We have had five straight weeks of midcap gains. What is the sense you get in the broader markets? The extreme pessimism is getting corrected now.
Certainly and also the market seems to be telling you that the economy may have actually started to turn and it will turn before the numbers come through. I would argue that broadening of the market is actually good news even if the frontline index does not move very much. In fact, that would be even better because that is where the valuation gap is the highest. If the frontline stocks stay in a range and midcaps and smallcaps were to move up, that would indicate a very healthy market.
What is the sense you get every time the economy bottoms out? Is the market signalling that will always be led by the midcap side?
It does look like there is a broadening of the market. For the longest time now, the market had been led by only a few stocks and that kind of concentration means there is a lack of earnings growth anywhere else. People are betting more and more on a few companies that are delivering growth irrespective of the valuations that you are getting. It is not a good thing and always sets you up for a severe fall.
Typically, a broadening of the market is seen and a greater amount of earnings growth is apparent in more sectors than just a few and that usually means there will be more money taken out from the frontline companies because they are very expensive and rotated into some of the others. If that happens in a systematic manner, you do not necessarily get a fall in the front line companies and that is the best case that we are hoping for.
What could upset this of course is if you get a perverse kind of Budget which disappoints or global issues that may crop up and could derail the growth that you are beginning to see.
We had consumption stocks doing decently this week and one the key reasons was the Nielsen report and the outlook they have given for Q4. Do you think the retail and consumption pack can do well?
Yes, there is no reason. From an FMCG point of view, one would argue that given that the rainfall has been very good and currently, most rivers and most reservoirs are at very healthy levels, agriculture this year should be quite good. We have already seen a price rise across several agricultural commodities. So good crop and reasonable price means more earnings in the hands of rural players and that is always good news to begin with in FMCG and then moving on to the rest of the consumption space. So barring valuations, I would argue that FMCG companies which had eased off a bit in the stock markets, could come back in favour.
Do you have any stock picks for us?
I do not mind making specific picks but the areas that one needs to be looking at positively is rural areas. Farm inputs is one clear indicator, maybe even tractors. On the other side, on Budget hopes, infrastructure and real estate could be two possible beneficiaries.
What are the key expectations that markets would have from the Budget?
One would be removal of the long-term capital gains tax which is a bit of a nuisance and a rationalisation of the dividend tax. One hopes that comes through but from more than the Budget because right now, the levers that the government has on the Budget are far fewer. You are really looking for policy direction and the speed of execution rather than what they can announce, given that they can only at best tinker with import duties and so on.
One is also looking for the willingness of the government to go out and sell large assets where they have no business to be, for releasing money which can be put into infrastructure, paying out to contractors so that held-up work can continue.
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