Looks like markets are stuck between rock and a hard surface. For the first time, bears are saying that we have not lost the battle!
Well, I do not think so. We have had a phenomenal rise from the lows and it is important that the market consolidates the gains it has made. Nobody expected that the market would bounce back so aggressively. The mutual fund flows data indicate that the investors have been selling for the last seven months because they think that markets have run ahead of themselves. They want to book profits, they want to keep cash on the sidelines. Markets don’t top after seven months of consecutive outflows. You can argue that some of that is being invested directly but my feeling is that the market is just catching its breath after a phenomenal rally.
What is the best way to approach this market? The economic cycle has started and we definitely would be higher in the next six months to a year. Should one just wait it out?If you sell now you may not get a chance?
Absolutely. We have been telling investors that do not make your investment decisions based on Nifty. We saw a classic first move of a bull market where the markets kept climbing the wall of worry. It is only once that move matures that people start to understand that it is not just a liquidity driven rally but there is an earnings support, there are reforms that are happening and the economy is rebounding.
In order to make money in this market, you need to take a very strategic two-three-year view to begin with and every intermittent correction that we are seeing right now should be used as an opportunity to get into the market rather than trying to time it. If you try to time this, you are going to be left behind.
But let us also be very clear that in this kind of rebound, it is possible for extraneous factors to come in between leading to a sharp correction or a drawdown. We are lulled by the fact that we have never seen a 5% plus correction on the Nifty. In the good old days, an 8-10-15% correction used to be a normal correction. We should go ahead with the fact that the markets could correct anytime. It is in the nature of the markets to correct but I see a very bright future both for the economy and for the markets. The best way to play it is to stay invested or use every fall to invest in the market.
What are your best two themes? These should be specific themes where for the next 2-3 years, a 15-20% growth is a possibility?
To some extent, every cycle is different but I think we are in a 2003-2007 kind of a cycle. Manufacturing is going to make a comeback. The economic cycle is likely to revive dramatically and therefore there needs to be some cyclical element in the portfolio. But if I were to use that one word which I have been saying since early this year, everything that is digital and cyclical will do well over the next two years. Therefore, IT services or tech as we call it in India, is likely to do extremely well over the next two, three years. People have spoken about it but I think that people are still waiting for confirmation that the IT industry is on a structural tailwind. Maybe this quarter and another quarter will convince investors that we are indeed in a structural tailwind as far as IT is concerned.
Then there is the theme of all the sectors that did not do so well like autos, auto ancillaries, cyclical sectors and even metals. Generally we do not invest too much in metals. The last time I did that was in early 2002 when we bought and a time has come that we should pay some attention, at least a small allocation to some of the so-called cyclical sectors that people have been avoiding for a long time. There are also other sub themes like logistics, autos, auto ancillaries which have good quality companies that will give very good returns over the next few years.
What according to you are the key pressure points?
So the pressure points come from the fact that we are experiencing some sort of a second wave which is going to hinder the movement of people a little bit, though we are not going to experience anything like the lockdown that we experienced in the early part of the pandemic.
Also the confidence comes from the fact that we now have our own domestic vaccines. Hopefully, by July-August most of us will get vaccinated and therefore the recovery should gain hold. But I do believe that there are opportunities in sectors which were more impacted by the pandemic and those sectors could revive whether it is hotels, airlines or discretionary consumption stocks. So many of them have not moved beyond the pre Covid highs. This year there could be an opportunity that maybe to some extent, the recovery could be delayed because of the second wave. But it is likely to happen eventually because the big strong point about India is that we have our own vaccines. We do not have to wait for vaccines to be imported from another county. To that extent, we are lucky and probably two or three more will get approved over a period of time.
So the recovery is still uneven but it is going to be a tale of two halves. It is going to be a tale of two years. There is 2020-21, which got substantially impacted because of the pandemic, but certain sectors did not get impacted. There are certain sectors which got more than disproportionately impacted as they will benefit in 2021-22. In a sense, one has to take a block of two years — FY21 and FY22 — because some businesses will probably recover in the forthcoming financial year because they got more than disproportionately impacted last year.
