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Stick with quality NBFCs and banks for now: Ajay Bagga

There is more pain coming around October for financials and we will start seeing more signs of it, says the market expert.Let us get your take on the markets and how much steam you feel is left as we enter a fresh week? How do you see things shaping up over the next few weeks?Last time I was on your programme, I mentioned three big factors which will impact the markets. One is the Covid second wave that we are seeing in the US, Europe. In fact the PMIs have come very good. The second was the US-China conflict where we are foreseeing an escalation happening going into the elections. With the mutual closure of their consulates in Houston and Chengdu already it has been ratcheted up. We are seeing Pompeo making speeches and this is a fundamental disconnect that is coming in, and it can have deep ramifications for global trade, for globalisation per se and it will only ratchet up going into the elections because President Trump has two big planks on which he is going to base his strategy. One is law and order and being a pro-business person, and the second is being the person who can take on China. So we are expecting that to have a big impact. Today, despite very good numbers from Europe in terms of PMI going up in April versus June, we had seen a good performance. July has been really very good on numbers. The composite European PMI came at 54 plus, so a very strong rebound in Europe. We saw the European markets falling largely because of the US-China issue. Third was earnings. Earnings have been better than anticipated and have surprised positively. It is still early days, we have to go through another month before we get all the earnings in. But so far, earnings have been better. Keeping all this together, the large negative is US-China. Coronavirus in the US will get addressed. It is a matter of another six weeks and you will see a flattening starting to happen, but US-China will be kept on the boil till November. Earnings we are seeing coming as per estimates and we are expecting a better performance in the July to September quarter. Then October to December we will see a flat lining happening, and maybe over the next year or sometime we will get back to 2019 numbers. That is the consensus. Technology stocks globally are overvalued. Our technology stocks are getting a boost from that. We expect IT to continue to perform. The catalyst next week will be that the US stimulus too right now is still in the air and in a lot of disarray. Whether Republicans can offer, to the Democrat's offer not being there on the table yet, it will work out over the next 7 to 10 days. That will be the catalyst upwards. In terms of economies, Europe's recovering, China is seeing a very strong recovery. China real estate in fact is really going up very fast. We saw US real estate doing very well in terms of how sales are coming in at a multi-year high. So there are a lot of drivers for the markets still. I think this market stays up for the next few months at least based on the stimulus. Based on the US stimulus too, we have just had the European stimulus coming in which will start coming into the market over the next one month. All that will keep the markets elevated.A slew of earnings passed us, and a few key ones are still to be processed by the market next week. What is going to be top of the agenda for you in terms of specific stocks?Sector wise, IT and pharma will continue to do well. Rural theme, globally-linked themes and cyclicals will do well to. Whenever the dollar goes weak, who are the beneficiaries. Emerging market stocks do better. There is a global hunt for yields going on, so people will start borrowing in the currencies giving negative rates and low rates, and invest in countries like India. On top of that if you have a weak dollar, emerging market currencies will do better, emerging market stocks will do better and cyclicals then tend to do better. So I would not write off the metals. Especially given that there was a project launch last week in Shenzhen and in eight minutes 280 flats were booked. For China, if you look at the housing loan dispersals for the trailing 12 months, at the peak of the US housing crisis they had dispersed $900 billion of mortgage loans in the US. China dispersed $1.4 trillion worth of mortgage loans in the last 12 months. Where will your metals fall when there is this kind of growth that is coming in. So cyclical again, I will say, is a buy on dips. The overall theme stays rural and export based. Our imports are weak, but exports are holding up. So exports will lead India out of the economic issue also. And cyclicals, like metals and cement, you should keep looking at. Fourth will be consumption. We are not very happy right now with the financials. I think there is more pain coming around October, we will start seeing more signs of it. We are expecting that RBI will allow a one-time restructuring which will washout all the bad loans and at least postpone the problem. But finances have had their best time. Stick with the quality names in the financials, both in banking and NBFCs. But IT, pharma, exports, rural and agro themes will continue to do well. Cement, metals and paints will do well, and then domestic consumption themes.