Looking for safety? Here’s what to buy now: Basant Maheshwari

The growth element is missing in most of the high PE stocks right now and when the economy is into these situations with high interest rate environments, the growth will take a backseat but this is a one-two quarter phenomena. Equity is supposed to be a friend forever but we try and test that friend every second day by looking at what the index or what the price is doing,” says Basant Maheshwari, Co-founder & Partner, Basant Maheshwari Wealth Advisers LLP.



What is your view for the next 13 years?
I want to spend the next 13 weeks without worrying. If I can spend that, I know money will be made. Money has been made before and money will be made in future but when one is stuck in a situation like this, your mind cannot think beyond 13 days, 13 hours, 13 minutes depending on the kind of trades or investments you have made. But yes, over the next 13 years, people will make money not from the same stocks, not from the same sectors but new trends, new things will emerge.

What will emerge no one knows but when it emerges, we will be able to catch them. But the basic problem right now is about information flow. There is much information flowing everywhere. I am not talking about Ukraine-Russia, I am not talking about interest rate, I am talking about the general format in which information flows. So there is Whatsapp, Twitter, Facebook and everyone knows the news and at the same time, everyone wants to get in from the same door and exit from the same door.

So because of that, the concept of stock markets being stably consolidating and trending slowly higher is giving way to volatile returns. You have to churn this.

Talking about the capitulation that we are seeing in the broader markets, where do you think the market is headed? Have we already priced in the worst and are we close to the bottom?
It could not have priced in the worst since a 75 bps rate hike happened in the US and the markets rallied. But suddenly, we got a new one from Swiss Bank which said they are going to hike rates by 50 bps. So when news flow moves that fast and that quick and the basic problem in a high interest rate recessionary environment is right now we are just seeing interest rates going up. But we have not seen corporate default. We have not seen people going bankrupt. We have not seen credit card defaults.

I am not trying to create a scary scenario. I am saying these will come as part of it but then you will have to price it in and because the good part about the Whatsapp and the Twitter community is everything gets priced in within an hour or a couple of days. If the news is floating for two days, it is well priced in. I think we are pricing in the situation but the problem is once we have a new set of bad news, then we have to price that again.

One of the investments that you have always done is look at high PE, high growth, quality names and try to create multi-baggers. Do you think that trade is really changing?

It does look like changing. I still remember when the BJP Government was voted to power in 2014. People said yeh high PE ka jamana khatam ho gaya hai, yeh growth ab nahi chalega, ab sirf value chalega.( The days of high PE are over, days of growth stocks over. Now only value will work). But things do not change in a year or two. Things have been there for decades and they will be the same but where is the growth in high PE?

I will buy a high PE, 80 PE stock when I can see at least a 25% growth. An 80 PE stock with a 12% growth means if the PEG were to go to one, you will have to spend five years of sideways, zero returns and that is the risk in buying a high PE stock. You do not buy high PE for quality. You buy high PE for growth because at the end, markets stay for growth.

So the growth element is missing in most of the high PE stocks right now and when the economy is into these situations with high interest rate environments, the growth will take a backseat but this is a one-two quarter phenomena. Equity is supposed to be a friend forever but we try and test that friend every second day by looking at what the index or what the price is doing.

Every time a high PE stock goes into numbers, there is always uncertainty over will they deliver again, will they not? When enough is enough? Markets also have to give their test right?Most of the funds do not want to underperform even for one month. So when one wants to underperform even for one month or two months, most of the long only funds, most of the investment funds have actually become traders and that is the fact not just in India, but globally. I do not want to buy a stock which is not going to perform for six months. If I am running a fund because my investors will withdraw and my distributors will be under my skin. Those are the problems that you take on with. But if you are an individual investor, how does it matter if a stock does not go up for six months? You can just keep holding it as long as you are sure that the growth would come through.

IT companies are talking about double digit growth. The optimism that we are getting from the management is really high but that is one of the worst performing sectors of the year. Why are people not buying into that particular sector?
People look at the Nasdaq and start selling IT– that’s how morning trade works. Over a longer period of time, if the US goes into recession, then we will have a situation where people will cut down some spending but there is so much of innovation happening in America that one cannot have an America innovating without India being used as its outsourcing back office.

So results would come through but then most of the IT stocks had been bid up at 40-50 times but not now. They are down 40% from the top. Great companies do not fall more than 40% without a reason. If they have fallen 60% and if we are short and the company will survive over the next five, seven, ten years, then that is broadly the bottom.

Most of the IT stocks are down 40% because America is supposed to be going into a recession. It has not yet gone into a recession. We are pushing it into a recession. It is like a bride-groom who says I do not want to marry but we insist he get married so that we can have a feast!

So there is no recession right now but we are assuming that there will be a recession because interest rates have gone up and obviously when interest rates go up, people have seen economies going into a recession but at this time it is too early to take that call.

Which are these companies that you are talking about, is it the traditional IT names the likes of , etc? Are these the midcaps which are growing at a faster clip or are these the new age tech companies like ?
The likes of Zomato are teenagers who had a nice time based on the pocket money they get from their dad, in this case the PE funds. So you do not want to be betting on those companies. TCS and Infosys are the senior citizens, the pensioner people who have made all that money in their life and now they want to enjoy life.

You want to look at the midcap IT names. I do not own them, I can just give you reference point just for viewers to understand maybe a

and LTI and LTTS. This category is growing at 25% when the economy is in a bad shape and when money flows back to America very soon and the dollar is going up.

The dollar normally appreciates against the rupee one year before the elections. So we are approaching a scenario where the dollar should normally do better and should appreciate against the rupee and these guys will make a little more money at that time. So the midcap IT is the flavour– stocks that are growing 20-30% – are the stocks to normally look for.

How would you play the reverse trade, what are the best sectors to play this?
Central bankers cannot create supply but they can destroy demand. If central banks hike interest rates, do you think Russia is going to reduce the price of crude by even $2? They would not. But that is the situation we are in. They can destroy demand. So when American people, who had booked housing loans at 3% are being asked to take up a housing loan at 6% over the last four months, no one is going to buy a house in America. Housing is going to be in a slump.

Once they destroy demand, they decide to give some money to create demand again. There is madari and the dance happening where the Fed does not know what to do because basically there is so much debt in the system but they are trying to tinker around with demand depending on the supplies that you get.

As for the stocks or sectors to bet on, the metals game is over, at least for the next few years. You should not look at metals again. They will appear to be cheap because you are looking at them on the basis of historical earnings. The moment current earnings come in, it will price in all the fall that these stocks have seen through.

and , we do not own them but these are classic companies where they will pass on the cost in the current year. So once they pass on the cost, there will be incremental savings because input costs will come down eventually and will translate into higher EBITDA margins.

So if you were very patient, want safety and want a good trade or investment, look at stocks like HUL or Dabur. These companies will do well over the next two, three years and they are also very protective of your capital.

These are the companies that you can look for but if you are really looking for some adventurism, then go for the consumer discretionaries, not now, maybe after six months. For now it is a very difficult wicket to bat on.

Among auto companies, has become a bit more discovered stock. In the last six months, we have been seeing the entire shift from the PV space into EV and it is getting a lot of positive response. Is it time to look at other companies like M&M from the auto pack?
You want to buy something in a new sector which is going to dominate over the next five, seven years. You should look at companies that are changing the format. Tata Motor DVR is the best hedge against Vladimir Putin. If crude stays at $120, people would go for EVs. So that is why you have to look at these kinds of companies where you look for a five-year or a three-year view but if you have got a one or two-year view, then one should look at companies like HUL and Dabur. You would not make a lot of money buying HUL and Dabur but you will make decent returns.