Is the banking sector ready for a recovery? Ajay Bagga’s analysis

“A lack of euphoria and a very healthy skepticism are giving strength to these markets, even as FIIs pull out and promoters sell. Ahead of Diwali and beyond, Indian markets could find new footing as trends stabilize global,” says markets expert Ajay Bagga. . Edited excerpts:

ET now: Give us an idea of ​​the movements we have seen in the market this week. What’s your take on the volatility we’ve experienced, with the market in the red for most of the week? On the last trading day we saw a slight recovery. Do you think this is the beginning of a recovery or is it just a good one-off day?

Ajay Bagga: Well, it could very well be the beginning. We have lost around 7 billion dollars in FII departures in recent weeks. The main problems have been negative flows, a slowing economy, an RBI that remains aggressive and food inflation that prevents the RBI from reducing rates in the upcoming MPC meetings. On top of that, corporate earnings have been disappointing. Any negative news is causing strong selling in those sectors. For example, gas companies, fintechs and MFIs that are under scrutiny by the RBI have seen significant downward movements. With markets at high levels, there is little tolerance for profit loss and bad news. But this skepticism gives strength to the market: there is no euphoria. In fact, there is a healthy skepticism as people are worried about FIIs withdrawing, promoters selling over Rs 2 lakh crore and IPOs and SFOs taking out another Rs 2 lakh crore between January 1 and October 15. They have been maintained, which is positive. This lack of euphoria and healthy skepticism are adding resilience to the market. Ahead of Diwali and beyond, as the US presidential election approaches, we typically see a global market rally. Historically, US markets are weaker before elections and then recover strongly, which could also support Indian markets. Therefore, this could be the beginning of a recovery.

ET now: Over the past few weeks, including this one, Nifty has underperformed its global peers for three consecutive weeks, closing lower. One important reason is that FII flows are coming out of India, while the chinese history remains central. Record FII sales in index futures have surpassed March levels. Has this trend ended or does China’s story still have more impact? What is your point of view?

Ajay Bagga: As we saw on Friday with China, when the People’s Bank of China announced more stimulus and released around $110 billion for stock market investments, Chinese markets rose more than 3%. China’s story will continue. Will it be at India’s expense? I don’t think it will be that way for much longer. The reset that was needed is probably 50-60% complete, with perhaps another $5 billion in outflows. But the positive thing is that we have absorbed those departures. If $7 billion has gone out, $7.6 billion has come in through DII. With the new month, around $2.5 billion will flow from mutual fund SIPs, along with EPFO, insurance and other funds. The factors driving FII outflows have been three-fold: stimulus from China, a stronger dollar with the dollar index above 103 and challenges within the Indian market, including high valuations and slowing growth. However, the long-term investment thesis for India remains strong. As the US presidential election concludes, we could see a reversal in emerging market flows. Right now, Wall Street is favoring a deal with Trump, which is positive for the dollar but has hurt India a bit. By November 6-7, we should have more clarity on the US presidential election, which normally drives the US market and will potentially boost the Indian markets as well.

ET now: Second quarter earnings have been muted and failed to impress in the early days. However, the axle bench and the figures from the IT sector surprised the market. What was unexpected in these sectors and which industries do you think will see improvements or downgrades in the future?Ajay Bagga: A big disappointment has been the consumer sector. We were expecting a revival in rural demand with the festive season, but management comments suggest this could be delayed by a quarter or two, which could be a drag. We need a monetary or fiscal boost to stimulate private consumption. Although GDP figures will reflect this with a lag, leading indicators of private consumption (a key part of our GDP) do not look promising. However, government capital spending is increasing, which should benefit capital goods companies and their suppliers. Electricity companies are also expected to perform well. Banks have faced challenges, but appear to be recovering, and technical indicators also point to improvement. In particular, private sector banks could see a resurgence in the next two quarters. IT sector remains stagnant; While it has performed well recently, following the results, there are few buyers in the space, so it is best to take a wait-and-see approach rather than jumping in right now.