investment strategy: be careful; watch how the market behaves in January-February: Sandip Sabharwal

“January-February are months where we have to be careful as many of the previous falls in the markets tend to occur during these months. I would continue to move cautiously despite the smart recovery we have seen over the past three days,” said Sandip Sabharwal, analyst,

Usually December is such a quiet time, but definitely not in 2021. Do we have Santa’s Gathering?
Someone who hasn’t watched the market swings in this month and fell asleep on November 30 and got up today would think it’s a mild month, only because Nifty rose around 60 odd points this month. December is a month in which the markets generally do not fall at all or very little. This has been the historical trend and generally in the last week of December we see the markets recovering even though they have fallen. I think this pattern is obviously repeating itself.

However, that does not change the general opinion that next year will not be so easy to make money from, because the markets, even if we compare it to 18,500 points from where it fell, are not still not cheap in the context of the fact that we could see interest rates rise and liquidity dry up from where it is now. Thus, January-February are months where we have to be careful, as many of the previous falls in the markets tend to occur during these months. I would still be cautious despite the kind of smart rally we’ve seen over the past three days.

With people going out, ordering, which was a way of life throughout the pandemic and various lockdowns are coming down. Could price increases dampen volumes for a Jubilant or a?
Yes, because this space is reasonably price sensitive and a price hike of 5-6% isn’t very insignificant, because usually these companies don’t take such big hikes. They normally end up increasing by 2-3% and so there could be an impact on demand. These companies held on for a long time, not raising their rates because consumer sentiment was somewhat mixed, but now they’ve taken the plunge to protect their margins, so that’s good. As for something like Domino’s, once the numbers come out this quarter, it will become obvious. As you said, going out has become more fashionable now and people would like to go to a restaurant and eat. But in places like Mumbai, because of the 50% restriction on tables, you don’t often get reservations. Thus, all the restaurant space is free. During the pandemic, ordering from QSRs was all the rage.

Now that people are starting to go out and eat too, how does that affect the volumes of something like Jubilant or Domino’s is something we need to see. I suspect there will definitely be some slowdown in volumes because growth cannot continue as it was and as such if we look at it on pure valuations, although it has gone from Rs 4,500 to Rs 3,500, the evaluations are still not convincing.

A similar thing will happen with real estate as well. Developers in Mumbai or Maharashtra no longer have this advantage of reduced stamp duty. Inflation is also affecting them, as cement and steel prices are on the rise, as are labor costs. The prices would therefore increase a little. Will this have an impact and dampen sentiment in the real estate sector?
Real estate went through 10 years of hibernation where the price fell before starting to rise in the past 18 months. So overall the next two years should be much better. But the kind of improvement in profitability these companies have seen coming out of the pandemic may not happen due to the cost pressures that are being felt. It will be difficult to pass on price increases very easily.

So on the one hand there is a huge cost push. Not so much in cement as in steel, the increases in labor costs are quite significant. On top of that, starting next year, the ultra low interest rate might not be available. There will be a slight uptick from the interest rate cycle and real estate demand is very sensitive. The most rate sensitive segment is real estate and this is something we need to consider.

Equity prices should therefore give us better entry points. These will always be good buys at some point, but we need to get better levels due to how these stocks have risen.

State Bank of India is up around more than 60% year-to-date. Compared to a private sector lender like HDFC Bank, has SBI fared much better this year?
Yes, SBI is one of the best performers in the banking sector this year. This is due to two factors; First, the relatively lesser impact of NPAs, so the accretion of NPAs due to the second wave and Covid overall was much less in banks and that obviously helped all banks, especially banks PSU and SBI was one of the big beneficiaries. Additionally, there were some takeovers due to the termination of NCLT processes in some steel companies earlier in the year.

The second factor was the growth in the value of SBI as its subsidiaries – insurance, AMC, etc. – performed well and the overall SOTP value of the bank including the subsidiaries increased. Next year could be tougher because the president of the bank himself says they are looking at 10% credit growth. This year, the overall growth of the credit system is 7%. Most PSU banks barely go 4-5%.

So going from 5% to 10% could be a challenge and we have to see if they will do it. And on a 10% credit growth, once all of those NPA benefits are gone, earnings growth might not be as significant as the cost base also continues to rise. This is one of the reasons why the banks underperformed and people were surprised because the majority of the positives are already there and we now need a slight increase in credit growth. 10% growth won’t do much for the banks. We need 12-15% growth. Some banks might be able to do this and they will outperform, but with 8-10% credit growth, earnings growth might be subdued.

What we saw in today’s trading happened throughout December – the outperformance of the broader markets.
Yes, the broader market outperformed as the markets sold off, but now the underperformance continues. As some high-weight stocks rose, the mid-cap index may have risen or done better than the overall index, but overall the broader markets began to underperform. because many retail investors, who were investing all the time, have invested heavily on IPOs and so money seems to be stuck now.

So from now on, for the broader markets to outperform, we need not only the markets to stabilize, but also to move higher and some of the locked-in money from retail investors to come out. The enlarged market must become very selective. So, given an overall economic recovery, specific stocks will continue to do well, but the overall movement we’ve seen this year may not continue,

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