As the market keeps rising, there are two options before investors; continue to wait until the correction kicks in or invest some part of your portfolio. What should one do?
No one can be 100% in cash and everyone tends to have some part of their money invested in the markets. What kind of cash level you maintain will depend on your own strategy. We go as high as 50% and I believe at this kind of market level, holding the upper end of the cash position makes sense. That said, there will be specific opportunities which will come up. For example, if you put some higher amount of allocations in stocks like
or United Spirits and they move up around 30%, you cut back your allocations. These kinds of moves will keep on happening; but having some cash on the sidelines makes sense now.
So one should not get more bullish when the market moves as valuations are high, caution looks like a bad strategy when markets are moving up every day. Buying looks like a bad strategy now but when markets were moving down in March 2020, whoever bought there blindly made money. Similarly, people who pull out some of their money irrespective of what they hold should benefit, if they are fully invested. If you are already reasonably in cash, then it makes sense to keep on holding that.
There are two pockets of stress in this market — pharma and auto. They both have different trends which are at play; one is structural and the second is cyclical. Which one do you like? Is it time to buy the numbness in autos or pharma?
Autos could have some more stress going forward. It is always a question of valuation paradigm but the two-wheeler space could have a tough time for the next six to nine months because monsoons have faltered, the rural incomes might not be as great, inventory levels in the system are very high. Also two-wheeler companies have a very strong base from last year for the next four-five months. Just on the base impact, they will suffer and on top of that there is raw material price pressure.
On the four-wheeler side, demand is strong at least in the passenger vehicles side. But the semiconductor problems have posed a double whammy for autos. One should not be buying autos at this stage but at some stage they will come to value.
As for pharma, we have had a few midcap pharma companies which continue to do well. On the largecap side, things have faltered. All the stocks fell and now they are trying to form a base. That is where we could still see some opportunities depending on how individual companies go. We hold Sun Pharma. I have been looking to add Dr Reddy’s on correction but when it falls, it bounces back as well and so it is not coming to the price level one would like. But it could become interesting at some stage.
What is your take on life insurance? Is it a good long term bet?
Long term, life insurance is a good story in India given that the penetration levels are still not optimal and to that extent, the larger players will still grow. The question always is and these days is about the valuations. Right now, the market is not looking at valuations in any segment but valuation wise, most of the insurance companies are no longer cheap.
Typically, the best way to invest in these companies is that the downside is limited and to that extent, whenever you get those corrections, that is the best time to buy. Also, they tend to be slightly negatively correlated to the banking sector. Typically, when banks are moving up, these tend to underperform a bit and they tend to do well, when the overall market is not doing as well.
This move which has started could go on for some time because unlike banks, the number of insurance companies is limited. Although
is looking to raise capital, they don’t really need that kind of capital which banks need. So to that extent, the equity which is available for investors is limited in these stocks. Overall, directionally it should do well, but at this point of time like the rest of the market, I do not think valuations are very attractive.
I can understand why autos are underperforming, I can understand why banks are coming up, why heavyweights like Reliance are outperforming because money is coming to passive ETFs. But why are FMCG stocks outperforming when everybody is talking about betting on cyclical recovery, not consumer recovery?
Many strategists keep on talking playing cyclicals but practically on the ground money managers do not seem to be doing that. Most portfolios are still overweight mostly on consumer and some chemical stocks. Typically, till the trend gets formed, people do not want to put money and try and make the trend. I think that is the phenomenon which is playing out.
Most of the FMCG stocks are very richly valued and they are building in maybe 20-25% kind of growth over the next four, five years. Even in the best of years, FMCG companies have not been able to come out with 20-25% growth. So they are overvalued right now. In the short term, stock prices are getting driven by the money flow which is happening and FMCG companies do not issue fresh capital. So when the money flow is so strong, they are getting more than their fair share of allocation and that is why the stock prices are moving up because people who are holding for long term, do not want to sell.
But I do not think it is across the board. Some of them are undervalued like Dabur but even that has moved up a lot. From here on, at these prices, whoever buys should not be able to make more than single digit returns over the next couple of years.
