“Since most stocks tend to follow the market’s broader trend, buying during a market correction means fighting a negative tide. It is more prudent to wait for the market to confirm a rally, ensuring you buy when success probabilities are at their peak,” he says.
Edited excerpts from a chat:How attractive does Nifty look after the recent correction? Are you cautious or bullish at this stage of the market?
Rather than attempting to predict market narratives, we focus on responding to market trends and monitoring evolving conditions. At any given time, there are reasons to be either cautious or optimistic, but we rely on well-defined rules. At O’Neil, we follow a structured approach to identify market trends. Currently, the Nifty’s recent low of 23,263 is considered a correction low. A Rally Attempt will be identified if the Nifty closes in the green or in the upper half of the day’s range and holds above this low for three consecutive sessions.
A Follow-Through Day—a gain of 1.5% or more on higher volume than the previous session—would then confirm a Confirmed Uptrend. Our studies show that P/E ratios alone are not decisive in stock selection. Many top-performing stocks had above-average P/E ratios before achieving substantial growth. Excluding such stocks based solely on valuation would mean missing out on major opportunities. While metrics like P/E and PEG provide context, factors such as earnings growth, profitability, competitive position, and market conditions are far more critical to success.Do you think FII selling is done now and the market will bounce back to lifetime peak once again by the end of the calendar year? What are the chances of a Santa rally this time?
FIIs have been on a selling spree, offloading over ₹40,000 crore worth of Indian equities in November so far, following a record ₹1.1 lakh crore in October, which coincided with a 6.2% decline in the Nifty. While FIIs continue to influence the Indian market, their impact has diminished in recent years due to increased participation from DIIs and retail investors. Notably, FII ownership in NSE-listed companies has fallen below 16% for the first time in 12 years. Several factors have driven FIIs to reduce exposure to India. Lower valuations in China have attracted significant FII interest, while a strengthening U.S. dollar, rising U.S. bond yields, and reduced global uncertainty post-U.S. elections have made India less favorable in the short term. However, India’s strong growth fundamentals remain intact, and we expect FIIs to return in the medium to long term. Currently, Nifty is in a downtrend, having breached its 200-DMA for the first time in over a year before quickly reclaiming it. To regain bullish momentum and reach new highs, the index must also reclaim its 50- and 100-DMAs. Until then, we anticipate a period of consolidation near these key levels.
How has your investing strategy changed after the Q2 earnings season? And do you think we will see recovery in H1FY25?
The 2Q FY25 corporate earnings report painted a mixed picture, with overall growth showing signs of weakness. However, excluding commodities, earnings were largely in line with expectations. The Nifty-50 registered a 4% y/y growth in profit after tax (PAT), marking the second consecutive quarter of single-digit PAT growth since the pandemic year. As part of the investment strategy, it was essential to exit stocks with weak earnings and create a fresh watchlist comprising stocks with strong earnings. These stocks can become actionable opportunities once the Nifty resumes its upward trend. Looking ahead, the second half of FY25 is expected to bring some recovery in corporate earnings, aided by an anticipated rebound in government spending, improved rural demand following a good Kharif harvest, and normalization of macroeconomic conditions. Although challenges persist, the expected tailwinds in H2FY25 could provide much-needed support to corporate earnings, balancing near-term caution with medium-term recovery potential.
Which sectors are on your watchlist from a longer term perspective? And which ones are you staying away from?
India, as the fastest-growing major economy, offers a robust long-term growth story. With an expected GDP growth rate of 8-10% over the next decade, opportunities will emerge across various sectors. The technology sector will continue to be a cornerstone of India’s economy. A growing pool of skilled labor, favorable government policies, and increasing global interest in India’s capabilities will drive innovation, employment, and revenue growth in this space. Similarly, healthcare remains an underpenetrated market compared to global standards, presenting immense potential.
Rising disposable incomes are likely to fuel demand for private healthcare services, while consistent growth in government spending will further support the sector’s expansion. The financial services sector is also expected to remain pivotal as a growing economy requires substantial capital for expansion. Increasing credit demand and digital innovations will keep this sector in focus. Additionally, India’s rapid urbanization and infrastructure development offer significant long-term opportunities. The infrastructure sector is projected to grow at a CAGR of 9.6% over the next five years, reaching $322B by 2029, driven by public and private investments. We believe a majority of the investment allocation should focus on these high-growth sectors, while other sectors can remain on the sidelines unless they demonstrate clear and compelling growth drivers. By concentrating on these core areas, investors can align their portfolios with India’s long-term growth trajectory.
Q2 earnings has been the season of downgrades. Are you finding some bottom-up opportunities amid the correction?
Although it is tempting to buy stocks on pullbacks during a market correction, one should wait for market conditions to improve and avoid catching a falling knife. Sectoral performance exhibited varied trends across industries in Q2 FY25. The banking sector showed mixed results, with private banks grappling with margin pressures and increased provisioning, while public sector banks benefited from reduced provisioning, delivering robust performance. The auto industry displayed signs of recovery, supported by improving rural demand due to favorable monsoon conditions and festive season sales, with optimism particularly noted in segments like two-wheelers and tractors. In contrast, the consumer goods sector faced challenges, as inflation and adverse weather dampened urban demand, leading to underwhelming volume growth. The oil and gas sector, particularly oil marketing companies, experienced a sharp decline in profitability. Technology companies achieved steady revenue growth. Meanwhile, healthcare companies performed in line with expectations. Considering the Q2 FY25 performance and the growth potential in H2 FY25, our focus remains on sectors such as IT, Infrastructure, Banking, Pharmaceuticals, and the two-wheeler segment, including both auto OEMs and ancillary industries.
How have you dealt with smallcaps since September-end when the bull market peaked out? Are there enough bottom-fishing opportunities available in the market at this stage?
In early October, we shifted the market status from Confirmed Uptrend to Uptrend Under Pressure. Since then, we have focused on booking profits and cutting losses in selected portfolio stocks while refraining from significant fresh buying, opting instead to remain on the sidelines. We avoid bottom-fishing and prefer to invest when conditions align with our disciplined strategy.
The ideal time to buy leading stocks—those with strong earnings, sales growth, and institutional sponsorship—is when they break out of a solid price base on heavy volume, with the market in a Confirmed Uptrend. Our investment approach emphasizes maximizing the probability of success by prioritizing stocks with the strongest relative price performance and sectors leading the market. Historically, at the start of a bull market, it is these leading stocks and groups that drive the new phase, as decades of market studies have demonstrated. Since most stocks tend to follow the market’s broader trend, buying during a market correction means fighting a negative tide. It is more prudent to wait for the market to confirm a rally, ensuring you buy when success probabilities are at their peak.
A number of bluechip stocks like Asian Paints, DMart, Bajaj Finance and Kotak Mahindra Bank have given negative return in last 3 years. Is this a sign of leadership transition in the market or these are just company specific issues?
We believe it’s a combination of both leadership transition and company-specific challenges. The evolving competitive landscape and sectoral shifts, coupled with individual hurdles, are impacting these blue-chip stocks. For instance, Asian Paints is grappling with weak demand, margin pressures, and intensified competition from new entrants like JSW and Birla Group, backed by strong brand power and financial resources.
The market will likely look for reassurance in its H2 FY25 performance to confirm its growth story remains intact. D-Mart faces stiff competition from online grocery platforms like Blinkit, Swiggy Instamart, Zepto, and BigBasket, which appeal to tech-savvy consumers with speed and convenience. Despite its efforts to adapt through DMart Ready, which grew 21.8% in H1 FY25, it still trails behind digital-first players. For Bajaj Finance, while growth remains strong, broad-based asset quality stress and elevated credit costs are weighing on performance. Improvements in these areas could reignite investor confidence. Finally, Kotak Mahindra Bank is dealing with pressure on its unsecured loan portfolio, higher slippages, and margin compression, which are likely to persist for a few more quarters.