There has been a shaky start to the market, given what is happening globally but otherwise things have been on track back home. There’s been a lot of focus on PSUs in light of the government’s privatisation plans. is raising big funds.
On the PSU front, the Prime Minister’s statement a couple of days back has created some momentum in deeply stressed and deeply undervalued PSUs. There are several large PSUs which could potentially get rerated if the government seriously executes the disinvestment plans. The government has been trying to disinvest tougher assets like Air India and BPCL where there are several issues. In case of Air India, it is because of the losses and on the BPCL front, it is because of government’s intervention in fuel pricing.
People do not know what profits they are looking at but there are companies like NTPC, Power Grid and Coal India to speak of a few which could create a lot of value if the disinvestment theme becomes real. This is true even for BHEL where they have huge facilities but which are underutilised. Over the next one year, we could see decent wealth creation in these stocks as long as the government walks the talk. That is the key here.
In case of financials like PSU banks, it will be still tougher because the asset quality is not going to increase anytime soon and it will be a long haul to turn around the banks which get privatised. We need to see the private sector interest in the privatisation as well. Frankly, what people will be buying into will be tough to evaluate. That is how I would like to categorise this.
The PSU rally seems to have started and it will go on. When the overall market on a particular day cracks, then we will see a crack but for the overall market, there have been substantial risks related to inflationary build- up which the market has been ignoring. It could come to play now and we could see the market correct and come down to levels at which we could see interesting valuations again.
The US bond yields are going higher because growth and inflation is coming back. In the short term, shouldn’t it be good news for the economy and for banks and industrials and other sectors if rates, growth come back?
Exactly so there is a disconnect between the economy and the market. Last year, the economy did badly but because bond yields went so low, the valuations of the market expanded and there was a huge amount of liquidity floating around and that money flew into all kinds of assets.
Now on the inverse side, next year, given the success of vaccination in several countries which have seen tremendous inoculation like Israel, the US and even the UK, Covid will be contained. This is going to be seen over the next few months.
Inflation is the biggest worry or risk for equity markets and other risk assets. There will be a disconnect and economies will recover. We will see significant traction in many economies and even in India. That does not mean that the markets will follow because valuations have expanded so much on the assumption that bond yields will remain extremely low for a prolonged period of time. As the US 10-year bond has moved from 0.5% to 1.5%, the way we value stocks based on the risk rerate and the premium on that, gets changed, So there has to be a derating and that derating is being seen now.
There is a possibility that bond yields could continue to rally, given they were overbought and the selloff in equity markets and crypto currencies could continue, leading to a bigger selloff in equity markets which will then create opportunities for investors. Right now, people need to be wary of where they are investing.
What will you buy if markets decline further?
If markets decline further, I would like to buy cyclicals like L&T or some consumption stocks if they come down really well. Banks have run up so much and for them to come into the buy zone, there has to be a more severe correction. The PSU basket which I have not touched for several years could look more interesting. From a pure valuation and return perspective, we could see more opportunities in the larger size PSUs — the non-financials — where the valuations are so suppressed that they could actually outperform.
Are any stocks from specialty chemicals basket in your radar?
I do not really invest too much in the specialty chemical space because it is very tough to evaluate their competence in the long run. In the short run, all these companies do well. Last year, they saw a significant improvement in profitability because final product prices moved up but the input prices did not move up so much.
But this year it could be a different phenomena. Long-term competence is tough in this space because it is very easy to replicate and a lot of them are doing well just because of the pollution arbitrage where China has struck down on pollution and India has not. But eventually India will. These are good as trading bets for investors who are willing to invest for three-six months but not longer term. I would not be able to comment on any of them.
