India is still lagging behind whereas global markets are making fresh highs. Now it seems to be bouncing back and the market is discounting six months far out. What are your thoughts?
Since the market fell in March 2020 and the subsequent run up, there have been periods of time when India significantly outperformed or even has been the best performing market among emerging market peers. Currently we are going through a minor correction or a sideways movement for two reasons. One is because everybody would like to wait and watch as the result season has already started. The September and December quarter results were ahead of expectations. People might want to watch the sustainability of that performance for a couple of quarters.
Also one has to see if as a result of the second Covid wave, there is any further strain on the financial sector. I would not get overly concerned about what is happening especially in the stock markets right now. I would rather think that this is more a phase and in the next couple of months, we might see sideways movement and also see investors watching out for the sustainability of corporate performance.
But if you look at the way the last 48 hours the market has got a boost because of the earning season commentaries. Most of the numbers are in line or with a positive tilt. What are your thoughts on corporate reporting?
Whenever you look at the key sectors — say IT — things are as per expectation. But if you look at financials, that is something to watch for. Till now, the results have been in line with expectations and, a couple of them have been really good. So I can say that it is early days yet though the result season has kicked off quite well. I do not see too many negative surprises.
On the other hand, it is widely expected that cyclicals like metals will lead the aggregate growth in earnings. When we are done with FY21 numbers, on an aggregate basis we will have reason to cheer. What is more important is that from here on, we will actually see sustenance given that we have seen only localised lockdowns with the second Covid wave.
What is the real impact on activity? Since the markets have already run up quite a bit in the last six months, next quarter sustainability is what we have to watch out for. But it is not expected to have a very big impact and we are positively biased.
Today the top gainers were the financials. Despite many of them saying that the sector will be impacted because of the second wave and provisions are being made, the NBFC guys are already saying that there would be an impact. On the other hand IT and pharma continues to outperform. What are your thoughts in these three sectors?
IT and pharma are the easier ones. We do not expect any negatives. In fact, we expect the momentum to sustain. There is a fair amount of excitement in IT because not only the large cap bellwethers but also a slew of midcap companies have come of age which are able to differentiate themselves in the global marketplace. So IT and pharma continue to be core holdings in our portfolios, purely on a bottom-up basis.
Coming to financials, we need to see where we are coming from. Even before Covid hit us, our system level credit growth was practically zero and GDP growth was more like 4%. In 2018, we had those massive IL&FS defaults and then a shakeout in the NBFC as well as the BFSI lenders. Even in the larger PSU space, they have been going through M&As and consolidation and capital raise and restructuring.
So even before Covid hit us, for nearly two years the financial sector was going through a massive shakeout and a clean-up. When Covid hit us, it was more like a slow speed car crash. If we were witnessing record system level credit growth and if we had seen a period of expansion before we hit upon Covid, the scenario would have been very different. But we hit Covid at a point in time when we were consolidating and restructuring the whole sector.
As a result,we are not seeing too much of panic or too much of delinquencies or reporting of very high NPLs. Hence we remain constructive. We are not very fearful of the next two quarters.
Which sectors will see headwinds in this kind of environment going forward?
At White Oak, there are no strict negative lists. We have stayed out of making macro bets and as a result taking exposure to global commodities. It is not that they will not make money. Of course, they do end up producing great results if caught at the right end of the cycle, but timing those cycles is precisely what we find difficult.
What I am going to say is not an indicative of our view really but it is something that we avoid because of inability to time the macro cycles. So global commodities is one. Second is anything which has huge intervention from the government. These are sectors largely dominated by the public sector where there is not much heterogeneity of choice amongst businesses. Those are the sectors that we typically tend to stay away from. But otherwise, if you were to cast a glance at any of our portfolios, we are pretty much invested across sectors and we find bottom-up ideas in literally every sector that one can think of.
