The question now is what to buy? IT and pharma are the only clear trend and perhaps metals as well, while consumption related sectors are facing the heat.
I think it is time to be neutral around the whole consumer pack, whether it is FMCG, consumer discretionary, auto and even housing. For the next 3 months, going neutral on consumer is a better bet. There is a risk in terms of input costs and the valuations have already factored in a bounce back which may not be possible.
I would still back banking because you have a variety of plays. Private sector banks are well capitalised and are taking advantage of RBI’s every move in terms of liquidity. PSU banks have the reach and are undervalued. The smaller private sector banks have an opportunity to take advantage of RBI support. The first line recipient of RBI’s largesse is going to be the banking system. You cannot go wrong if you keep buying the banking sector consistently.
When we spoke last time you were quite optimistic on cement and autos. Have you changed your positioning?
I have continued to be optimistic on cement. The government’s infrastructure programme and road laying would continue despite all the price hikes because they will need to keep providing NREGA jobs. Construction activities will continue and so continue to remain bullish on cement.
I have changed auto to neutral from optimistic as the sector has been impacted by the second wave.
What should one avoid or exit now?
In the last 1-2 years, the small cap segment has run up a lot and until we come out of this crisis you can book profits here and shift it to midcaps. Midcaps are more balanced in terms of exposure to sectors because overall small caps have an high exposure to industrials and because of the pharma pick up it has also gone up. Pharma is a place where I would recommend booking profits because it is a short term bounceback rally due to the second wave. Largecaps will be volatile because of FIIs. So midcap is in a sweet spot now.
Sectorally, pharma is not a long term play for me. I see NBFCs and insurance going through pain with the second wave in terms of retail default rates going up.
The smallcap index has gone up in terms of its forward valuation whereas the midcap index is still trading at a 10% discount to the large cap index.
Would you buy insurance stocks? Even though insurance premium has gone higher, the demand has been relentless.
Yes, but you got to have at least a 3-5 year perspective. In the short run, they will be more volatility because as the claims ratio picks up they will have to readjust. So we could get a chance to buy insurance even cheaper than today. If you have a 3-5 year perspective, you can keep steadily allocating a little because you will definitely get it at better prices. But if you want to allocate a lump sum, I would say you will actually get a better day to buy it than today. Overall, having insurance in your portfolio is a good thing to do.
What are your outsized positions? Apart from cyclicals and industrials, where you are significantly higher than the benchmark?
Banks and IT. I am overweight on both.
Let us understand IT. The average PE multiple for largecap is 25-30 with a 10-12% growth. Are you betting on rupee depreciation or are you playing safety?
I am playing three things: rupee depreciation, safety and the fundamental factor that IT spends abroad are going to rise because of the fundamental nature of 5G, Internet of Things, the shift to cloud and shift towards work from home.
IT is huge. A bigger part of the budget will be spent on IT which makes growth rate sustainable. Ultimately, you do not mind paying a high price as long as the growth is predictable. I also believe that the rupee is due for a depreciation in the medium term. I am factoring in at least a 5% per annum uptick on these stocks just on their earnings from depreciation.
