What do you make of the market being near all-time high? What is the market trying to price in?
Clearly, the market is looking beyond the near-term to price in the recovery post the second wave. There are benefits of a quick vaccination programme that the government has embarked upon. Positive global cues are coming from the Federal Reserve and the US government in terms of spending. It is a positive scenario in terms of the investment cycle and cyclical sectors. That is why we are seeing commodities, industrials, industrial products and BFSI doing well. So investors are actually looking beyond the near-term concerns to look at what can happen one or two years down the line.
Are metals the best placed in the capex cycle?
We have been bullish on the commodity cycle since last October. I have been bullish about the reflation story and specifically about recovery in commodity prices. We have seen a very strong leg of up move in commodity prices across the world, which has also benefited commodity companies in the country. They have seen fantastic improvement in profits, they are also using their cash flows to deleverage their balance sheets and some of them are also looking to expand further. There will be some impact coming from the easing of the pandemic situation also.
There will be certain commodities that benefit from supply constraints. The demand has been recovering well but there are pockets where there are supply constraints. With normalisation, we can expect some supply coming back. So some correction can happen in commodity prices. Overall, as the economic recovery picks up across the globe, the capex story in commodities, metals in particular, become a very strong contender.
Whenever there is an uptick, midcaps get benefitted more.
Midcaps and smallcaps peaked around December 2017. From ,2018 they were in a bearish cycle till about September 2019. There was some recovery in select pockets in midcaps and smallcaps. Some midcaps were helped by government initiatives like PLI and tax incentives. They fell sharply during the pandemic last year in March and April. Only in the last six months we have seen midcaps and smallcaps do extremely well. The valuation gap between Nifty and the midcap and smallcap indices have been filled in the last six months. It is a wide canvas and we need to be selective from here on when investing in midcaps and smallcaps.
How would you look at building a safe portfolio at this point of time? Should one increase allocation to IT stocks or large FMCG names like HUL, etc?
We are quite positive on the market outlook. We are not expecting a significant fall. Yes, there can be corrections which are part of a bull market. It is difficult to time them.
We see a lot of opportunity in the capex part of the economy. We are seeing a revival in capex in India after a very long time. Most of the capex indicators had peaked between 2010 and 2012 and have been moving down.
From here on, we expect a good improvement in capex from the government through infrastructure spending and by the private sector through investments in manufacturing, whether it is related to PLI or commodity or cyclicals. We also expect a good pick up in real estate.
All three engines of investment — government, private corporates and household sector — will fire in the next 2-3 years. That gives a very good opportunity to pick up companies or sectors that are benefitting from the capex cycle. So there could be companies in the commodity side, cyclicals, industrial products or auto ancillaries. The valuations are quite attractive because people are still skeptical.
In the last 10 years, a lot of false dons have been seen in this sector. They never really sustained, but this time the signs are quite strong with lower interest rates, better capital markets and good availability of funding. I believe there will be a fantastic pickup in the capex cycle in the country going forward. And these are the areas to fish for where growth is either underappreciated or valuations are attractive enough to deserve a rerating.
