When the market is still trading at highs, what can be the next big trigger?
Globally, the way the US jobs report came on Friday, we were expecting a correction in the markets because the texture of the markets has moved to good news is bad news for markets and bad news for the economy is good news for the markets. There was extremely good news in the US markets. We were expecting a correction but the Dow and the S&P held up while there was a minor correction in the Nasdaq with the stay at home beneficiaries of last year coming down a bit. Today we are seeing that catching up. So, the stronger US report puts a bit of a cloud on the Jackson Hole meeting of October 26th as to what the Fed will come out with in terms of a calendar for the taper.
They have learnt the lesson of May 2013 and so it will not be a surprising taper. It will be well broadcast and maybe in August they do not announce anything. They push it back to September, but largely we are expecting the speech of Powell at Jackson Hole on 26 to lay down a tapering roadmap. So that is the biggest global development and till then, markets will be volatile. Domestically, we are entering the second half of this government and a lot of political capital has been spent with not that much to show for it.
Thanks to Covid being such a big crisis, I am expecting more and more issues coming in like we saw the retrospective tax going away. There will be a big focus on delivery now from this government. So domestically, I am expecting a policy environment which becomes very pro investment as well as very pro welfare. That will mean a lot of money going into the economy and leading to better consumption and virtuous circle emanating in the economy. Overall, on balance I would say that the markets are not cheap. Market is at near all-time highs and so it has become difficult. It is an active stock pickers market. The active fund managers will outperform the passive funds in this kind of scenario.
On the global front, if there is even the hint of a little bit taper from the Fed, one could see emerging markets seeing outflows. We saw that with China also, at least in the beginning. India also saw outflows. We did not see those inflows though last week was a pleasant surprise with the FIIs buying on at least three out of the five days. We saw two-and-a-half thousand crores odd coming into Indian markets net but that has to continue to take these markets higher but domestically, we are getting well set for a good run for the markets as the government enters the second half of performance.
What is going on with the entire Vodafone story? The market is reading it as disadvantage Vodafone. Could it actually mean advantage Bharti and is the market right in adding more weight to Bharti?
Both the main promoters of Vodafone have stepped back and said they would not be putting in more capital but the market is still ascribing some value to the stock. A lot will depend on what happens in terms of the government package. Even today, there was a news flow that DOT might be setting up a panel to look at the financial package for the telecom sector but most of that will be again moratoriums on spectrum payments and some more time to pay off their dues but what is needed is injection of capital. Vodafone India has a negative net worth. So unless the promoter or some new funder comes in, the scene remains bad.
There was speculation this retrospective tax amendment might have come to help them find a new funder but a new funder will not come to make your negative net worth positive. They will fund growth. So some pricing action has to happen in the sector. All three players have not really bitten the bullet in terms of taking some pricing action. What Airtel has done is very minor, very cosmetic. It does not impact the large section of their users and if you look at all corporate plans, we would be at 8 to 10 times the average ARPUs and that is where a lot of the cream of the portfolios is and we would be willing to pay more if we got quality service.
Everybody is using internet these days as normal calls are just not going through. I would not really recommend investing in the telecom sector at this juncture even if it becomes a duopoly, until you start seeing some kind of price action coming in terms of them going ahead. Maybe the backroom talks are there. There is some speculation that RBI would put a floor to the borrowing and the lending rates and maybe the government will come in and say you cannot price it below this rate, but that will be anti-consumer. So I do not know if that will happen. Right now I would say stay away even if it is a duopoly. There are other growth sectors where one can invest.
How are you looking at all the various internet companies headed to Dalal Street? Zomato had a blockbuster listing but that is missing when it comes to CarTrades. It is nowhere near that scale?
The big issue is that venture capitalists are making good money, the promoters are making good money. This is the era of profit less prosperity. So it is prosperity for the promoters and the venture capital backers. They are extracting most of the value. Public investors who are coming in now are coming in hope that there is a big runway and a big total addressable market, that these companies will grab a lot of revenue and give Amazon, Google or Facebook kind of returns.
It is very difficult to make money in the next few years with these kinds of valuations. The venture capitalists have made a lot of money and that was the thesis over the last three, four years as these unicorns kept on becoming bigger and bigger. The VCs said this is the difference from 2000. In 2000, we came to the markets too early and those valuations then made the markets very heavy and led to a fall. They have taken on the risk but now the risk has been passed to the public markets in a very subtle manner at very high valuations.
Right now, people are just running into IPOs based on easy funding but there has been a setback with the Glenmark IPO where most HNIs have ended up making losses. So that is leading to a bit of caution which is good. I was reading one analysis over the weekend. Somebody had put out 2007 numbers. Out of 100 IPOs, 23 do not exist today and about 11 have given good returns over the next 11 years while 89 have given subpar returns including 23 which disappeared or got subsumed into some other company.
We have to be very careful about these kinds of valuations. I would stay away from a red hot IPO market like this. Retail investors are coming in like the Robinhoods in the US and if somebody is putting in one lakh or two lakh, that is not too big an issue. But I think it is becoming too frothy and it is better to wait out and then analyse the cash flows and see which company will survive. Right now, there is a frenzy in the IPO market.
