What should be the strategy for 202? Does it make sense to take some chips off the table?
A little bit of profit booking can be advised, at least fresh purchases can be postponed. I would like to buy at a decline. Another aspect to consider is that the earning season will start in a couple of weeks or so and typically a lot of intraday volatility can be seen during the earnings season. That is why there is an opportunity to buy as well as sell and when you are so close to companies coming out with their numbers and giving their opinion on the past quarter and also the future prospects, it is a better strategy to wait, listen to what the company management has to say, reassess all the various factors, relook at the valuations and then take a more informed vision. That should be the strategy that of most investors at least that is what we are following at this point.
It is not that we are under invested or are sitting on a lot of cash. I am sure most investors are also not sitting on a lot of cash but whatever incremental cash is coming in, just wait and see how the numbers are coming. A lot of companies have done well in the last quarter. Are they fulfilling promises or whatever estimates analysts have got about those companies? Are they on track or not and then may be look at reshuffling their portfolio but fresh investments, putting fresh money to work has to be at a correction and the correction has to be in the range of at least 7-8% on the index and may be 15% or so on the stock prices.
Right now, that may seem far fetched given the strength of the market for the last couple of months but then bear markets for corrections have a way of coming at the most inopportune times and for reasons which we cannot have thought of at this point of time. So wait for a correction and then look at deploying fresh cash.
What about FMCG? Going into 2021, would this sector hold its ground comparatively?
Indian FMCG companies like Godrej Consumer, Emami may be a Jyothy Laboratories and even Britannia have been underperforming the likes of Nestle and HUL for some time. They may start to outperform and the reason for that is there is valuation comfort, they have the benefit of base effect and lastly a lot of them are focussed on health and hygiene and they are into underpenetrated categories. When the overall growth in those categories starts to pick up, these companies will do much better.
Also the pandemic and lockdown has given a lot of cost saving which may be permanent in nature.
What are the short-term one-year kind of stories that one should be investing in stepping into the new year?
Immediately what comes to mind is maybe the PSU pack. It could be the banks and financial companies in the PSU, it could be engineering companies or metals and mining. They certainly have the benefit of lower valuation on their side. At the same time, technically they have stopped falling the way they have and a mild bit of outperformance also has been seen over there.
Once the economy is back to its old levels, we will see a lot more efforts being made to unlock value over there. Already new approaches are being taken in terms of buybacks and privatisation and that can lighten up the entire PSU pack. There is no doubt that PSUs are available at attractive valuations. All they need is a trigger and that trigger will come in 2021. There is comfort as far as valuations go.
These are not great long term stories, you cannot have them as part of the core holding, you cannot be invested in them for three to five years or so but over the next 12 months, you could expect a basket of PSUs banks or other PSU companies give out a 25% or thereabout returns. So, that is one investment theme which we feel can give good returns.
The second is commodities but it is like a moving train. Already the stock prices have gone up significantly and entering the last phase of the bull market in those commodity stocks. But the first quarter could be good for a whole host of commodity companies. Within that, Tata Steel does come to mind as they are trying to get their UK operations under control in terms of EBITDA losses. This is a great time in the steel industry to get rid of non performing assets and Tata Steel is looking at that quite aggressively. That could be a special situation play as far as the steel companies are concerned. Broadly these are the two themes which come to mind which one can take as a trading opportunity with the horizon of three to six months or so.
When it comes to the midcaps, which sectors and stocks would you prefer in 2021?
Within midcaps, there is still some scope for appreciation as far as the banks and NBFCs are concerned. Once the December and March quarter numbers are out and analysts have factored in the credit cost because of the pandemic and the associated lockdown, we will have a clearer picture in terms of what the growth and earnings could be.
A lot of the midcap banks and NBFCs — not the likes of Bajaj Finance, HDFC, Kotak — but RBL Bank, IndusInd Bank, Federal Bank, L&T Finance, Cholamandalam and some of the other businesses have been hit quite hard. We have actually seen compression in their price to earnings, price to book valuation and reversal to mean also offers an opportunity over there.
These companies will see a significant improvement in terms of their credit growth and credit cost also will come down and by all means RBI will pursue this cheap money policy and interest rates will remain stable. That is a good environment for midcap banks and NBFCs to thrive and grow. So within that space, we are looking at these companies where we see a good opportunity for outperformance.
