State-owned companies’ stocks face correction; new-age stocks rise as growth momentum returns: Ajay Bagga, Elyments Platforms

ET Now: Since the damage was coming from the macroeconomic front, tell us that since the recession concerns in the US are easing, the US seems to be on a disinflationary trajectory, the kind of economic data that is coming out, the talks are pointing to the Fed cutting rates in September and therefore expectations are building up for other central banks only. But in such a scenario, what could be the chances and of course this is good news for the markets but then I wanted to understand how would the IFIs approach emerging markets in such a scenario when rate cuts are going to happen?

Ajay Bagga: As you mentioned, this is the best week since November for the US markets. It’s the best week of stock market gains in over a year for the Asian markets and for the Japanese markets, it’s been a great week. So, we started Monday with three big concerns. One was the US EconomySecond, there was the divestment of the yen carry trade. And third, the geopolitical risk if Iran took any action against Israel and how big that action would be.

The big risk came on August 12 and 13, the day of the destruction of Solomon’s Temple, and the US assessment was that Iran would attack Israel on the 12th or 13th in a symbolic gesture. That did not happen. It was a big relief for the markets.

What happened to the US economy? A deflationary trend in both the wholesale and consumer price indexes, as well as very good figures for retail sales growth and better than expected figures for unemployment benefit claims. So, overall, a Goldilocks-type US economy with negative price action and an economy that managed to hold its own, which was a very positive factor for the markets.

As for the yen carry trade, the Bank of Japan has issued appropriate comments. Next week, the Japanese parliament will summon the Bank of Japan governor and also the finance minister for a review. There is talk that the Bank of Japan will not raise interest rates further. In fact, hedge funds have returned to short yen positions, which had been reduced by almost 60%. They have again accumulated short yen positions and the yen has been seen to fall from levels of 141 against the dollar to 149, which has helped the Japanese market and helped to reassure carry trade investors.

What does this mean for FPIs? Well, we are now looking at a 25 basis point cut in September. For the rest of the year, it looks like there will be a 90 basis point cut in total. When there are rate cuts in the US, normally the dollar starts to weaken. As the dollar weakens, there are increased flows from emerging markets and flows to growth segments in emerging markets and that is what we have been seeing with the IT issue in India; in anticipation of those moves, the market is already moving. So, three major factors did not turn out as bad as we had anticipated earlier in the week and the markets are closing with good momentum and we expect this momentum to continue from here.

ET Now: I also wanted to understand a very interesting trend that we saw: State-owned company stocks have taken a backseat. Stocks like HALBDL, IRFC, all have fallen more than 20%. While new era actions as Zomato, Online payment, PB Financial Technologyare back in power and have in fact almost doubled from their 2024 lows. Is that the trend that could be seen, is it likely the return of growth? There could be further legs to this rally, Shares of public sector companies Taking a supporting role?

Ajay Bagga: So what we have discussed before, defense And the railway stocks, which are mostly in the public sector, had become very overvalued and much of the future performance had already been priced in. So it was time for them to undergo a correction. We have seen very good results and there is growth in revenue and profits, but the valuations have been stretched out over several years and this kind of growth continues. So it was quite feasible that we would see some consolidation, a breather for a few months and then the next leg up would begin as the execution took place.

As far as new economy stocks are concerned, it’s a function of growth and momentum being a factor again, and we’re seeing that buying. So, again, a lot of this is based on future profitability. There are some that are already profitable and have recently gone public as well, but most of these stocks are on a future growth trajectory, that’s what the market is buying. So, it’s a sector rotation that’s happening. Is that valid? Time will tell. I personally would like to see cash on the cash flow statement.

So, companies that generate positive cash flow and we don’t just value them going forward. But who are we to argue with the market? There is good demand for those stocks. So, I will stay on the sidelines and watch it, but I would still bet on companies that generate good cash flow and defence and railways will come back, but we will need some time for the valuations to justify themselves. State banks came back up quite well, but now we are seeing margin compression. So, we are looking for new catalysts, new drivers.

Credit is growing but deposits are coming in at a fairly high price. So, margins are getting compressed, net interest margins are getting compressed and that will be reflected in future results, which is why we have seen a sell-off in these two IFIs and domestic mutual funds have reduced their positions in banks. Even private banks have seen some amount of selling in July as per the data released and we have seen that continuing in August with public sector banks being hit the hardest because they clearly have a deposit problem. They cannot raise deposits as fast as private sector banks and the cost of deposits is rising.