Market crash: Market correction, are you in good shape?
How do you analyze the situation? After the huge price hike, the Indian market was looking expensive and thus had a greater affinity for correction. News point coming from overseas markets and additional data – how do you put all this into perspective?
While we think that Covid is completely over, the market reminds us of the fact that it is still around. It was actually the basis that some variables would continue to come and annoy us but the important thing to remember is that we also have vaccines that have proven to be quite effective and it’s not like we’re as vulnerable as we used to be. Even collective immunity in many countries will be much higher than before.
But the markets were priced to perfection and that’s where some of these weaknesses exposed the markets to downside risks and that’s what was happening. If the market ignores some of these risks at a given point in time, and there is bad news, it leads to a sharper correction. This is effectively what happens.
There were a lot of 10-20% corrections even during the economic expansion from 2003 to 2008 that everyone is drawing too. In the last 18 months, we haven’t even had a full 10% correction from the top. So, even if it does happen and we drop to 16,500 a 10% discount from the recent high, what areas might you look to add to your portfolio?
There has been no sharp correction yet. We will continue to add to the financials because if we look at a positive long-term economic cycle, finances are a proven way to play that out. Many of these banks have come out of the rough NPA cycle with a consolidated balance sheet and are hungry for growth and that should help.
Industries is another area that we continue to look at very positively given that if there is a capital cycle, it will benefit. Topics of normal consumption remain and are larger compounds. They will be selective about stocks that benefit from consolidation in their businesses as we see in many of these retail businesses. I’d also like to take a look at such emerging topics as PLI, which enables manufacturing. It’s a very good new topic that should drive the next economic cycle.
The other topic is the digitally enabled business ecosystem and the structured labor economy. Delivery systems are in line with that. We are fortunate to be in a position where some positive cyclical elements coming in could drive economic growth. New cycles are emerging and could drive economic growth over the next three to five years.
We need to be positioned in those areas in our portfolios, especially if there is a correction.
Among the financiers, are you talking about private corporate-centric banking names or big banking or PSU insurance, select PSU banks and NBFCs, HFCs and all that?
We’ve been looking at finance through a corporate versus retail lens for a very long time. To an extent, this remains but we also know that corporate books are not growing as we speak.
But when we consider that the overall economic cycle will be positive for the next three years, and the fact that many good banks have cleaned up their balance sheets, we will look at it through the following new lens: the first is growth – banks that are able to generate profitable growth given that their balance sheets are clean and the return On decent assets. Second, we will look for larger banks due to their advantage in CASA and cost of funds. If one wants a decent NII or a decent NIM to grow, it’s important to have a lower cost of financing and that’s what we’ve been looking for.
What areas in your mind are optimally priced for future earnings growth? What is subject to correction?
It is very broad today. The valuation dilemma is not limited to a few sectors, it is widespread. But having said that, some sectors will stand out in the dilemma of growth versus valuation and margins as well because we’re seeing raw material price inflation approaching which hurts demand. We’ve seen it play out in cars. In the rest of the consumer durables packaging, one also has to be aware of the impact of inflation, the sustainability of margins and the extension of valuations.
Midcap IT is another sector that is trading at a very high valuation compared to their own history and thus one must also be careful to support the right companies with the right kind of growth. One has to be selective. New business that has emerged through great long term opportunities but today is trading with very strong valuations. One can be a little careful about buying at the right price.
The mid-market end has seen a much stronger rally by benchmarks or big caps in the last four or six quarters, some well deserved, some not. Any topics here that you are looking for?
Yes, certainly if there is a real estate cycle as many people expect. One can take a look at the average real estate plays. One can look to the intermediate funders of this issue and be positive about the beneficiaries of the PLI who will be the enablers of this ecosystem. It could be in chemicals or electronics. So these are the average opportunities one should definitely keep looking at.
What kind of earnings growth is reflected in the numbers as we stand here over the next three or four years?
It’s safe to say that 20% plus compound earnings growth is something that is coming in and we’ll have to pay attention to how much is actually coming in but today as we’re talking, the growth is solid and we don’t see an immediate risk to that growth. But inflation can eventually hurt demand.
What about the risk of rising interest rates, the risk of liquidity pressures from the global system? Will this happen in any of your investment portfolios?
It’s actually another factor going on. We’re hearing increasing talk about how fast a gradual taper could be next year and that’s something we once lived through. It is very much in expectation. Yes, that won’t allow ratings to rise, as I’ll put it, or it could lead to some shrinkage. So the growth must be good enough to generate adequate returns from here because revaluation of valuations may not beneficially occur.
What have you been reading lately in terms of research, topics beyond direct week to week, or related issues from month to month? Some of the huge topics that we read about or research closely, could impact portfolio creation in the long term but not in the near term?
The way the Internet ecosystem is evolving globally, we are seeing the emergence of businesses that support the Internet. The whole convergence of technology is like 5G, what it means for businesses and how they evolve, what kind of businesses they benefit from and what they don’t benefit from, it’s at a very early stage but that is of great importance. If one is a long-term investor, this is something one can look at and try to understand more.
Building in this ecosystem, a lot of stocks have been listed. Many will be corrected. Are you looking to add some of these industries — used car space, food delivery, online medical services — into your portfolios?
The business is an exciting growth opportunity in that it is also very expensive because it is now trading. When there is a correction, these can be interesting opportunities to look at from a portfolio perspective.