the banking stocks are fairly valued within the overall market which is highly valued. 

The banking sector is in the pink of health with declining NPAs, reducing provisions and improving profits in the backdrop of impressive credit growth of around 15 per cent. 

Even though there is some pressure on NIMs, the prospects for the banking sector look bright.

Can IT be a bet at this juncture if a person has a two to three-year investment horizon? What is your view on the sector?

For an investor with a two to three-year time horizon, the IT stocks are good buys now. The digitisation trend remains strong. 

Since the US economy is heading for a soft landing, the IT sector is likely to start getting increasing orders soon. Big deal wins are already happening. 

It is important to remember that many IT majors have been phenomenal wealth creators with excellent standards of corporate governance.

What is your view on the overall market? Where do you see Nifty by the end of the year?

Nifty may consolidate around the present levels. The valuation in the market is high. And, at high valuations, the market is vulnerable to corrections. Corrections can be triggered by known risks or presently unknown events. 

A known risk is the surge in Brent crude from around $78 in July to $94 now. The market is ignoring this risk. The fallout of the patchy monsoon this year is another negative. 

If the Fed goes for further tightening to rein in inflation, it can impact the mother market US and consequently other markets, too. Investors should remain invested, but there is no room for unbridled optimism.

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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.

Updated: 15 Sep 2023, 01:27 PM IST