Why is Ajay Bagga cautioning to stay away from the markets for now

In September, we have two big events were held, the
Federal Open Market Committee
meet and the RBI Monetary Policy Committee deliberations. In October, we have Diwali. So, what are the targets that you have for Diwali 2022?

It is going to be tough. Today, I think, it was just a relief rally on the base of Bank of England’s intervention leading to better yields for the UK gilts. That had a spill over effect on the rest of the risk markets. But things are not looking good. Inflation has come pretty high for the ECB and rates are going to go up. In India, of course we are going to have a blockbuster festival season. Personal consumption and expenditure are contributing strongly to India’s GDP. So, we should be okay as far as the economy is concerned.

On the markets front, I am very cautious now. I have always advised to be cautious, but I think now we are entering that last squeeze in the markets, where we will see some panic selling over the next month. Short-term holders will start losing faith and you will see accelerated selling coming in.

So, October is not looking good to me at all, and I would say stay away from the markets for now. Do not take positions, the longs especially can get cut very badly. Long-term money can be put, long-term money stay invested because this will eventually turnaround in three or six months. Maintain long-term positions but avoid new positions. Shorting, again, I am not advising because central banks have too much ammunition. As the Bank of England intervened on Monday, we thought a Lehman-like situation is going to happen and we were discussing the kind of yields that were coming in England and the major pension fund managers that would have defaulted. It could trigger a domino effect in the US pension funds. This is one of the biggest categories that got averted by the Bank of England’s intervention. So, shorting is not going to work because the central banks have a lot of ammunition and they are very trigger-happy to step in. Thus, since longs are not working, shorts suffer the risk of central bank involvement. I would advise to stay away from these markets.

You have pointed out that we are inching towards, perhaps, the last stretch and there might be a last-round of panic selling. So, is it a good time to keep the shopping list ready in terms of the stocks and sectors that you would want to be positive on, with the two to three years’ perspective. If yes, what is there on your shopping list?

Definitely. I think, we should stick to quality on a yearly basis. Also, I am extremely positive but there might be some pain points of which I am warning of. The staples have already run up too much. This quarter’s results will really give us an idea because what we are seeing in staples is even though revenues have gone up, and they manage to maintain profits, the volumes have been sluggish. The RBI governor was saying that he is still waiting for an uptick in the rural demand. Having said so, there is a hidden stimulus by the government.

Nearly 3 lakh crore worth extra food and fertiliser subsidies are going into the rural economy. We expected the last Budget to be welfare-oriented, given we have general elections in 2024. So, anything to do with consumption, will do well in India. This we are very sure of. Right now, I would say FMCG, cement, banking and auto would be the go-to places. In defensives, pharma normally works. It has started showing some traction in India. But I am still worried, given the track record of the last two-three years. IT is going to get hammered again, post the results. So, IT is a no-go zone for now.

You did touch upon auto as one of the sectors that you like right now. Next week, Monday onwards, the auto sales data will be out. This time across, the segments are expected to see positive-growth figures on the back of festive season sales. What do you sense? Most of these counters have already given good returns from the OEM perspective, is there anything that you will be looking out for? What is your take on the two- wheeler stocks? As they are still not great in terms of the returns they have given to investors, do you expect some recovery?

You know two-wheelers will be a very critical area because a lot of sales will happen in the semi-urban and rural areas. Now, with the harvest coming in this week onwards, we will see that money coming into rural areas. So, two-wheelers will see a big crunch time and we will watch that carefully. We have had nearly three years of underperformance by the two-wheeler space in terms of volumes. So, we will be looking at that very closely. The higher-end two-wheeler companies are doing much better, the urban demand has returned quite fast, and these companies are outperforming. But the two-wheelers, as a broader space, are still suffering in the absence of rural demand. Now the interest rates have gone up over the last three months with a little more impact on the EMIs. Rate hike will also come in.

Nearly 60-65% of the offtake in the entry-levels is through NBFC financing. So that does make an impact. Very critically, I would say right now the passenger vehicle majors are looking much better. The supplies are better. You have to see the value chain and be sure that none of the ancillaries in those companies are Europe-dependent, because in Europe the demand is going down for quite some time. Till at least for six months, we might have a small recession in Europe. So, Europe demand going down will hurt the companies which are linked to it for their sales.