What else in the market is going to hold out? We have recently seen some good breakouts in autos and healthcare services companies including hospital stocks. Do you find long-term opportunities in these sectors?
I will just broaden it slightly. An interesting thing is happening in the consumption space. When Covid started, consumption collapsed and that led to a bit of battering in the consumption stocks. In the post Covid world, we are seeing revenge trade. The problem on the other side is that inflation is ticking up and so prices are going up also. So we have inflation-led growth and that means when prices are going up, we are all feeling it and it is visible. But even then demand continues to go up. That is a very interesting prospect in the whole consumption basket and that is reflected in the consumption stocks.
So despite an inflation led growth in consumption, the manufacturers will be able to pass on the price hikes. However, when rising commodity prices, which is causing the inflation, corrects, the margins which are under pressure will suddenly shoot up. So I personally think a very exciting thing is happening in the consumption basket. Today what seems to be under pressure because of raw material cost or inflationary push in commodities is a temporary thing and if manufacturers are able to transfer or translate these price hikes without affecting demand, it is a fantastic scenario.
Even the numbers of Walmart that came out yesterday are talking about inflation led growth. The stocks that were beaten down the most, could prove to be very exciting. That is the trend I am seeing emerging in the markets in the last few days.
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What is the holiday list looking like? India is opening up to foreign travellers. Does that make you bullish on any of the hotel or aviation names?
The airline traffic is going strong. We are going to see a very big surge in the whole hospitality space. That is visible in the prices. It is happening everywhere and I think that is likely to really pan out. The fear is that obviously all these destinations are really going to be jam packed and may not be as desirable and so probably one should wait for the first level of froth to settle. Hopefully, we will get to much saner places but this is exactly the point I was making earlier about inflation led consumption growth. People don’t care. They are just coming out and they want to go on a holiday as they have not been on a holiday for one to two years. They have saved budgets and so this time the ability to pay will be greater. A very big beneficiary will be the consumption related stories. Apart from hotels and aviation, there are a lot of other sectors that are going to be beneficiaries.
How are investors supposed to balance their portfolio because the cyclicals are outperforming in the earning season but there is the new wave of technology as well?
Cyclicals standing out is nothing but a function of what we saw happening in commodity prices and that is where the metals and your energy related spaces have panned out. The million dollar question, not just for us but for everybody in the world, is whether this whole inflation that we are experiencing is transitory or structural. I personally think that this is transitory. This is happening more because of the supply chain issues.
Baltic Dry Freight is again a very key element in the current prices. It is correcting because of dislocation of people not being able to come back to or not wanting to come back. There are temporary bottlenecks. For the first time in the history of the whole world, the economic machine had shut down. So restarting it takes time.
Once people get back to work, once we have efficiencies in the supply chain which are manmade and they will even out. I feel the whole commodity thing would cool off and I think that is ultimately what will calm down inflation. So we think this is transitionary and the moment these things even out in a month or quarter or whatever, these very guys who have been able to pass on price hikes and have been able to increase their market share despite this kind of inflation will continue to be leaders as marginal players get wiped out.
We saw that the biggest beneficiaries of the demonetisation process were the organised players and this happened again during Covid. The move to organised from unorganized, from small to large is happening globally and in India. I continue to retain the faith in those plays which are structural demand stories and which are long term trends and we want to have them in our portfolio. One quarter margins may get compressed but I do not think you can kill the basic theory the basic trend or the mega trend.
