It has been a year since the lockdown. But the prospect of another lockdown is looming large as Covid cases are on the rise though there is a vaccination drive in full throttle. How are you assessing the overall markets right now?
Overall, it was a function of a very sharp runup in the beginning of the year. In the first 45 days, we saw a very sharp runup in markets and markets largely achieved the year-end targets of most sell side brokerages. Now we are seeing a consolidation phase where markets have given up some of that frothiness. The reasons are multifaceted — from second level infections to another series of lockdowns, increasing bond yields as well as fear of inflation. All that has got discounted to a large extent as has been an earnings surge.
The catalyst for the markets will clearly be that the bond yields have started to plateau off over the last three, four days. As the central banks stay accommodative and keep pumping in liquidity and as personal consumption trade comes in as economies reopen, there is a lot of savings accumulated with households as well as corporates.
Yesterday, Intel announced plans of spending $20 billion on two new factories for chip making. It will take three years for that to start producing but capex is returning. Those kinds of announcements will lead the markets higher. And who will be the beneficiaries? Coming out of a slowdown like this, the smallcaps tend to outperform. We have seen that in India, we have seen that in the US as well where the Russell 2000 has outperformed the S&P by nearly 30-40%.
Even in India, the smallcap index is up about 130% from the March 23 lows. Of course, they had fallen more than the large caps. So smallcaps will outperform. Cyclicals like metals, auto, banks and real estate are already shining and so cyclicals will continue to do well and the reflation trade will hold sway.
Will the technology and pharma companies underperform now? I do not think so. It is going to be a goldilocks market. I do not see a big crash coming. We have to see if this is the roaring 20s that we saw after the Spanish flu or dotcom-2. In either of those cases, we will see the market run up for two more years and given the kind of liquidity that is there, at maybe as much as five years.
There will be corrections but that will be followed by up moves. The point is one has to invest in growth companies, in sectors which are coming back to favour and there is a huge reflation trade.
Is it a risk-off market? Mildly so and that will get absorbed as the time wise correction is over and then the markets would go up.
I hope it is not famous last words but I am invested and I would say that there is very little alternative to being invested. Hedging costs are very high given the high volatility and the premiums are very high to hedge, It is good to move portfolios more into the cyclical plays, away from the basic IT plays that did very well last year. But those ITs are not going away in a rush.
