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Markets are getting a reality check now; use dips to buy IT, pharma stocks

Andrew Holland, CEO, Avendus Capital Alternate Strategies
Monday's market fall can be attributed to around four negatives news (albeit separate) factors coming together. First, the potential US political battle for the Supreme Court nomination, which in turn has focused attention towards the upcoming US election in November. Most political analysts are predicting a close race between President Trump and Biden and that's where the complications begin. Given that there will be a postal ballot in a large number of “swing” states the actual results of the election may not be known for days or weeks, even then, one can assume that these numbers may be contested. And it is this what worries the market not an outright victory for either of the candidates. Expect these concerns to escalate nearer to the election.

Second, has been reported that a number of banks may have laundered money over a 10-year period, which has impacted several European banks. International Consortium of Investigative Journalism (ICIJ) obtained the top-secret Suspicious Activity Reports, or SARs, worth over $2 trillion globally. These transactions are not outright evidence of fraud or proof of nefarious activities but are red-flagged by the US authority as suspicious. While the data dump is available on the organisation’s website, so far it has meticulously tracked down 18,153 transactions totaling $35 billion, in which links between both sending and beneficiary banks have been established. The transactions were done between 2000 and 2017.

Third, a rising concern in Europe and the UK that the ballooning Covid-19 cases could lead to a new lockdown, which in turn will cause great pain to an already fragile economic recovery. Airlines, leisure stocks, etc, have all witnessed significant share price declines.

And finally, the resignation of the CEO of Nikola (electric vehicle start-up) which has been a stock market favourite will also have a negative impact. The board has accepted Milton’s resignation, adding that Stephen Girsky, former vice chairman of General Motors and a member of Nikola’s board, has been appointed chairman of the board, effective immediately.

Perhaps now, a bit of reality is coming back to markets, which are anyway expensive. I expect market volatility to remain high as the US election approaches.

For the Indian market, we have slavishly followed the global markets upwards and would likely follow on the way down, too, especially given it has all been liquidity-driven. Moreover, the recent tailwind of the weaker dollar may reverse the short-term as investors head back to safe havens. Any correction should be used as a buying opportunity, particularly towards emerging themes in the information technology (IT) and Pharma sectors. Profit taking may be seen more actively in mid-and small-caps in the short term.

Andrew Holland is chief executive officer at Avendus Capital Alternate Strategies. Views are his own.

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