Metal stocks have come under a bit of pressure on the back of China’s announcement of curbing the rising commodity prices. What is the outlook?
When you see governments are trying to push down prices by cosmetic action, it tells you that demand is so strong that prices are on a tear and that is being cooled off through cosmetic measures. Now demand is bottom up and it is organic while top down cosmetic actions to reduce prices are a need of the moment. In a fight between the two, generally the bottom up trends work longer than the top down trends.
In this case, it is likely that over a temporary period of time, prices may cool down but if global estimates of growth as also the investment outlook that central banks and governments are giving, play out then demand for global commodities is going to remain strong and that will be the biggest driving factor for prices.
In this particular case of metals and steel in particular, there is an issue of cost as well. As a result of a realignment of supply chains, China is not being able to procure from Australia and as a result there is cost pressure on steel, on iron ore as also on coal. That is causing a base to form for steel prices in China. We all know China is the biggest consumer of steel, and a base on prices is being formed there. As consumption remains strong, there is only one way that prices can go to.
The Group CFO clarified that there is no restriction on the FPI accounts and as of now, they are completely active. They also spoke a lot about the growth drivers and the underlying business and said that deleveraging of debt to EBITDA is going to continue. Given that there has been market cap erosion, what is the advice for investors?
Yes, you know rather than speaking of the stocks in particular or individual stocks as a concept, it is paramount to understand two things. One is what is the time horizon in a particular stock? Whether one is investing in a stock or speculating in it? That means are we there for a three-six month period or is the time horizon 5-10 years?
The success of our investment calls will depend on us understanding ourselves better, that is one. The second is that as a general rule, when we see significant uptick in stock prices, clearly what is happening is that a lot of the future growth is getting built in. If we try to chase such stock price rise, then we will be exposing ourselves to downsides because the growth is already built in and that downside can come in various forms. It is a balloon that gets filled up and it can be picked in many ways. In this instance, it was more a regulatory pick but it could also be a pick on account of numbers not meeting expectations.
So on both these accounts,on a temporary basis, if one is able to bear volatility and the time horizon is 5-10 years, then it is alright investing in stocks which have rallied a lot but generally in such cases, one should be more cautious and try not to chase these names.
Five years is a great time but can one really afford to have that kind of a time frame because there are businesses which currently are looking great they may not exist in five years and vice versa?
Absolutely right and which is why I am saying that if your time horizon is not five years, then do not chase and to that extent I must also say that it is not like that this market despite the rally that we have seen in the last one year, does not have opportunities. There are pockets of opportunities which have not rallied. It is better to seek opportunities in pockets where valuations are still reasonable and where you have not seen an out-of-turn or a significant rally play out.
Of course, the success of such investments depends on the analysis of whether the market is incorrect in assessing these pockets and hence those pockets will go on and rally in future. But clearly a chasing opportunity is not a good strategy if your time horizon is 6-12 months or even two years. In many of those names you may lose money.
When the bull market started last year it appeared that the rally leadership was with pharma, From December onwards, cyclicals and deep value stocks have started coming back. Where is the leadership sector in this bull market?
Cycles have shortened quite meaningfully and it is better not to look for leaders is our assessment of the situation. It is better to understand where is it that there is a mismatch between reality and current prices and there will be sector rotation because cycles have gotten shortened quite meaningfully.
Pharma was doing well initially and then IT started doing well; thereafter banks started doing well and then commodities started doing well. It is a case of sector rotation and hence a portfolio approach to investing is a better way to invest rather than looking for individual sectors and going all in there. I would say that any investor would benefit by taking a portfolio approach. If one just looks at the context, we are in a market where there is a lot of liquidity, global growth is picking up and in our judgement we may now see earnings growth for the broader markets moving up after nearly a three-year hiatus.
As that starts happening, in terms of outperformance, the broader markets may take the lead. And so it may be a better bet to look for certain cyclicals — in home improvement, in commodities sector, capital goods, consumer durables, autos — for opportunities and growth is going to surprise everyone on the upside. That is the thesis that we do believe will play out six, 12 months out.
Is anything looking interesting in the PSU energy basket?
I was going through these energy stocks, particularly in the power utility space. What surprised me is that since 2008 when that space actually peaked out, till date certain stocks amongst the largest utility companies in the country, are trading at half the absolute price while their book values have nearly doubled.
So in valuation terms, they are one-fourth the valuations that existed in 2008 and that is quite an anomaly in our judgement. It is an anomaly which has played out on multiple accounts because we have the government selling stocks. Also, the ESG requirements that many of these companies have are really not up to the mark on. Now after such a valuation compression, room for downside is limited and a little bit of interest from the investor community in these segments can seriously rerate this segment. This space does look interesting and there are some extent outperformances and opportunities in this space.
