Given that markets are taking the medical news as a trigger, would you say much of the pain is behind us or would you say the picture is quite hazy and you do not know which way both the medical news as well as the markets are going to head?
It is reasonably clear that the medical news will get better, maybe after two weeks. We got caught unprepared in terms of the magnitude of the virus resurgence but there is no doubt that we are much better off than last year because at that time there was no solution. Today, we have vaccines as well as protocols of treatment. There is no real shortage in terms of many of the basic requirements other than the fact that there is an immediate requirement of certain medicines and oxygen, which of course is small comfort for people who are suffering right now. But on a longer term, this will be something that will get sorted out as capacities scale up. It can happen very quickly.
I would argue that we are not looking at a very serious impact in terms of the downgrades of either the earnings or the economy. We will have to factor in some downgrades. If we were expecting say 30% growth, that is likely to be much lower but it will still be higher than 20% in terms of the earnings. Similarly, if one is looking at 12% GDP growth, it may now be closer to 10-10.5% because there will be a certain amount of slowdown but otherwise it is not as if it is going down to negative or single digits of anything of that sort.
In terms of the market it is a lot more difficult to anticipate because the market has priced in all the good news and then some! We have had a huge amount of money coming into the system both globally as well as locally. RBI also has been doing its own form of QE and has increased its balance sheet by almost 30%. Much of that money has flown into the market and that priced in most of the good news. The best case situation is that we hang around in terms of the front line companies and the rally becomes more broad based as some of the commodity oriented stocks and the companies which benefit from an increase in commodity prices begin to show better earnings.
This year, it will mean some stock picking outside the index. The best case situation is that the index stays in a range which may have some upside but I would be very surprised if the index gives a huge breakout on the upside this year.
How have you read into the tech earnings? What is the expectation from ?
The front line tech has declared that the numbers will be somewhere around the mid teens in terms of the earnings growth and the market is already valuing it at between 20 and 30 times depending on which company one is looking at.
Now it is a question of relative valuation across various services companies. The good news is that the demand sum continues to be fairly robust and with Covid etc. the demand for cloud and digital will continue to be fairly good. There is definitely going to be an improvement over the last several years but that will not necessarily translate into a huge upside for many of these companies if you were to keep an eye on the valuations.
We have to look down the curve a little bit in terms of the smaller companies. Among the large companies,
is likely to surprise the most because they have done quite well in terms of accumulating a much bigger order book than they have done in the past. They have also gotten a little more aggressive in terms of trying to acquire areas of expertise in which they perhaps feel there are gaps. So among the frontline companies, that could be one of a surprise. Otherwise, if you are looking at a 2-3-year view, I would continue to hold on to an rather than try and be too adventurous.
Going down the curve, product companies look a little more interesting. Tech Mahindra should come out with good results.
may have a bit of a negative earnings numbers but that is anticipated because of the kind of bonus they have given. I would be neutral at this stage.
What about ICICI Bank?
ICICI Bank has done a major clean up of its books. There is no particular reason to assume that the cost of funds will be anything out of the ordinary and therefore you should be able to find a company which has come out with a relatively clean balance sheet with a good growth trajectory. The earnings are more or less in line with what the analysts are expecting. I do not expect any surprise in the earnings there. Corporate facing banks should be among the top sectors to watch out for in the next 12 months.
Where are you finding comfort in this market?
Most of the earnings this year will come from the more volatile sectors and that is where we have seen much of the action. So, leaving cyclical movements aside, in terms of market positioning, the reality is that most of the earnings growth will come through the banking sector, the metal sector and perhaps some of the materials, the chemicals and also sectors like pharma and FMCG.
I have a somewhat contra view on FMCG. It has not performed that well but if you go back in history, FMCG has always does well whenever inflation comes through and I have been arguing for a while that the inflation will not only sustain but will actually be much sharper and much longer than the regulators are willing to accept at this stage. Towards the latter half of the year, we would have seen a fairly sharp uptick in the inflation numbers and that will lead to better performance from FMCG. So near term, you will continue to see outperformance from metals and cyclicals and slightly longer term, one can be positioned on FMCG as well.
