Two sectors Ajay Bagga is bullish on

A few months down the line a good opportunity will definitely emerge in IT, says independent market expert Ajay Bagga. Edited excerpts:

First up, the earning season so far has been quite weak and the earnings scorecard for you will also come up. Let us talk about the IT earnings. What is your read through?

The IT earnings have been as per expectations. They are lower than previous years and we are seeing a postponement of new orders coming through. As we were expecting, the BFSI slowdown will lead to IT orders also slowing down for our service companies, so the large companies have shown poor results with respect to previous years and with this kind of single digit growth there was a re-rating of the IT sector.

The good thing is that the sell-off in IT has been going off for nearly a year and it is a very under-owned, very unloved kind of a sector. I think a few months down the line a good opportunity will definitely emerge in IT. Right now it has just been consigned to one side and IT weightage in the Indian markets also is down to a very low level of about 12%.

We are also watching out for earnings from a lot of these auto companies which are lined up. Do you expect things to improve both in terms of the top line as well as the margins?

Yes for commercial vehicles and passenger vehicles. Yes, two-wheelers have been hurt by the lack of rural demand. We have seen those headwinds and a lot will now depend on how the rural economy fares, given that there is some question mark on the monsoon. Overall this quarter, we really see BFSI, Bank and NBFCs and other financials leading the way on year-on-year growth on good bottom line growth. We will see the oil majors showing pretty good growth and we are expecting autos because their input costs have been going down. The material costs have come down over the last three quarters so the new contracts are favourable to them while they have been taking a price hike. So apart from the two-wheeler segment which is suffering from the rural demand not yet picking up, I think otherwise auto should do well. And there is a lot of connectivity for some of the auto majors even into defence contracts and we are seeing some flow through there. So overall I would say a very domestic kind of stock picking is what we would favour domestic and defensive.

You mentioned pharma in the earlier. I would agree with that. You know pharma is a multi-year non-performer and finally might be turning the corner and a lot could be helped also because of the defensiveness. With May coming up, May and June seasonality is not very good for markets. Normally there are a couple of big events lined up, will the Fed pause after a final rate hike? I think that will determine a lot of the market direction. Expect volatility for the next 15 days going into May 3rd and then the Fed move will really decide the rest of the market.

Markets are a bit complacent. They are factoring in a 50 bps rate cut in the US by December so consensus is again recession like it was in last September we did not see the recession. But we are seeing a weakening European and US economy. Is that going into a full-blown recession leading to deep cuts is anybody's guess right now but the banking trouble in the US definitely has a credit impact that will also lead to some amount of slowdown. Markets are fragile, markets are poised in a very weak manner, and post May 3rd bad news could be taken as bad news by the markets. And finally we could see going towards a bottom formation in the US markets sometime in May June that would be my expectation. So very cautious still we have not gone anywhere since September 2021 when the market was at 17500 in the top end of the market, I think we will have to wait this out, we are not getting out of it in a rush and there are very few catalysts to really take the markets up right now. We might have six months of sideways markets. Good thing would be if the US market bottoms out, that will help emerging markets and India to get flows back and we could then see a rally happening but a lot will depend on how the US market ultimately performs let us see how that goes through.

I know you usually do not talk stock specific but is there any stock that you like at this point of time, any fresh buys or any other stocks that come on your radar?

Yes, banks and banks. Private sector banks, public sector banks. India will continue to grow and banks will be at the forefront. Second would be industrials, so infrastructure related stocks. Pre-election year, normally you see industrials do well, normally you see good spending coming into the economy and as we get into early part of next year, as the election related expenditure peaks, these stocks would have done well. So banks and industrials would be the first to pick. Within industrials, it is cement. Their input costs have been going down and auto. Auto I think this year we will see a pickup, the margins have improved, they have held up pricing while the raw material costs have been going down. So these would be the top sectors to look at.