Our take on the Market
Is It Time to Shift Some Allocation from India to Us Tech as A Risk Mitigation Strategy?
NASDAQ 100 index is down 11% from its recent peak. The sell off in the Semiconductor segment has been even sharper with SOXX index down 24%.
On the other hand, Indian markets continue to trade around their peak levels.
The valuation differential between the rest of the world markets & Indian markets has widened even further.
Should one move some allocation from India to US Tech?
- US Markets an assessment
The recent sell-off in US Tech has not only been triggered by worries that the US economy is slowing down at a faster clip than expected (unemployment rate rising to 4.3%) and that FED should not have delayed lowering interest rates. There is also nervousness that the massive AI related investments that are being made by the hyper scalers may not translate into immediate earnings.
Our take is that while AI related earnings may not ramp up immediately, it will ultimately do so with a time lag. Hence, in our opinion, any sharp selloff is a buying opportunity.
- Indian markets an assessment
Markets in India trade at near peak levels. While large caps trade at a premium of 10% to historical levels, mid-caps are trading at 50% premium. There are several pockets such as PSU, defence, railways, CAPEX etc., that are at excessive valuations. Some examples of such excesses are:
- Stocks with P/E > 100 – Suzlon, ABB, Siemens, CG Power, Hitachi Energy, Rail Vikas Nigam, Trent, Solar Industries, Dixon, Voltas, Whirlpool
- Stocks with P/E between 70 to 100 – Titan, Titagarh rail, IRCTC, Cochin Shipyard, Havells, Rail Vikas Nigam
What about the argument that liquidity flow will continue to drive Indian markets up?
Retail segment has latched on to the markets, driven by recent return experiences and the sheer one-way momentum of the market.
There has been a surge in retail participation, not only through the monthly SIP route (~Rs 20,000 Crs), but also their participation in the cash as well as the future & options segment.
However, I see supply emerging that may absorb this wall of money from the retail segment and prevent the markets from moving further up hereon.
- Flurry of IPO’S in pipeline may significantly increase supply: – It would not be surprising if over 2 lac Crs of supply emerges on this account, over the coming one year.
- Indian Promoters are starting to divest. It should be noted that they own 40% of the market (~ 160 lac Cr)
- FII own 18% of the market ( ~ 80 lac Cr) – As the valuation differential between India and rest of the world increases, it is very likely that FII will be tempted to withdraw at some stretched levels.
- Govt owns 10% of the market (~ 40 lac Cr) – Govt too will be tempted to gradually sell some of their existing holdings to mobilise funds towards meeting, more aggressive growth targets.
Hence clearly there is risk that the upward trend could stall. Though not sure when!
I recommend moving some money into US Tech from Indian equity as a risk mitigation strategy. As the US market is very technically driven, the selloff in NASDAQ may intensify somewhat more. Hence, this rebalancing of portfolio must be done gradually.
Further, it should be noted that as per the changes announced in taxation regime in the recent budget, Capital Gains on International Equity will be taxed at 12.5% after 2 years. This makes international equity very attractive from taxation perspective too.
