Momentum strategy works in market now: Ajay Bagga | Economic Times

For the right asset or at the right FOMO level, there is enough liquidity which will come chasing and that will give some legs to this market, say the market expert.Will it get worse before it gets better for the market right now?It is very tough to say but in my view a lot depends on a US stimulus. Remember the US government shuts down on October 1, and unless there is some kind of an agreement on vote on account till December 15 to fund the government, they have authorisation only till September 30th. We are hoping that the Democrats will latch on some kind of fiscal stimulus, some kind of an Act along with this. So a lot will depend on that fiscal stimulus. Otherwise, what we saw yesterday was a total risk off where not only stocks but also gold, crude everything getting sold off. Emerging market currencies being sold out. Dollars getting stronger. So it is a risk-off scenario. Is it justified? Well the markets have run up very fast in a very short span of time. Will it stay? The volatility indices, the VIX is showing very heightened volatility right through December and so the glide path into the US elections will mean a lot of volatility globally and then if there is a disputed election, if there is not a clear winner and it takes a month like it happened in 2000 with Bush and Gore and the Supreme Court gets in, then there will be even more volatility and that is what the market has priced in, if you look at the options and the VIX on the US markets. Having said that, the US money supply is up 25% and that is flowing into assets. It has helped the global recovery both economically as well as in the markets and that is here to stay. $120 billion of quantitative easing (QE) is happening in the US per month. BOJ, Bank of England, ECB all are into QE on a very strong wicket and that is holding up the markets. Within the markets you have four choices today – either you pursue momentum and growth which has worked for the last so many years. Second, you diversify by going into an index ETF so that you are owning the markets and not trying to make calls. Third is to rotate out into value sectors, into beaten down sectors which will be the players for 2021 and beyond and fourth is stay on the sidelines or have a combination of all this. I ran a small poll last week. I was speaking at William O’Neil seminar and for that I ran a poll on Hindi and English Tweeter and about 3,500 investors tweeted back; 40% were in favour of going into more value stocks, 30% said we would prefer to stay on the sidelines and book the profits, 17% said continue chasing momentum and growth as growth will beat everything else given the liquidity and 13% were for getting into a more index ETF. That gives some idea of what Indian investors are thinking right now. I think markets will recover because a lot of the uncertainties are already factored in and the liquidity is standing pat. On the other side, huge amounts of liquidity are still available as we have seen in the IPO market. So for the right asset or at the right FOMO level, there is enough liquidity which will come chasing and that will give some legs to this market. What is so defensive about IT, pharma? These companies are growing at 9-10% next year base effect, 14-15% the PE multiples have gone north of 25, 30 times for some of these companies. It is not linked to the domestic economy and they can get tailwinds from the global economy so they are not so linked to our domestic slowdown. They have a global footprint and there is a cost advantage for the Indian players. So those are the two big factors. In IT the business models are being revamped over the last two years and now digital, Cloud, automation are getting a lot of synergies because of the work from home. Being suppliers, they are able to benefit from that. We have seen that in the IPO market also and we have seen that in the global market. A company like Snowflake has a $70-billion market cap in an $80-billion total addressable market. If the competitors are Google, Amazon and Microsoft and still you are giving 140 times sales, profits are not there, it is a loss-making company, But it still gets 140 times sales because it is in that pure play high growth sitting on top Cloud analytics business which investors seem to like. If you see private equity, where is the money going? It is going into fintech and healthcare apart from EdTech or education technology because schooling and education is happening from home. So whoever can provide fintech because you are disrupting the fat cats of finance. But in healthcare, every presentation I have seen starts with that premise. A typical drug discovery takes 10 years, $2.5 billion of expenditure per year and then it has a success rate of 22-25%. Can we bring in data analytics, can we bring big data, can we bring AI? Those kinds of things will come into our healthcare also. Right now, we are seeing why it is defensive because the earnings visibility is high and it is not linked to your domestic consumption story, it is a global story that is the big thing. I would say these will stay but we had a bit of rotation starting from 2nd September onwards and on Monday, the Russell Index fell 3%. That means small caps and value were all of a sudden shunned and people started escaping back into big tech which has worked. If you look at the FAAMG rather than the FAANGs -- if you remove Netflix, the top five have gone up about 124% from March 23rd while the broader market has gone up 58% for NASDAQ, 40% odd for Dow and S&P 500. These players have really generated growth. So one option is you go for magnitude, for the high probability growth players and stick with them across cycles, saying that you cannot go wrong with them because they are supplying all the disruption. So that is one easy strategy. Next year, I am sure there will be some rotation and beaten down cyclicals will come back as global growth recovers. So right now I would say the momentum strategy works.