Do you believe that going forward, some sort of correction could set in the market — be it due to the macroeconomic factors, be it inflation worries or perhaps global events? Or do you think that the trajectory of the markets continues to look fairly strong over the next few months?
Markets are clearly struggling and have been moving sideways for nearly a month now. Most of the reflation, recovery trade has got baked in. One interesting statistic is that for the first time after 1992, 90% of active managers in the US outperformed the Russell 1000. What that shows is that it has become very much a stock-pickers market. It is no longer a beta play that you buy the entire market and coast along with the Fed’s generosity leading markets up across the world. So we have to be careful now.
We are expecting that in the August meeting at Jackson Hole, they might come out with a calendar for starting tapering by January. The Fed fund futures are factoring in four rate hikes, two in 2022 and two in 2023 even though a majority of the Fed participants are still counting for the first rate hike to come only in 2023. Those are the indicators for the market which is showing that a lot of the earnings growth is already baked in. Also, inflation is very much there. So, there is a triple whammy. One is that the commodity super cycle is still going on. Second, supply chain disruptions have not eased out. Thirdly, there is a big issue with global trade where frictional costs have gone up because of the rise in shipping or the lack of shipping capacity which is again leading to disruptions. So all that will have to be factored in.
Right now I would say it is a stock pickers market. We have to be very careful and I do not expect much from the market per se but you will have individual sectors and individual stocks which will outperform. So it will be better to go with good stock pickers in this kind of market, they will tend to outperform rather than the entire market moving up.
Where is this rotation going to take place next and where do you think gains are to be made?
If you look across the world, the US recovery has got baked in. The European recovery is just starting. Emerging markets are still lagging. One can say, China is at base one, US is at base two, Europe is at base three and India with most of the other emerging markets is still very much at base four but the stocks are already reflecting the recovery. The best thing in such a situation would be a barbell strategy. You have to be growth-focused and defensive both.
In terms of the pick up, I would go with cyclicals. In the case of automobiles, we will look at the June recovery but the commentary from the majors has been that inventory overhang has not been as bad as anticipated. Market leader
has taken a price hike. Escorts has announced tractor price hikes. So, power to price with the quality companies is what we have to go with — be it increasing prices, be it the cement majors who have raised prices. Even in monsoon season across April, May and June, cement majors hiked prices by nearly 5%. So, I would go with the cyclicals. Financials, industrials, real estate and autos would be the preferred cyclicals. On the defensive side, if one looks through the Accenture numbers, they had very strong growth across geographies. Out of every four dollars, nearly one-and-a-half dollars in global IT is spent in BFSI; BFSI had a 21% growth. Retail saw a good traction. Manufacturing was very good.
The only player that lagged their average number was energy and we know that oil and gas is not really spending capex. They are transforming themselves because of ESG issues into global energy companies rather than oil and gas companies. So I would go with IT as a part of the defensives. A barbell approach is what we have to look at.
What about pharmaceuticals? There was the PharmEasy-Thyrocare deal. How are you looking at the entire healthcare universe that is pure play pharma –diagnostics and hospitals included?
Yes, all have done very well. If you look at hospitals, the kind of growth and usage that has happened has led to a re-rating. In pharma, the only issue remains the compliance part. There are just so many surprises that building a quality long-term portfolio becomes very difficult. Dr Reddy’s went up to Rs 5,500-5,600 and then came down again. Now on this DRDO medicine news, there is again an increase but you do not know what is lurking around the corner and that is the big issue with Indian pharma.
I am continuously in touch with auditors who work on behalf of FDA to figure out why India gets singled out. Is it a racism issue, is it an insecurity issue? But the same company buys a plant in New Jersey and gets an adverse comment! That does not happen in the US. They would shut down a company which would be getting FDA adverse comments like this. So it comes back to the management and that is the biggest issue with Indian pharma.
The same MNCs operating in India and their plants do not get the FDA comments and we have been talking about this for years now. We have been following this for nearly three to four years. So instead of pharma I would say go with the specialty chemicals, go into the supply chain of the pharma. These are priced to perfection. One has to be careful. But there are enough quality small cap, midcap companies in the specialty segment. I would go with those.
One cannot expect blockbuster drugs from Indian pharma. We see a betrayal of investor trust. I would rather go with IT as my defensive global pick and would not go overweight on pharma at all.
