Is the momentum once again going to move away from the smallcaps and midcaps?
In our judgment, the driver of liquidity towards small and midcaps is the growth that is happening in that segment of the market. Even if we look at Nifty earnings, there also for this quarter, we have seen very steady growth of 35% on earnings for the current quarter. This indicates that there is a tailwind of growth in all segments of the market and if that growth continues, there will be liquidity which will flow through to this segment of the market.
In the case of small and the midcaps, as long as this steadiness in growth continues, we do not have too much worry, given how much this segment has rallied in the last one year. What we are seeing now is a bit of a speed breaker and who knows, it may just continue for some time. It is also good for the markets because we will see weak hands going out of the market if such sort of a speed breaker plays out. It always pays to be a little cautious but I do not think that this is a time to be overly worried about what has happened in the markets of late.
What is going to happen to one of the hottest trades that we were seeing recent times, the reopening trade? Look at the runups that we have seen when it comes to hotel stocks, travel companies, restaurant companies?
I can tell you through personal experience and this is anecdotal. Over the last week, I was in Goa and the fun and frolic that was playing out in that city was much more than what I have seen in the past. There is a revenge consumption which is going on. There is a revenge frolic which is underway and this is pent up feelings of nearly two years. It is unlikely that it is just going to fizzle out in a short span because of something that has happened as a blip in the near term.
In our judgement this is a trend which is going to continue for some time. Even if we look at the nature of spends around the time of the lockdowns and now, we see the spends shifting from goods to experiences.
In experiences travel, tourism, going out, having alcohol, going to restaurants — all are only going to pick up and our judgment is that while there will be expectations of a near term slowdown on this because of the new wave that is being anticipated, it is unlikely that with each passing day and with each passing vaccine that is being administered, we are going to see a situation similar to the first wave or even the second wave. Each passing day we are getting closer to people getting accustomed to this and finding a way out.
Within this current weakness a) what would you be tempted to buy sectorally and b) would auto be part of that list at all?
An eye has to be kept on growth really and wherever growth is going to continue over the next four quarters and thereafter for 1-3 years, that is the space to focus on. We believe that the trend of credit and margin pickup in banking, as also profitability improvement is a secular trend. That is a space that holds promise. Of course, there will be consolidation and one has to be very cautious which segment of that market one has to look at. We would focus on the larger players.
As regards home improvement and building material kind of companies, we think real estate is a space which is in a secular uptrend and it has only just started. We are seeing volume uptick in our judgment in the next 6 to 12 months. This should translate into price uptick as well because inventory is fast moving out of the system and regarding autos, there are two vantage points through which, one can look at autos. One is the uncertainty of EV and how that will impact the current incumbents and the other is the semi-conductor issue and also the other logistic issues that the auto companies are facing.
In our judgment, the second issue is more temporary and at some point, it will get resolved and so companies which are getting impacted because of this issue in terms of their stock price action being adverse, hold value. Those spaces can in the next 6 to 12 months offer significant value. On the other hand, companies which are going to see a secular sort of stagnation of volume growth because of the EV impact, are to be avoided. Many of those segments may optically look cheap but they may not be cheap because at the margin their business might be chipped into by the EV segment and we would not want to be present in that space where the terminal value of the business is under question.
That is how we would look at the auto space but I must say that there is opportunity in this market and gradually as price action becomes adverse, opportunity may start increasing even more.
Whenever we have these kind of uncertainties, safe haven gold starts shining even brighter. We have seen gold prices jump since the new variant news came out. Is there an opportunity in gold related stocks in the equity markets?
Most gold related companies do not hold much gold inventory on their balance sheets. They get into contracts wherein they get supplies of gold at the time that they need the gold. So in a sense they do not really benefit from inventory gains. At the margin, what also happens is that if gold prices go up, there is demand elasticity and the consumer steps back and lets the gold price consolidate over a period of time and then comes in and buys.
So in that respect, gold prices going up is not good for demand and is really not a material inventory benefit that many of these gold companies get from gold prices moving up. Actually gold prices remaining steady at a certain point is better for these companies. Even if it is a heightened sort of a gold price, if it remains steady, consumers are accustomed to that price and are willing to come in and buy rather than see gold prices moving up consistently
