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  • Writer's pictureTikona Capital

Fear of heights for short term in markets

Updated: Sep 25, 2023

In quest of sharing investment wisdom with our clients and prospective investors, here is our article in EconomicTimes.com Market Moguls which is an an elite platform, where the who's who of Indian financial markets blog on investment wisdom, strategies and challenges of investor interest. In this article, we delve into the current market conditions and explore the ongoing phenomena of block sales and profit booking by market participants when the markets are at a high. We analyze the tug-of-war between the bulls and bears, the impact of central bank policies, and the potential opportunities in the IT sector.




Synopsis

​Of course, every other day, we are seeing many investors or FIIs coming out with blocks and selling out their stakes in specific companies that are there so this is the phenomena that happens most of the times when the markets are at all time high.


Complete Article at ET Market Moguls


So what are you seeing in terms of the markets now going forward? Should we see this correction and actually a bit of a profit booking that we are seeing coming in here that could continue for the Nifty?


It is quite heartening and last week, definitely, we saw that it is a tussle between the bulls and the bears and we are kind of looking at Nifty breaking that particular high that we had seen in December 22 as such. So, I mean, a couple of interesting things happening. Of course, fear of heights is what is making markets to see this kind of phenomena where you see that at every high levels we are seeing supplies.


Of course, every other day, we are seeing most of the guys or most of the FIIs rather coming out with blocks and selling out their stakes in specific companies that are there so this is the phenomena that happens most of the times when the markets are at high


Last year definitely was full of events that were largely influenced by the central bankers on the inflation or interest rate sides and those issues are kind of coming down. So yes, I mean interesting times bulls versus bears.


Last year definitely was full of events that were largely influenced by the central bankers on the inflation or interest rate sides and those issues are kind of coming down. So yes, I mean interesting times bulls versus bears.


Also I want to understand in terms of just Nifty IT, Accenture reported its numbers last evening. Nifty IT obviously was that underperformer that we saw and nothing exciting has happened in this space now. Fundamentally, maybe some weakness but Nifty IT would that be something that you would look at now and is it an interesting time to enter the space?


Yes that is another interesting point that you brought up. And especially when markets are at high most investors would kind of try to hunt for areas where the correction would have taken place or if there is an underperformance.


We, as investors, as human psychologists, will continue to look at that opportunity. But at the same time, let us dive deeper of what is happening. The growth that was happening in the developed world is actually taking a pause and maybe the impact of inflation, impact of even the interest rates is kind of flowing down, which is what is impacting most of the consumers in the developed world and ultimately from consumers is flowing to the corporates out there and which is what is impacting the spending or tech spending that is where most of these IT companies get their revenues from.


So it will take some time. Nonetheless, these companies are strong companies generating fantastic cash flows, fantastic return on capital employed and even the drivers of business are in place.


But nonetheless, given the fact that we had seen a kind of pent-up demand in the past year because of high base pent-up demand, one factor is that. Secondly, of course, most of the customers or clients are watching the situation and that is why they are kind of deferring their decisions.


Again, I will bring the point that IT is not kind of finished. While there are some bears who would be talking about with advent of AI, IT as a sector is gone.


But nonetheless, with AI coming in, possibly there is further complexity that brings in or comes into the picture for the corporates and that is why the drivers are well in place. It is just that we are going through this economic slower growth or maybe economic moderation in the developed world which is where the IT as a sector, I think it is better to let the volatility kind of settle down.


We may see a kind of a dead cat bounce or things like that which is what we have seen post-Infosys result that some of the companies had bounced back but once possibly commentary comes in, we would see the moderation.


So far in the FY24, we have seen a stark divergence when it comes to the midcap, small cap and the benchmark performance. Despite the sharp up move that we have seen in the midcap and the small cap space, are you still more bullish on the midcap and small cap and what are you advising your clients?


Yes this is another interesting point because most of our clients or any investor would always seek to optimise their returns and given the situation that has got created despite the outperformance. Maybe I think March actually saw a good sell-off in midcaps and small caps and that has come back.


So while this seems to be an outperformance as far as large caps is concerned but at the same time, we have to kind of go deep to see what are the drivers in those stocks or companies as such.



A couple of kind of differentiators that can really crop up is, of course, we have seen supply chain kind of easing off which is what is going to benefit many of these midcaps or small-caps.


Similarly, raw material prices given the commodity or energy costs coming down, a lot of small caps or midcaps are likely to benefit.



And especially, to give you some examples, some of the chemical companies would bottom out in one or two quarters as such in terms of their financial performance and they would start kind of thriving as such.

Similarly, even auto-ancillary companies, they got impacted because of supply chain, because of energy prices, because of demand being slower that is likely to come back.


And lastly, I would say that India continues to be growing at a fastest rate. Most of the customers in the developed world or companies in the developed world are looking to tie up with Indian companies and these small cap, midcap, actually whatever seeds they had sown in the last 10 years or maybe even post-COVID, all those companies are likely to see a fantastic or a very good run in the coming decade while these short-term fear of heights will continue to be there.



But I think as an investor we need to be bullish on midcaps as well as small caps and these 5%, 10%, 15% kind of corrections in such small cap or midcap stocks could be an interim factor as such.


And keep a watch, of course, small cap and midcap carry an additional risk or additional effort to track extremely closely so that needs to be in place as such.


And that is what we are kind of advising our clients per se as far as in this bears versus wolves’ scenario that we are seeing.



Sumit Poddar

Chief Investment Officer & Smallcase Portfolio Manager

Tikona Capital





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