Defensive for banking: Where investors can find comfort in the current market

“If we look at the structure of the market, there is a series of negative developments. Earnings last quarter were weak, GDP growth in the last quarter also fell short of expectations and the Fed’s outlook suggests a slower pace of rate cuts in the coming year,” says Ashi Anand, Founder and CEO, IME Capital. Edited quotes:

ET now: We understand that, if at all, you are seeing strength in the market right now. If we look at the week-to-date moves across the indices, the pharma end is positive. FMCG and IT were among the least losing indices compared to other indices like metals, auto and realty. Do you think FMCG can continue to offer defensive support like IT and pharma? Will this pocket provide some comfort to investors struggling with where to allocate funds in a declining market?

Ashi Anand: If we look at the market structure, there has been a series of negative developments. Earnings last quarter were weak, GDP growth in the last quarter also fell short of expectations and the Fed’s outlook suggests a slower pace of rate cuts next year. There is some positivity in the markets in the near term. However, the long-term outlook remains strong.

In the near term, defensive sectors like pharma, IT and consumer sectors can act as safe havens. These sectors have underperformed in the last two to two and a half years. During this time, markets were driven by real estate, capital goods, defence, railways and other capital formation-related stocks, many of which have outperformed fundamentals. This is why we are seeing more downsides in those sectors. Smallcaps, in particular, created quite a bit of froth, and we’re being careful there.

In the near term, can serve as a protective “hiding place” during periods of volatility. However, the long-term picture for the Indian economy and markets remains very positive. We see this volatility as an opportunity for investors to increase their equity exposure. For sectors and companies with strong business momentum, a correction in valuation can make them attractive. For example, banking offers an attractive combination of growth, quality and value, making it a good option for investors.

ET now: There is an argument that many smallcap and midcap stocks are concentrated domestically and analysts expect strong earnings in the coming quarters. However, midcaps and the broader market mirror the benchmark in their movements. What is your view on the broader market right now?

Ashi Anand: In terms of broader markets, while many smaller companies are concentrated locally, most of the selling pressure is coming from FIIs. That said, small and midcap earnings were hit harder than largecaps in the last quarter. Over the past few years, smallcaps and midcaps have outperformed largecaps, but now, the valuation gap between them has narrowed significantly.

We are more comfortable in largecaps and large midcaps. In a declining market, smaller firms are inherently more risky, even if they are more locally concentrated. We believe largecaps are better positioned to respond to current market conditions.

ET now: Tomorrow is the 55th meeting of GST. Some advertising is expected. What are you expecting from this meeting, and how might it affect the market opening on Monday?

Ashi Anand: The GST meet is likely to have a more sectoral impact. While certain changes are expected, it is difficult to predict what may emerge. There are expectations of rate hikes in certain sectors, but changes in GST rates, being pass-through in nature, generally do not have a major impact on the overall market.

Markets are more focused on larger factors, such as when interest rates will be cut, when government spending will resume and when urban consumption, which has weakened, will pick up. These macroeconomic factors are more important, along with technical pressures such as FII-led selling due to dollar strength and changes in the Fed’s outlook.

We don’t focus on short-term movements but on a broader view. The key question is: when does growth return, and how do these technological pressures evolve? These are the factors that will shape the market going forward.