You have been more positive on midcaps than largecaps. What are your observations on the broader market?
Our house view is that equity will see more buying interest as an asset class as the yields are not very attractive globally as compared to inflation. In the US, inflation has gone higher but bond yields have not moved much. It is a perfect sign that valuations may remain elevated. Currently, we are trading at 20 times forward price to earnings on Nifty. We think that this valuation expansion is going to remain till the time yields move up very sharply.
In the last 4-5 years, there was a significant deterioration in earnings environment but now we have restructured our balance sheets. We are also expecting a broad-based recovery on the economy side. The capex has started moving up and private companies are spending, so it is going to be a broad-based recovery. If you look at midcaps, exporters are doing pretty good and they are cheaper than largecaps.
We think that the portfolio should be mostly in cyclical stocks and also have a good proportion of midcaps.
Have you made any recent changes to your model portfolio?
We have been positive on top 4-5 banks, including the largest public sector bank. Look at the valuations and the restructuring they have done. Any dip is a good buying opportunity in the banking space.
The second is chemicals which is doing extremely well given the opportunities in the export market. Even domestically we are seeing that these companies are gaining market shares and have good capex plans. Expansion is going on and it is in a structural bull market from a 3-5 years perspective.
We have now cut down our exposure to metals. We were bullish for the past 4-6 months but now we think that the rally has peaked. Aluminium or copper might do better than iron ore and steel and so we have cut down our exposure to steel and moved to autos. Now it could be a contra call, but for the past few weeks we have been recommending to buy autos. We think that the valuations for autos are now at a reasonable level. We have seen that the commodity price pressure has impacted their gross margins and is now going to ease as they have started taking price hikes. So I feel the margin pressure for auto companies will come down over the next couple of quarters. If the monsoon is good, then the rural demand might also be strong. Land prices have moved up, which also will have some rub-off impact on wealth perception in rural areas. So all these factors are nicely aligned for auto sector to do well over the next 6-9 months.
What are your thoughts on global growth plays?
In the second half of the year, there could be a rub-off impact on Indian exports. In the US, almost 2 trillion dollars are lying with consumers. The demand is definitely going to surge. US cannot produce so much so fast, so they will have to import. In the second half of the year, our economy, which is linked to US, will also do well. We are neutral on IT. Chemicals and agrochemicals, which are exporting to US, will see good demand rebound. US may grow in the range of 6-6.5% but we may be in for some surprise. If that happens, Indian exporters will be in focus.
