A lot has happened with the equity markets after the tumultuous month of April. May did not get off to a heady start but now some semblance of normalcy can be seen. Are you reading into this move as a decisive pick up or is the undertone of the market still looking rather weak given the kind of macro backdrop we are placed with?
Yes, the undertone is still quite weak. These are not dead-cat bounces but more relief rallies. Some things which are oversold are getting bought. There is domestic liquidity with mutual funds which are there to buy but I would still say that overall the undertone is still weak given the uncertainty around the advanced countries.
It is a mixed bag both in terms of the fact that the Ukraine-Russia crisis is not anywhere close to a solution. The decision to expand NATO by getting Finland and all is not going to help and also the signs that the US overplayed their rate cut card and the liquidity card right is coming through. Now they have created a stagflationary scenario and there are talks about recession happening in the US and that is not a very good news. The level of geopolitical economic uncertainty is going to be an undertone for the markets in the near future.
When we had interacted in March, you had spoken about doubling your SIPs for the next six months, looking at the current setup. What is the advice for SIP investors?
The advice is excellent and remains strong because of subsequent volatility. All this volatility has meant that if every single instalment of SIP had doubled, they would be sitting on a lot of gains. I would continue with that thought process till Diwali for the next six months.
If the volatility is there, there should be a heightened level of SIP to take advantage of this volatility. This is not the time to commit lump sums. In terms of sectors, I recommend this SIP because you are doing it for mutual funds. You are diversifying because of FII selling and the pressure is largecap oriented. The small and midcaps are also correcting but they are the ones which are going to bounce back. One cannot just go and buy that which has fallen the most. That is the simple theory and it is best to stick to the SIP route.
There are reports that are coming in that the cash levels have reached what it was post 9/11. Brokerages have started to see much less business. With equities falling out of favour, what should be the plan of action? You are saying only SIPs?
SIPs because it is for the monthly income category – the salaried class. For HNIs, sitting on cash, the way to go is a staggered deployment, which is not necessarily a regular SIP, but looking at a base level of market for every correction. Topping up your investment is the best way to go because it is a very funny situation.
At a time when the Indian economic outlook is better on a medium term basis because of all the capex, we are seeing capacity utilisation come back up. The news on the Indian economy is reasonably good but at the same time, the markets are correcting. So, it represents a very funny situation that we keep talking about economics and markets being in sync with each other, but we are going to see a phase where newsprint on the economy will continue to come out good, GST collections, everything will look good but the markets are not going to immediately respond and people will be puzzled.
From that perspective, it is best to stagger the investment in the market gradually over a period of time. Obviously in a scenario when interest rates are rising, it is time to lock into medium term debt. If at all you do any allocation to debt, you are going to keep it short term into the liquid overnight funds that kind of a category. In the absence of that asset class, when equities are down, they would put money into fixed income. But today both those asset classes are challenged and gold is going nowhere. So, to that extent, keep faith in equities because when the bounceback comes, it will help you with the gains.
But they also say use dips or corrections to fix your regrets. What about you?
We have been very happy to see the correction in the banking and financial services space because that remains our top pick as a sector. We have been accumulating that and so across the funds, the banking and the BFSI space has been the biggest thing and we have been buying a good quality stocks there, whenever there has been correction. That has been the one significant thing where we actually have welcomed this volatility because while we have been bullish on banking, things actually come to play out of that correction because a large portion of the largecap index is in that space.
FII selling is generally across the board. It is not coming and selling a specific sector. They are selling India and to that extent, we believe in good quality financial services banking stocks at reasonable valuations and that is what we are accumulating.
What are the recent sells? What should one be avoiding from a long-term perspective?
Given the commodity price hike, the FMCG space looks challenged because you are not going to be able to pass on any of the commodity increases in a market where people are still not going out and buying stuff.
The other place where a little bit of correction has happened in terms of the growth outlook is the IT space. Because of the US getting into a potential recessionary scenario, IT business and the Nasdaq fall is also reflecting there.
IT valuations had overreached themselves. We believe in the quality of the companies. Some more correction is possible there is and so IT is something where we are cautious in the current scenario.
The third aspect is pharma, which had a great run of the Covid crisis. Now that Covid is easing up, we believe those pharma valuations will come to a more normalised level from the current levels. So, these are the three sectors where I would say we have been doing profit-booking.
What is the outlook when it comes to the tremendous move that we have witnessed within the metals basket? How are you looking at that dynamic?
We are still underweight on the metals pack because if there is a recession in the US, that is not going to be great for the metal commodities. Earlier, there was hope for a big infrastructure revival in the US and metals ran up partly on the back of that.
Second, in China also we have to see how this latest Covid wave pans out and goes through. So, metals have discounted a lot of the future and the rally has happened. So going forward, I do not expect this to sustain in a very big way. We are underweight metals at this point in time.
Earlier this week we saw JPMorgan saying that the worst is over when it comes to the Chinese consumer tech stocks. Globally we have seen a comeback in tech stocks. The new-age listed companies have started to see buying – whether it is or Policybazaar. Even has started moving up. still has to play catch up. Would you say these levels are now attractive?
We would like to have a little more correction. A lot of the hype and the froth is gone but we would like to wait a little bit more because traditional models do not work with these companies. You cannot do discounted cash flows and so economic recovery, digitisation, people changing their methods of buying – all those which were basically factored into these kind of model stocks – we have yet to see that play out in reality.
We still want to wait and watch these new-age plays and see where the dust ultimately settles. They are good quality companies. There is no doubt about it but at current prices, we are still a little bit hesitant and we would still wait for a little more correction to get that greater comfort around the space.
Your top five names do not contain any Adani name. Is that going to change?
I cannot talk stock specific but actions speak louder than words.
A lot is also being said these days about IT company valuations. In the last two years, IT has been market leader, but there seems to be a fatigue. How would you approach the IT pack now?
One of the reasons that IT had this great runup was the liquidity where people sought safety. FIIs get comfort from IT because they understand the underlying business is from their countries and they are getting a better sense. Though it is an emerging market stock, they know that the business is from the developed world which they understand well and that was the second reason.
The third reason for this was that there was a revival expected in the US and because the Covid crisis had given a big push forward to digitisation, to the internet of things, to cloud computing they expected the end user industries to rejig their whole and work from home was also adding to that. So there was this huge hype that this is like a Y2K moment for IT and that is why that run up happened. It was very good while it lasted.
While the fundamental business model of the IT companies remains sound, the fact is that the US overplayed the rate cut card and created demand-based inflation and are triggering a stagflationary, recessionary environment. In that context, how much would your end user companies really go and do all those mega IT related backbone changes which was going to benefit the Indian IT companies is the question and that triggered the correction, especially in blue chip IT.
The second aspect is now dollar has started to strengthen. Historically depreciation of the rupee is favourable for export-oriented and IT companies. But now we see two things happening. One is that in these blue chips, they have active treasury management. So, they tend to go and hedge. So gains from rupee depreciation do not actually translate to the bottom line because they have hedged it as a risk based measure.
Two, the customers being the top companies of the world, re-negotiate prices with the IT companies based on the depreciation. So the rupee depreciation angle is not fully playing out. It is one of the reasons we have seen a cooling down in terms of the business growth model and IT is now migrating back to a safety oriented play, whereas post Covid, it had switched from its safety orientation to a growth play.
On the balance, IT is good, it is stable but it is not going to be the runaway sector which it was anticipated about say 18-24 months ago.
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