Stock market outlook: No time to add to asset allocation despite market rebound: Anand Tandon

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“For the equity allocation, the rate sensitives, especially the banks, would do reasonably well and should outperform many other sectors. We have seen evidence of very strong credit growth and it is likely that ‘there is increased pressure to increase deposit rates as well,’ says one market expert. Anand Tandon.

It looks like the markets are welcoming the long-awaited move from the Reserve Bank. Rate-sensitives are in the forefront, with some defensives taking over the back seat. What do you think will lead the market now? Will it be the banks?

I don’t think the market is far out of the woods. Expect the cycle of rising interest rates to continue for longer and I don’t think inflation is going down anytime soon.

Against this backdrop, all risky assets will remain depressed for longer than the market thinks. I’m not saying you should consider increasing the asset allocation to equities in this environment; for the equity allocation, I would still say that rate sensitive sectors and especially banks would do reasonably well and should outperform many other sectors. We have explained the reasons several times in the past. The final reason that can be added to the list is the fact that we have seen evidence of very strong credit growth and there is likely to be increased pressure to raise deposit rates as well.

This means that companies that have strong enough liability franchisees are the ones you should consider adding now. For about a year, we’ve been very much looking at companies that have the ability to lend to business credit, because that’s the sector that’s been most under-penetrated, so to speak. This was largely the domain of public sector banks.

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Now we also need to start looking at the liability deductible.

Would you use this market bounce to book as this is of course also a short cover of an extremely oversold area. It should not be forgotten. How would you protect your capital? It doesn’t look like the worst is behind us as global markets are clearly not out of the woods?
This is why I prefaced my remarks by saying that now is not the time to increase asset allocation over the long term. It’s a tactical game. The market was largely oversold and a rebound was therefore expected. Usually as soon as a policy statement is released many shorts are cut and therefore if the policy is not a surprise to the market you would have a move in the other direction.

So, despite a rate increase, we see that markets are rebounding largely because this rate increase was already expected. I speak only from a tactical point of view. Obviously this bounce can continue for a few more days and maybe go a bit higher but from a strategic perspective risk assets are still very risky at this point and I would say that’s not when to increase asset allocation to equity.

Soon, debt will become reasonably attractive, especially assuming that rate hikes will continue for another two quarters and that will likely mark the near-term peak. This could therefore allow you to obtain very good returns as the rates start to fall again. So over the next two to three years you would get pretty good returns even in the debt markets.

Do you think the negatives are sufficiently assessed in the IT sector or is there still a case for further downgrading of the sector if growth does not go as expected?
Growth forecasts for this year are already very moderate. We are looking at mid-single-digit growth and it is unlikely to decline in the near term. I would say that while the sector remains expensive compared to its prior periods, we also have to take into account that the overall market is quite expensive.

Now, the Indian market’s outperformance is reaching a stage where one would expect to see foreigners struggling to buy India versus some of the other emerging markets due to the relative outperformance. In this context, computing at least for me is at least a weight on the market. He might have been a little underweight earlier, but most of that has been taken into account now.

There does not seem to be a problem with the dynamism of demand, at least for passenger vehicles?
Some segments are doing very well, especially SUVs. This reflects the type of economy we find ourselves in. In the rural areas, there is pressure in terms of income, etc., and that translates into lower sales or moderate, lower sales growth or whatever of tractors. We are also seeing lackluster performance in the two-wheeler segment.

We’re now left with only four-wheelers and that too at the high end, which basically tells us that most of the demand is coming from urban middle-class earners with stable jobs and where jobs offer can – also be higher salaries. This is the type of market we find ourselves in, so sectors aimed at this particular segment are likely to provide some sustenance in the markets we find ourselves in.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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