It has been a good September, a very decent October but in November, a little bit of consolidation and numbness has started. Do you think we have topped out for the year and we may remain like this for the next couple of days, weeks at least for the year now?
It is very possible and there is nothing to be worried about. The Nifty per se, on a one-year basis — and we are not talking about Covid bottoms — is up 40% from a year ago. We track 25 global markets. India is the third best performing in the world on a one-year basis. The two markets that have outperformed us are Saudi Arabia and Russia and obviously that is thanks to the price of crude because they are exporters.
So India has been an absolute outlier and outperformed in the last one year. The biggest driver of global markets is the US where S&P 500 is up 30%. We are talking about investing globally. There is a big euphoria but Indian markets have done much better than that. Even the Nasdaq on a one year basis is up about 34-35%. So the Indian market has been an outperformer. If you start seeing it in relation to emerging markets, which thanks to China, is a subset of the EM index, in the last one year, it is up about 7-8% and we are up 40%. So we have had a massive outperformance relative to global markets, relative to the peers and it is very natural for markets to take some pause.
The correction or the pause can be two ways. One is it can be via price rise and that means the prices can correct 10-20% or it can be time-correction and that means markets can be 18,000, 17,500 or 18,500. I am in the camp that believes that there will be more of a time-wise correction.
The beautiful thing that is happening in India is sector rotation. If some day banking is not doing well, tech does well and vice-versa. We are not seeing a big damage but a lot of churn is happening. We have a time-wise correction and that is getting reflected. There are some global issues also which will put pressure on India in the short term. The strength of the US dollar typically has a knockdown effect on emerging markets and commodities.
The way bond yields in the US are going up, some dark clouds are emerging globally. That will put pressure and that is reflected in the FII numbers. They have been negative for the last two months. If we continue to have a time-wise correction in which there will be good days for some sectors and bad days for another, it will be very good for the market and that will set us up for the next stage.
If the correction is price-wise, the pain comes in. As long as it is time-wise, it is more of a question of patience and as far as patience goes, as investors we have a lot of it and that is really my concern. The big red flags are global, which is mainly bond yields and the dollar, but our markets are behaving very well and it has been a stellar outperforming year for the last one year.
There is an exciting sector called new tech which is getting created and is too large to be ignored. We are looking at about $50 billion approximately in these four new tech companies. Which is the one startup which could be a stunning wealth creator like HDFC Bank of 2000 or the Bajaj Finance of 2010?
Every bull market is symbolised by a certain sector or a certain theme. If 2000 was IT, 2008 was infrastructure. This is going to be about the digital play that is going to come in. But the problem with digital play or maybe our models is the profitability angle. No doubt we are seeing amazing price moves but the real test is going to be when the market corrects because when companies do not have earnings or when there are a lot of assumptions, the corrections that happen are very sharp. Personally, I would be more biased towards a certain element of demonstrated profitability. The reason is not that other stocks will not go up, but the risks involved in a lot of other stocks, which are based on pure storytelling, tend to be very high. There will be a lot of excitement. There has been a lot of money making but volatility is something which is not my mandate.
So we are invested in this space but we are looking for those places which are backed by profitability simply because then, when the market corrects, your head does not get chopped off. When it is not backed by numbers and is based on pure hope, the journey to becoming an HDFC Bank or a Kotak Bank, is very tough.
Even HDFC Bank or Kotak Bank were not the same from day one. For many years they did nothing. It is when it got translated to visible profitability that the real move happened and that is not just in India, even globally companies like Apple and Amazon and Tesla were also disastrous stocks for a period of time. It is only when profitability set in that there was the big wealth creation.
I do not want to be in everything that goes up or every story telling but my eye is on profitability because when profitability sets in, that is when the wealth creation starts, I think we will have one correction and a lot of them will get tested which will also give us a lot of insight. So I would be selective. I would go where there is a certain visibility of profitability because that is the ultimate armour in a correction and we do not want to go through immense volatility.
What is the stock market behaviour really telling you because some of these banking names were the last ones to join the rally? If I just look at the last month to date performance, banking as a sector has been the only drag and the underperformer so far?
That is very true and whether we like it or not, everyone is bullish on banking and everyone is talking about an industrial revival. So it is nothing new. It is not unknown and this is really relative underperformance. When these companies come out with numbers, we will see these stocks spike up, a nearly vertical move; but post their numbers, all these stocks have given away 10-15-20%. Banking is definitely the most popular, haloed, over-owned consensus bullishness sector but the market is telling us something else. The market is clearly telling us that the money or a certain amount of strategic move away is happening from banking and I am referring to the biggest private sector banking stocks. Their price movement is not very inspiring.
Though everyone knows the story is good, though everyone knows that if revival happens, banking will do well but the market is telling us something else and clearly I feel the market is going a little lighter in banking. In the last bull market from 2015 to 2020, the best performance came from some of these private sector banks. From being grossly overweight, people are getting equal or underweight and that is why on a day-to-day basis, banking does not inspire confidence.
In fact, what inspires confidence for me personally is the IT sector. Post Covid, it was the first sector which really broke out into lifetime highs. Post that, it has had a very beautiful bull market and more so in the midcap space. Now that the market is going through a correction in the last month or two, IT as a sector has not given much away. In fact, it is still continuing to push to lifetime highs.
I feel that the crown is moving away from banking towards IT. It is not that IT is a lightweight, but the fact is in our lives on a day-to-day basis, in global markets, maximum excitement is in the digital plays. These are all related to that space and I think our portfolio’s single largest overweight sector is IT, rather than banking and that is a shift in trend that is happening and this is a decadal shift.
