Ajay Baga talks about why the market is going up despite headwinds and 5 sectors to bet on now

Sure, the setup is very good and if we see a lot of negative catalysts coming in especially this week with the visit of Nancy Pelosi and the Chinese armed drills off the Taiwan shore, but we still see the Taiwan market up almost 2%.

A year ago, if someone had told us, this is how July 2022 would look, I don’t think anyone would have been positive about the stock.

So what exactly was happening was that more than the new streams, the short coverage globally was happening. If you look at the top 50 stocks that were shorted, they are up 31% in the US over the past three weeks.

In India, we are seeing a resurgence of foreign investment inflows. We saw a positive number for July and August that was also positive.

So what we see at play is that as of October 1 we’ve lost about $33 billion in outflows from FIIs as of June 30. The market came from 17500 in Nifty to a low of 15200 singles and then rose very well. On a 10 month basis, we stand today close to the break-even point in the market. So it’s not a very good performance if you see over a 12 month or 10 month period but not bad whether you see how many stock markets have gone into correction or bear market territory this year. Obviously things are looking better.

Are the markets in the grip of some euphoria? not at all. There is a lot of doubt. With a 50 basis point rise by the central bank, we saw a nice rally in the market until profit taking came in the last half hour. Overall, the market gave a good response to the RBI’s rate hike that was unimaginable even four months ago.

Typically, the market tends to outperform in the first 12 months after a price-raising cycle, and that’s probably what catches up. If we look at the Fed in the first three months, the market goes down really badly and then over the next 12 months the market tends to give a pretty good return, we’d probably be in that territory.

What is your position when it comes to stock picking within the entire banking field given that this sector is active. What high-quality banking names would you choose that are expected to generate smart returns in the long run?

Top four – five private sector banks is what I’m going to stick with. Usually flatter public sector banks to deceive. This time there has been a lot of talk that we will see a bill in Parliament where the government will reduce its stake to 26% and retain control while moving forward with a lot of divestments. Now that is now ruled out. So we keep seeing this kind of catalyst in public sector banks, but I would say stick to quality in this scenario.

We have seen losses in the treasury even for the best banks as we are not used to experiencing trading losses of this magnitude. But the credit dimension is improving overall. Credit growth returns year-over-year, and retail books remain very strong. NPAs are within a very manageable level. So as growth improves, banks will be the first to go into place. So I suggest you not look at transformation stories and avoid public sector stories.

What are some of the hottest stocks on your long-term radar?
Again the first two sectors will be banking and automobiles. The automotive sector is usually the preferred sector but we saw some slight correction in it. The two wheels won’t really rebound until the rustic demand I’m anticipating is back in festival season or this time after the harvest.

Then I will pick the capital goods sector especially after the overall RBI story of 75% capacity utilization which is an indication that in the next 2-3 years we will see a lot of capital goods sold.

My eternal bet against IT has been the worst performing sector over the past year and has been sold off heavily by FIIs. But given the upcoming US recovery in growth stocks and no matter where the yield curves point, these tech stocks tend to be evergreen. So, by comparison, IT will be one sector to look at.

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