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Next 2 months look dicey for market as V-shaped recovery hopes fade: Sandip Sabharwal

Steel is a decent story to play on correction and as the market corrects, steel stocks, especially the larger ones could be good bets, says analyst, asksandipsabharwal.com.

Yes it is expiry but nonetheless the pressure is just building up and it closed below 11,000 today.
Globally risks are now playing out with the rally in the US dollar indicating risk averseness and many investors eventually realising that. The huge V-shaped recovery they were playing for might not be sustainable with just monetary stimulus as the fiscal stimulus given by many of the large economy wears off and you could be looking at more a W-shaped kind of recovery rather than a V-shaped kind of recovery. So the next couple of months could be dicey in that sense as the markets realise that the sustainable V-shaped recovery that they were looking at might not play out.

In the US, investors are also playing out the risk of the presidential election and the impact of that on the equity markets potentially. There are various factors playing out. Markets were ignoring much of those risks earlier when there was a frenzied upside on and now those risks are playing out. We could see some bounce back from current levels because markets got beaten down around 800-900 points in a short period of time but we should see lower levels over the next two weeks before the market settles down.

Even pockets like IT are scrumming today. Anything there that warrants a relook or is it shaving off some profits?
Most overbought sectors get sold out the most because a large number of traders get into those sectors and on any adverse news, those stocks get beaten down more. The problem with the IT sector as I see it is that a) the rupee remained reasonably strong and that could have an impact on near term margins on the negative side and significant optimism that many of these IT companies are reflecting in terms of their commentary.

I personally think that over the next two-three months, we could see a reversal of that optimism as the impact of the fiscal stimulus wears off, economic growth revival slows down and the entire initial up move towards digitisation because the demand from many companies were forced to invest due to the work at home and adapt their platforms to that, wears off and valuations are no longer cheaper. One should be cautious on the IT sector at the current prices.

What do you make of the metals basket? Are you being very selective here?
We have to be selective in metals because many of the metals which rallied ex of steel, could again see some selloff coming through if they believe that the recovery might not sustain and the way it is played out.

Steel is a decent story to play on correction and as the market corrects, steel stocks, especially the larger ones could be good bets because domestic steel prices have moved up and globally also, the price uptick is there and steel tends to be less volatile as a commodity. Many of these companies will benefit from that this quarter and the next. For investors who want to look at metals as a space for investment, steel could be the better bet.

How are you looking at some of the specialty chemical names because that area is attracting quite a bit of attention. Which are the stocks you like within this space?
Speciality chemicals space has a large number of players and many of these companies actually do not have very high entry barriers in the operations which they have and also pricing. The entire speciality chemicals space got built up excessively and in my view they have very little pricing power. They will show very good results in a particular quarter when raw material prices are subdued and output prices are higher or there is some spike in demand of particular prices but overall as a theme, one should be very careful playing this space. Among the large established companies, Vinati Organics done well over a period of time, they do not have balance sheet concerns and generate cash flow and to that extent, it is a credible player. There are many others but I would not like to recommend any of them at this stage.

Ashok Leyland, Mahindra & Mahindra and even Tata Motors had run up. But look at the cuts — 8% on Ashok Leyland and M&M. Maruti was also down 4% this afternoon. Eicher and even the two wheelers are down. Do you feel perhaps some of the optimism pre festive season was oversubscribed in some of these auto names?
Two things are happening; one when the market falls the way it has today like there is a 300 point fall in Nifty, then looking at individual stocks makes more sense. Some stocks might have fallen 3%, some 5%, some 7% depending on how the trading positions are in individual stocks. I would tend to agree that there was excessive optimism built around auto because just rural revival cannot take auto sales higher than pre Covid levels. You could go to pre Covid levels, near pre Covid levels but not higher than that unless and until there is all around revival because if jobs have been lost and businesses shut down, people are not going to go and buy large ticket auto.

Two-wheelers was a different story because they are at relatively lower ticket prices and because of the need for mobility, we saw a spike there. The two-wheeler demand could still sustain but the question will be on margins because input price pressures have picked up with the rally in steel and other commodity prices and to that extent, the benefit on the gross margin front might no longer be there and volumes will actually be lower than last year.

I would think that in auto, the runup has been very fast and these stocks need to give up some gains before they come back into a decent buying zone although the longer term story still remains decent for many of these companies.

Some of the FMCG names like Britannia, Marico, Colgate, HUL are holding out. With markets falling so fast, suddenly some of these names seem to be the safer plays?
It is the typical market psychology. They are the top defensive plays. Defensive players come up whenever the market takes such a heavy knock because that is where many of the traders and investors take refuge. So to some extent, the growth pattern of these companies are also holding up and could be more sustainable than many of the other cyclical stocks which moved up. But there is very little to read on it. These are marginal moves here and there.

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