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The article, titled "F&O Talk: Nifty may scale to 26,500 in near term, Long Collar strategy for October series: Rahul Ghose," discusses the potential impact of the recent 50 bps Fed rate cut on the Indian equity market, particularly the Nifty and Bank Nifty indices. Rahul Ghose, Founder of Hedged.in, provides insights on the market outlook, potential sectors to watch, and an investment strategy for the upcoming October series.
Ghose believes that the Fed rate cut will have a positive impact on the Indian market in the longer run, with more money flowing into emerging markets, particularly India, due to its strong growth prospects. He also expects the Reserve Bank of India (RBI) to follow suit with rate cuts, leading to an overall 50 bps rate cut by March 2025. However, in the short term, he remains cautious due to the current overvaluation of the market, especially in mid and small-cap stocks, which have seen a correction and could experience further declines. While the indices are hitting new highs, Ghose highlights that the advance-decline ratio suggests the rally is not broad-based and may have limited upside potential, potentially reaching 26,500.
Regarding Bank Nifty, Ghose observes a divergence in performance compared to Nifty, with the banking index lagging behind its all-time highs. He points out that heavyweight stocks like HDFC Bank are in consolidation, while others like SBI and ICICI Bank have limited room for further growth. Until these divergences are resolved, he believes Bank Nifty is more likely to consolidate rather than experience a strong rally. He suggests looking at beaten-down banks with good fundamentals for long-term investment, specifically mentioning IDFC First, HDFC Bank, and Kotak Bank.
Ghose identifies two key sectors poised to benefit from the rate cuts: NBFCs and consumption-oriented stocks. He argues that NBFCs, with their fixed-rate loan books, stand to gain from lower funding costs while maintaining their loan rates, leading to improved profitability. He recommends focusing on Bajaj Finance and L&T Finance as potential buying opportunities during any correction. For consumption stocks, Ghose suggests D-Mart and Titan as potential beneficiaries of increased disposable income.
In terms of the overall market outlook, Ghose believes the Nifty rally may be capped in the near term around 26,500, but sees strong support levels at 24,000 and 22,500. He cautions against expectations of a significant correction, citing the large amount of cash held by mutual funds, which would likely be deployed to buy any dips. He recommends a long collar strategy for the October series to limit downside risk while also capturing potential upside gains.
Ghose provides historical examples of how large Fed rate cuts have impacted different sectors, noting that sectors sensitive to borrowing costs and economic growth, like technology, consumer discretionary, and real estate, typically benefit. Financials often experience mixed responses, initially facing pressure on margins but eventually rebounding as loan demand picks up. Defensive sectors like utilities and consumer staples also perform well but to a lesser extent. He specifically cites the Fed's responses to the tech bubble, the financial crisis, and the COVID-19 pandemic as examples.
In terms of individual stocks, Ghose advises against investing in Vodafone Idea due to its significant financial burden from AGR dues and lack of technical support. He recommends exiting any positions in the stock on rallies to avoid further losses. For Bajaj Housing Finance, he suggests holding for the long term, highlighting the company's strong pedigree, favorable demographics in India, and focus on the Rs 50 lakh home loan segment. He advises against buying on FOMO and instead recommends a staggered buying approach.
Lastly, Ghose recommends FMCG and IT as good themes in the medium term, highlighting Dixon Technologies, Infosys, ITC, and Hindustan Unilever as potential investments. He emphasizes the importance of a staggered approach to investment, noting that the market is currently heated. He also suggests NTPC as an attractive option from the public sector enterprise (PSE) space for the medium term.