2022 is a tough year, there’s no place to hide! Savvy investors can take a call: Sridhar Sivaram

What has happened with the market all of a sudden? The RBI calling an out-of-turn move on the rates, suddenly seems to have blown the lid?
Inflation is always a big worry for the markets and we are seeing the ugly head of inflation come back this year. This was broadly expected but the pace at which inflation has come up post February, has been a surprise. In my view, the inflation worry is more for the US markets, India will have its share of inflation. March was not a good number, we are going to see an ugly number for April but typically India’s inflation settles down in the second half of the year. But for US markets, whose threshold is 2%, we are seeing 8% inflation. I think the Fed is way behind the curve.

Normally, during the early part of the rate hike cycle, markets are very jittery and that is what we are seeing right now. Our broad view is that 2022 is a tough year and one should protect capital; do not be in stocks where you are not sure of your earnings, high growth and buying stocks at any price have to be avoided. I do not think there is any hiding place but that is broadly the view.

Is this a correction in an otherwise intact bull market or would you say that the macro landscape, which has completely reversed in the last two or three months, would make you a little bit circumspect on whether or not the tide of the market overall has completely changed?
For the moment, I would say that it is a correction in a bull market but I will keep a close watch on how global inflation plays out. Typically, it is a very sticky animal to tame. Geopolitical issues also are some of the reasons for the inflation but if this inflation animal continues to be at a higher level, then maybe eventually the tide of the market could change but for the moment, our view is that this is just a broad correction in the market and the bull market is intact. However, 2022 is a tough year and we have to tide over 2022 with as little hurt in the portfolio as possible.

They always say that good news and good prices do not come together. The news is far from good, have the prices become good?
In some sectors yes. Overall, the market has corrected about 5-6%. The emerging markets are down 17-18%; Nasdaq is down 18%. When one compares other large markets, it looks like India has been a very smart outperformer. So there is a chance that we could see some more corrections if we were to follow some of the global trends.

I would say that broadly we could see some more correction in the high growth segment but otherwise we are reaching stages where one can start looking at investing in some of the value segments.

What are you doing with your portfolio? The last time you talked about going long on public sector banks. You were not sounding very enthusiastic about private sector lenders. You wanted to gravitate towards high value stocks?
Yes, I think that theme is still intact as far as we are concerned. We have been long on the public sector in general because there has been a huge value erosion as far as public sector stocks have been concerned. Two things have changed there as far as the public sector is concerned: One, the intention of the government is to privatise. But they have not been successful in privatising any of the large PSUs. We are still hopeful that given the intention of the government, if one of the large PSUs gets privatised, the entire sector could rerate.

Just keep in mind that the entire public sector market cap today is around Rs 14-15 lakh crore. That is less than what

is and the entire banking PSU is less than Rs 7-8 lakh crore, which is less than what is. So that is the extent of undervaluation of some of these PSUs.

We are selective in what we are buying there but we think that given the macro environment that we are facing, some of these could give outsized returns or at least protect capital in the near term. We are still long PSUs both on the banking side as well as the non-banking side.

You have a very selective approach when it comes to IT because by and large, you are underweight IT and it is very stock specific. Coming to some new age recent listings as well as midcap names. would you be very stock specific there also or is that a complete no?
We broadly avoided the new listings, I lived through the 2000 tech boom bust and we all made our mistakes paying 50 times revenue for even companies like

and . They were very good companies but we paid the wrong price. Eventually, it took seven-eight years for those companies to come back to the 2000 highs.

In fact, Zee even today, after more than 20 years, is still below it’s 2000 high. I still believe that paying 50 times revenue for some of these new age companies, it will be very difficult to make money. Some of them will eventually emerge as winners but I would rather wait on the sideline and see who the winners are rather than trying to bet on each and every of these new age companies.

ET Now: Still…
They are still multiple times revenue. I would still question why they would trade at Rs 35,000-40,000-crore market cap with revenues which is one-tenth of their market cap?

You have given us a fair hint of which one you are talking about…
This is our view. There are different investors, there are different ways of achieving respective goals. Given our view of 2022, which is that it is a tough year, one would better avoid these types of investments where you really do not have any earning support. Even after a correction of 50% for some of these stocks, they still look very expensive.

So besides PSUs where is that ripe opportunity that you are spotting right now?
Financials do look good. If you look at even private sector banks,versus NBFCs, HFCs – which we have been bearish for a very long time – I still maintain that view.

What about the new mega merged combined entity?
I will not comment on that but they look very interesting as far as private sector banks are concerned. There is a huge opportunity. Typically one will see some corrections, some valuation adjustments but over a long period of time, they have all given mid teens returns over the last five years-10 years. So, I would still bet on some of those.

We are still very bullish on commodities; we still think that there have been massive under investments in commodities in the last five to six years thanks to ESG. I can give you an anecdote that we were on a conversation with our Indonesian coal company about six months back, even before the coal shortage that we are seeing right now started. They were highlighting that they do not even get bank funding for a new coal mine, let alone equity. That is the extent of ESG concern that no investments are going into some of these segments. This will eventually come to bite us because the new energy is not catching up at the same pace as we need.

Keep in mind that if aviation picks up globally, we are going to see massive spurt in demand. I do not see crude coming back below $100 in a hurry. Keep in mind that pre-Ukraine war, we were already at $80.The pinch of demand for crude and the under investment was already showing. Our view is the same for non-ferrous that non-ferrous metals which have been facing the same issue. A lot of non-ferrous metals gets used in EVs and the fact that we have had the same argument of under investment there, points to the extent of issues that we are facing.

We still remain bullish whereas the risk off in some of these commodity stocks will come off but we think they will surprise on the upside as far as earnings is concerned. So, there are pockets where you can still look.

What about the earnings trajectory?
There is a slowdown in the rural segment. In the last six months, I travelled to five to six different states and there is a distinct slowdown as far as rural consumption is concerned. I would say that companies are not able to pass on the increase that is required to take care of the commodity inflation. We can see that in many companies on the FMCG side. The volume growth are really anaemic at 3-4%.

Look at two-wheeler companies and look at the margin profile. Even good companies are not able to pass on the margin. Eventually this will settle down but in the short term, we would see some impact on earnings. Top line may come back because we have had multiple challenges even for last quarter. The first few months had Omicron issues and too many disruptions.

I think this quarter will be a better quarter to judge. Maybe the top line will come but we will have to have a margin reset because the earnings estimates look very aggressive right now. The markets also had a reset. So we will see some adjustments but it is not going to be easy. That is why I said 2022 has too many challenges and we will see how this pans outs.

The expectation was that when CY2022 ends, we will see margin normalisation. I think that is very unlikely. We have not seen that many earnings downgrades. Should investors brace themselves for earnings downgrades coming in the next couple of weeks?
Yes we are already seeing some early signs of earnings downgrade but we will see a larger part of the earnings downgrade in the next two quarters as companies adjust for the higher commodity prices. Keep in mind that most companies have earlier commodities which they have already purchased because nobody buys just in time; there is always some inventory.

I would assume that some of the earnings, especially the EBITDA level adjustments, will happen in the coming two quarters. If demand were to surprise very strongly, then it is possible that companies could re-adjust and bring the earnings back to normalisation, I would doubt if that happens at a fast pace. It would happen at a very gradual pace and so there could be some hit to earnings.

I would broadly feel that the earnings numbers right now for FY23 are still slightly on the higher side. We would see a hit on the consumption side mostly. Commodities and financials may still outperform or surprise on the upside.

When you talk about 2022 being a tough year, where you also have to be selective and protect your cash, is this a time to take more cash off the table?
We have already seen a large part of the correction. If somebody had done this just before 2022, it would have been a good option. Keep in mind that we had this view entering 2022 and the markets were behaving extremely well for the first four-five months and we often questioned our wisdom – whether it is a right strategy to increase our cash and be selective. But given how inflation has played out, I do not see that getting tamed in hurry and we will see more surprises as the year goes by.

We are talking of the Fed increasing rates by another 100 to 125 bps in the next two months. We are talking of possibly 50 to 75 bps of rate hike for India in the next two-three months. April inflation number for India could be north of 7.5%. So, we are going to see very ugly numbers and commentary from central banks. This is not great news for markets in general.

Some

are already priced in and I do not know how much more is yet to be priced in. Given all this, I would still be very cautious. Whether somebody wants to be more in cash it is an individual call; each individual will have to take a call on this but somebody who is investing in the markets through SIP, or a retail investor, I would just say that is why SIPs are made so that you can keep investing every month and et an average based on how the markets move. It is never linear. I would not advise the same for retail investors, but an institutional investor or a savvy investor could always take a call.


(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)