Keep your shopping list ready! Time to start bottom fishing soon: Ajay Bagga

Would you concur with the fact that despite all that has taken place we have gained an excess of a percent for the week, the Nifty Bank has gained about 1.4% and even IT has performed quite well?

I would totally agree and why I take October 1, 2021, as a starting point because we started seeing a lot of FII outflows last year starting October 1. If you map it to October 1 2021, the Nifty was at about 17,500. So we have not gone anywhere for the past one year. There have been individual sectors and individual stocks which have done very well especially if you take the top 500 stocks, you could have made a very good portfolio, which would have outperformed but the index has gone nowhere, all the passive investors have actually not made much money. SIP investors have made good money because if you regularly invested over the last 12 months and you bought more when the market was at the lower levels you ended up making 10-11% over the year so SIP investors are the ones who have made money.

Overall looking at the macro, the trouble is international very clearly and it is not going away in a rush. I agree with Nooresh that the bottom is not formed. If you apply the Rule of 20, which has worked every time the S&P 500 has bottomed from 1926 to now, the Rule of 20 comes in, which is the PE of the S&P 500 plus the CPI. Right now it is sitting at a 26 level, 26 to 26.5 level, so either the markets have to fall or the earnings have to go up. Earnings I am seeing going down rather. The third is the CPI has nearly halved so that will take 6 to 12 months to happen. So I do not see in a rush the market bottom coming in unless the S&P 500 falls about 20% then you will get a market bottom and this Rule of 20 is ironclad, it is not something I have made up it is from 1926 every time the market has bottomed the Rule of 20 has been held up. So we are not at the market bottom. India will get impacted by it, the place to be will be domestic cyclicals only.

You have to stay in domestic consumption, domestic cyclicals, the rest of the world is feeling the slowing growth and a strong dollar, rising rates all three are negative emerging markets, all three are negative for India as well.

What is outlook on the entire defence space because that has really been gaining prominence of late, a lot of these stocks have been closed to their life highs and there have been a lot of steps that have been taken by the government on indigenisation, there has been the push on export front as well. Do you believe that we are just at the start or at the cusp of a boom within the defence sector?

Absolutely. We are one of the biggest importers of defence equipment and the government is very clear of going
atmanirbhar on this of self-reliance and given the PLI schemes that have been rolled out, given the kind of support. I have spoken to a lot of the smaller defence suppliers which are supplying into these listed companies and what used to happen earlier, they would have to do the proof of concept at their risk and a lot of multiple crore prototypes would get (1:10) shared after a lot of R&D and a lot of effort going into it that was the big risk that these suppliers used to run. The situation has changed very dramatically, the government is giving a lot of support. There have been emergency measures at times where the purchasing policies have changed for emergency procurement and orders are coming in and these suppliers are really having full order books and this is one level below the listed companies that I am talking to and it is looking quite rosy. The order pipeline is very clear. The government is clearing bills and there is a very strong push from the PMO downwards to get the self-reliance going so these beneficiaries will be there.

Of course, there are the shipbuilders for example who have been there, the public sector shipbuilders for example, they have been there forever and ever but the good thing again there is that the order flow is ratcheting up so I would say defence sector remains a buy even at these levels and it is a multiple year ownership that you can have in the defence sector.

We did touch upon the defence sector but earlier we have got your take on the financials as well as IT pack as well but in the week gone by we have seen a couple of sectors that were laggards, case in point being the pharma sector as well as the metal sectors, the counters in these particular sectors did rebound quite significantly. Do you expect this up move to continue and not just these two apart from that of any other sector as per you because we will be kicking in the earnings season because of the dollar and the other macroeconomic data, a lot of ups and down is expected, any other sector on your radar?

I think clearly you can look at paper. In paper we are seeing a lot of news of price hikes again coming in, shortages being there, imports getting impacted so the domestic players are able to release much better cost. So, look at the paper sector, it is a very small sector but there is trading opportunity for the next three-four weeks. I would say look at the specialty chemicals after a correction. Those are looking quite decent so I am looking at opportunities there as well. But the broad-brush remains financials, credit growth is returning, domestic capex remains good largely by the public domestic capex, domestic consumption remains good. The issue with India is the valuations. We are still on a very premium pricing to most of the emerging markets, of course, to the developed markets and with the strong dollar, rising US rates, slowing global growth that normally ends badly for India so I am not very comfortable.

On the broader Indian market we could be sideways. What we have done well is thanks to the domestic flows, we have held up over the last one year despite a lot of FII exit from India. We manage to hold steady and deliver broadly 0% growth but going ahead we could get challenged on that and I am seeing a compressed fall in the markets coming up. Over the next four to six weeks I think we will get a compressed fall in the markets globally and we will get a little bit of hiccup on that and that will be a good entry point. So my suggestion is keep your quality stock list ready, keep your shopping list ready. We will get a chance by November, December to start bottom fishing and that might be a good time to go in. Right now again on the sidelines cash is king, maintain your cash positions and keep doing your SIPs.