Ride the wave of rotation trade in both autos and durables: Ajay Bagga

On stock market reaching new highs
We were the top performing market by far in the world and the momentum has continued into June. Last Friday, we had a little bit of a breather and that is normal when the market is performing so well and has gone up 5% in a month! There is a catch-up trade happening in India. The other good news is that after Rs 18,000 crore of outflows by FIIs over April and May, we are seeing net inflows from FIIs in the first four days of June. So, that has been quite commendable and now the market has discounted that the second wave has plateaued and by June end, we will get back to the February kind of numbers where all India numbers could be in a 10,000-15,000 range. There is also the hope that the vaccines will start gaining traction around August,

On the economy side it is very clear that this April to June is much better than last April to June as companies were more ready, people were more ready, the administrators and the government were more ready and we did not have a general lockdown like last year. So manufacturing has managed to carry on, services are impacted, the rural economy has got impacted because of the infections but in terms of traction, the rural economy is still enjoying a lot of prosperity because of nearly five years of good monsoon and good remuneration on the crop side.

So the situation is better and my personal analysis would be that just like last year we are overestimating the impact on the economy, we are overestimating the rebound time but the markets have got it right and the markets will continue to go up.

On auto in Q2 and Q3
I would say rotation is the theme now and we have to get back into the reopening or the recovery trades. Those are the sectors which will outperform. The banks have shown the way, the banks and the NBFCs will lead the way, they are the biggest sector in India and they will be the biggest sectors leading the recovery trade but you can look at autos, you can look at materials, industrials there will be a lot of capex coming by early next year and in anticipation of that markets will start moving up so travel, tourism, aviation, high contact intensive trades, restaurants, hotels I think these will be the ones, all the entertainment sectors and media.

I would say it is time to rotate. One has to look at portfolios again and some of what worked last year, will continue to work this year too. So, IT and pharma are evergreens. Also everybody has deleveraged, everybody has cut costs and so the Indian industry is much better in terms of preparation for the future. The capex has been under-invested for now nearly seven to eight years and right from 2011, the capex cycle has been stalling in India. We will see the capex cycle returning but the first return will be the Indian consumer. I would say at the reopening trade, one will see more to start within the bank and NBFCs, insurance and mutual funds. They will outperform. Then will come the consumer durables and autos.

The pent up demand will come back in those and then the reopening in the high contact zones will restart in another three to six months. Third wave mostly will come July to August is what the doctors are saying but the third wave historically and across the 16 countries which have seen third waves already it has not got that higher mortality or that high a hospitalisation and of course if we can get the vaccinations running at we are running at 23 lakh-24 lakhs a day and hopefully by July-August if we are in the one crore zone then it is a different game altogether. We might not have that severe a lockdown in the third wave and then the recovery trades really take off but time to rotate out into the recovery sectors.

On auto ancillary space
There is some amount of trepidation based on the semiconductor shortage and volume may get impacted by the supply chain issues that the entire sector is facing. But across the world, the Japanese automakers rallied very fast on Thursday despite shutting down their Malaysian plants because of the Covid outbreak. So what the market is looking at is three months, six months hence and the semiconductors issues.

I have been reading all the earnings calls of all the major automakers around the world and they seem to be getting through with it. It is not as bad as we had anticipated even two months ago. AMong auto ancillary companies,

had run up too much already. Otherwise it was a great set of numbers under great management. again is very much linked to the US recovery which is very strong. So they will tend to do better out ahead. In the rotation recovery trade, one has to be present in auto and auto related sectors. We should ride the wave and there is a strong wave coming in terms of the rotations and both autos and durables will do well in that scenario.

What is looking good when it comes to the midcaps?
The auto ancillary pack is looking good as the opening trade is getting traction. Second is the housing finance companies. That’s a very clear standout. The leaders are on the large cap side but there are lots in the midcap segment in housing finance companies which seem to be doing well. We are going to see good liquidity and low interest rates for a long time. All the housing finance and the general finance companies will do well. I would say the truck finance companies will follow once the housing finance companies’ run is over. If you would like to be early in the curve, look at the truck finance companies like Chola and Shriram. They will join the party with other NBFCs. So those would be my top picks