The Nifty is back around the 6,000 mark and the Sensex at 20,000 levels. But talk to anyone on the street and the feeling is quite despondent. It is surprising that the Sensex@20,000 is completely not in sync with the broader macro economic situation. Recently, RBI tightened interest rates to manage the rupee. Bond markets went into turmoil with income funds wiping out all gains made over 6 months in one day. A day later and thereafter - it is business as usual. In fact, the PM and FM are trying to soothe frayed nerves saying that the measures may be rolled back sooner than later.
A look at the results and conversations with industry people reiterate that nothing rosy is happening at the ground level. Earnings season is playing on predicted lines. Then there is the big unknown as far as the elections are concerned. Then why is the market not tanking?
We took a look at the Nifty constituents to see if there are any patterns emerging. On a yoy basis, the Nifty has given almost 16% return (which is very good and slightly better than long term Nifty return averages. But not many people or rather hardly any people have made money. The reason is very simple; the market is suffering from bipolar disorder. If you are not in the select Nifty Fifty then you are very badly hit. I almost feel like marketing our lowest cost Nifty ETF Fund but I'll leave that for another day. On the other side, defensives weight in Nifty is quite high, and that is preventing a major crash.
Coming back to the Nifty, there are 15 stocks in the Nifty that are trading near their 52-week highs and 11 stocks are trading near the 52 week low. The stocks trading at 52 week highs are the usual suspects like FMCG, pharma, private sector banks, IT and Reliance which has finally seen some strength on back of gas prices.
The stocks trading around their 52-week lows are also the usual suspects like public sector banks, other public sector undertakings, real estate and metals like Tata Steel. Needless to say, 52-week lows are dominated by PSUs. Surprisingly even so called defensives like NTPC and a resource-rich entity like Coal India are part of the infamous list. Besides ONGC, the only other public sector company to buck the trend is Power Grid.
The market is also trading in a tight band. On the average, the gap between high and low is only 30%. Only 3 stocks are out of this range - Jindal Steel, JP Associates and NMDC - where the 52 week high is more than twice the 52 week low. Is the market signalling a breakout either way? Wish we knew which way!
The PSU, as a pack, has been hit very badly for obvious reasons. It's almost tragic that Coal India, is trading near its 52-week low in a country desperately needing coal. Lack of clarity and abysmal production track record are just among the reasons. If you are unfortunate holder of the PSU pack then your portfolio would be underperforming in a very big way. To refresh your memory, in the last bull run, the PSU bull was running amok.
There is a huge valuation gap between the private sector and the public sector banks. At one end you have the private sector bank trading at 52-week highs and on the other hand you have the public sector banks trading at 52-week lows.
FMCG stocks are on a roll. Post open offer closure, HUL rallied to touch almost Rs700, up 15% in a week or so. If you are holding to pharma or FMCG stocks, you would have been laughing your way to the bank, unless of course you are stuck with Ranbaxy. IT stocks again are doing well because of Rupee depreciation and US recovery, and moreover God is back at Infy.
So is the trade of the decade - long PSU banks and sell private sector banks? Or long cyclical and short defensives? I discussed this with our Head of Research. Unlike me, he doesn't believe in the reversal to mean theory. He has extremely strong views that the private sector banks will outperform the PSU banks and that defensives will outperform cyclicals. As per his analysis, over the last 10 years, private sector banks have been trading at average premium levels to PSU banks. The next two quarters will see the peak of NPA menace for the PSU banks and there is still time.
Contrary to popular perception, even defensives are trading at average premium to cyclicals. The cyclical stocks outperformed defensives most of the last decade. Only in last 3 years or so, defensives have caught up. We are not at the peak, which means there is still room for divergence before actual mean reversal takes place.
To conclude, stay in defensives and wait for the overall macro economic situation to recover before jumping into cyclical stocks. First indicator would be interest rate cuts and that looks delayed by at least six months unless Governor gives a positive surprise in month end.
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