This is not the first time that you have seen these kinds of big cracks in bull markets. How should investors and your clients out there cope with this kind of a fall in just one day?
Whilst it is worrisome to go through this, clearly the panic this year is radically lower than it was 12 months ago. Last year, it was 10.30 in the morning when the market fell 12%. So just compare March 12 or 13 last year with what we are going through today. The reason we are panicking less as a nation, a society and a stock market is that treatment protocols are in place. The death rate now is one-quarter of what it was last year. We have got 100 million people already vaccinated. We need to vaccinate another 200 million people in the next month or so if we really want to get ahead of this.
But the panic is substantially lower both in the country at large and in our clientele and as a result, the moderation in the market correction. A year ago, the sentiment that we have lived through in Mumbai in the last three or four days would have led to a much bigger crack and I think that gives us the message for the months ahead.
The months ahead are likely to bring more lockdowns but the effect on the economy of that will also be moderated because it will be a partial lockdown, not the whole country will go into it. Secondly, businesses have learnt how to cope with lockdowns and still carry on doing at least 70-80% of what they do in normal circumstances. Hence on a YoY basis for the quarter ending June this year versus the quarter ending June last year, we are still likely to see the economy growing because in the quarter ending June last year, a huge part of the economy was shut.
This year, parts of the economy would be shut for parts of the quarter. So we need to put it in context. Across the world we have taken two steps forward and one step back. What we have lived through in the last week or so in Mumbai is clearly a step back for India. But I am optimistic that over the next three months, we will once again get ahead of the problem. We will step up the vaccination drive and try to hit that 300-400 million number on vaccines over the next two to three months.
If we can do that, then the current jitteriness everybody is feeling not just as an investor but also as a human being will be overcome. We shall overcome this year like we overcame last year.
Do you think the Street is cautious about not what is going to be reported for Q4 but what is going to be the commentary going forward?
By and large, the investors are a little bit in the dark as to how powerful this upsurge in Covid is, as we have significantly exceeded the peak Covid levels we saw in September last year. None of us really has a crystal ball on how far this will peak, the hill that we are currently climbing and how much further do we have to go vis-à-vis the second calendar quarter, first financial quarter and the quarter ending June. All of us know that it will be significantly better than the quarter ending June last year.
As I said, in the quarter ending June last year, we were pretty much shut down as a country and GDP fell 25%. This year, even Maharashtra, the worst affected states is not going to see a complete lockdown. We will potentially see a partial lockdown in Maharashtra. Further more, whether it is Maharashtra or the rest of the country, corporates have figured out how to carry on functioning with a degree of normality even in the midst of a lockdown. So I am not so sure the forward looking visibility is that much clouded on companies like IT services.
Given Accenture’s blazing results for the quarter ending March, the Indian IT services companies will probably have their best quarter in 40 quarters. This is probably the best quarter in 10 years for IT services. There is very little opacity around IT services. FMCG a little bit, financial a little bit more, industrials a little bit more but year-on-year for April, May, June 2021 versus April, May, June 2020 is night and day. I cannot believe that anybody is that worried as to what will happen in April, May, June this year versus what we went through last year, which was a once in a generation event.
Cyclicals were going to lead the earnings acceleration this time around coupled with a low base as well. Now Nomura, Jefferies are actually suggesting that the cyclical recovery may have peaked for now and is already baked in into the prices. Do you think that is also aggravating this fall in the market?
I never quite understand why as an equity investor, people would load up on metals. You are effectively playing the LME price of the metals. That is the bulk of the exposure and to some extent, you are playing economic activity. Neither are easy to forecast.
I mean, if anybody can forecast the underlying commodity price on the LME then play that commodity. Why do you want to play the stock and day to day economic activity? Nobody has a crystal ball. So it could well be that some people who had loaded up on metal stocks and who would have made lots of money in the last 12 months, have panicked.
But in sectors like auto, financials I remain very optimistic. The frontline auto companies and banks will continue to do very well. Even if we see a rocky three months for Maharashtra, the broader piece on cars, top quality banks and top quality NBFCs, I remain very optimistic.
The Supreme Court announcement two weeks back is going to lead to a further shakeout amongst the lenders. The polarisation in lending market share in favour of Marcellus investee firms HDFC Bank, Kotak Bank, Bajaj Finance, AU Finance potentially ends up quite sharp in the next six months or so.
So in auto and financials, play the best names there if you want to benefit from the economic recovery. On metals, I remain a little perplexed about those who say they want to play an economic recovery by buying metals and mining stocks.
As an investor would you buy this fall or would you just be in capital protection mode?
We will buy. We will buy consistently. We will buy not just for the factors like lower death rate, India being the pharma factory of the world etc. There is also another factor. Through the Covid dislocation last year, during the GST launch, through the demonetisation, there has been a consistent pattern; well run high quality companies are gaining massive market share in each of these dislocations.
So even if we go through a mini dislocation over the next two, three months, once again we will see the pattern getting repeated where market leaders such as Titan, Asian Paints, Nestle and HDFC Bank will grab market share. Given that these are investee companies of ours, we have designed the portfolio to benefit from these exigencies. It is a very clear pattern of market share gains for stronger franchises and therefore it behooves us to take advantage of these sorts of knee-jerk reactions and load up on these high class companies. We will carry on buying, we have done so over the last year or so and we will carry on doing so over the next week especially if the correction goes a little deeper.
