The Delhi winter is at its peak. How are things with you?
My only worry is the winter cold shouldn’t hit the markets because at the moment they are hot and in action. Otherwise, markets are bearing pretty positively for investors for a long time and the last two-three days’ correction and some deep cuts in select stocks will shake out the weak hands and give people a reality check.
From Ruchir Sharma to CLSA, from Citi to BofA, the universal view is that markets are pricing in a strong economic recovery this year and next and stocks are trading at a valuation from where near term returns should not be expected?
On a broader gauge, I would agree with that especially in some of the sectoral indices, but one can’t say that there are no opportunities in the market. There are a lot of opportunities in the market. Industry may not see another 10-20% rise over the next 12-18 months, but there are opportunities in select stocks and sectors, particularly economy-facing cyclical, manufacturing and select PSU plays where the government is expected to take some serious steps over the next two years and either privatise them or make them more efficient.
We are already seeing first signs of that. So to cut a long story short, most of the observations are being made by research houses that markets are more or less pricing in everything but to say that there are no opportunities in the market is wrong. There are a lot of opportunities in the market to make money but it is getting difficult to find them and to really go into depth and understand as to what kind of growth they will give and how much of the growth is already in the price.
What should an ordinary investor do? We definitely are in a bull run. In a bull run, it is important to participate but if you are participating via the mutual fund route, the returns have not been very gratifying?
I do not think we can really pass a verdict on mutual fund returns over the last year or two. Most of the mutual fund money can only be evaluated for a little longer time frame. Yes the past five-six years has not been good but for various reasons and I am reasonably confident that lay investors or investors who do not understand the integrities of individual stock and sector analysis should continue to do their SIPs. Yes they can take selective calls on some of the funds they bet on, funds that are exposed to the economy.
They could probably increase allocation there and avoid funds that are exposed to the much higher and overvalued kind of growth story. That is very easy to evaluate by looking at the funds portfolio. So my recommendation would be selective on mutual funds, but do not evaluate them over the last year or two which have been pretty rough for the fund managers.
It is not easy to make money but I am reasonably confident that 5-10 funds would perform very well in the next five odd years.
The countdown to Budget has started, There has been an upbeat sentiment on consumption and demand coming back and things really getting back on track. What would be your strategy going forward? Would you still focus on cyclicals or go for consumer stocks?
I would focus on cyclicals. I have been positioned on cyclicals and domestic facing stocks for the last six-eight months. Consumption is also domestic facing. Infra, steel and cement segments are the places where aggressive public expenditure can be seen. Also, the capex cycle will see revival in the next 12 months because the single most important factor that is going to benefit the economy are lower interest rates. We are already seeing the impact and we are hearing positive news from some of the housing finance companies.
We heard a lot of positive talk from the managers at HDFC that demand is starting to pick up at the lower end of the market. As interest rates fall, the cost for all companies which are into manufacturing and who need working capital, are going to come down, margins are going to improve and at the consumer level, the average EMI is going to come down substantially. Lower interest rates are here to stay. We can worry about inflation and 25-50 bps up and down in interest rates over the next two to three years but I do not think anything more than that. I do not see inflation being a big headache over the next 24 months for the RBI Governor.
There seems to be a suggestion that perhaps you should get used to this new normal from the financial basket; maybe we would not see outperformance in that same time period. What is your take?
Financials is a very tricky space as one does not have the conviction to take a call on buying an HDFC at the valuations it is trading right now. I would be quite sceptical but markets are markets, prices are prices, people are buying into them and I really would want to be underweight on private sector financials which are so overvalued.
I am positioned more towards the State Bank of India, If you are betting on the economy there is no reason why good quality PSU banks will not start doing well over the next two to three years! I am a tad worried about investing in the likes of Kotak and HDFC Bank though they are phenomenally good, well managed companies and have been delivering quarter on quarter. Whenever you bet against them you go wrong, but I would still avoid being invested in them because they are not my cup of tea as such.
