Business head & CIO, ASK Investment.
Are markets fully priced now and do you think markets are due for a prolonged period of consolidation and it is best if we consolidate here?
Yes, I would agree with you. We have had a good run from the bottom. Now on most valuation parameters we are looking more expensive than historical levels on average, even on bond yield to earnings yield parameters. So while there is an upside and we do believe we will get there, let us say the earlier highs over the next few months but for some time it is good to consolidate where we are and let the economic activity pick up that will give more legs to the rally.
Have you changed your portfolio allocation considering that right now gold is available at the price of gold? I mean it is not March or April where gold was available at the price of silver?
We have actually reduced the defensiveness of the portfolio. If you believe that being in consumers, staples was being a very defensive positioning, while we have retained most of the names, we have taken money off the table as our natural process of rebalancing so our consumption portfolio weightage has come down and we have introduced more of technology, technology services, chemicals and pharmaceuticals.
So that change has been done, most of the spaces that we have added have a strong tailwind of growth. These spaces should do well this year and the growth should continue into the next year as well. So with that thought, we have changed some bit of the portfolio moving away from consumption was mostly on valuation considerations.
Have you participated in any of the banks’ QIPs which have come out?
We do not qualify to be part of a QIP process. We are seen more in terms of regulation as a PMS, more like an HNI entity. So, no we have not participated in the QIPs but that said, we have exposure to some of these names we like in retail financial businesses.
We have actually bumped up our financial sector exposure mostly on the retail side, in all three places — NBFCs, banks and insurance. Insurance would benefit from much better awareness itself for life insurance and health insurance spaces and they are the more profitable space whenever normalcy comes in.
Let us look at retail financials. Everybody in financials may get impacted. Now that the weakness is going away, we have seen most NBFCs being able to raise money via equity and bonds. Many of the better NBFCs have taken the opportunity to reduce ALM and increase the duration of their borrowings. As things get normalised, NBFCs are also surviving. Retail focussed good NBFCs are also very nicely positioned.
Where would you be tempted to take profits off? Or do you think the long term growth story is intact and staying put is the way to go when it comes to IT and pharmaceutical stocks?
We would be staying put. These are spaces where growth will come by and this is a thought that I want to share. As liquidity becomes amply available, the capex intensive spaces that overbuild, you start with the situation of overcapacity and they get further overbuilt. Taking out consistent profit increases from those spaces becomes very difficult. The spaces where one can build a scenario of continuous longs would command higher valuations in the marketplace and that is our belief. Technology, pharmaceuticals, specialty chemicals and even consumers, and retail financials, insurances are these spaces of choice for us.
What are the major triggers that you will be watching out for going forward? Globally we are aware of what may take place in terms of elections etc. but back home what is the next trigger according to you?
People are tracking the quick data that comes by after June. July was a bit soft; while the recovery continued, the pace of recovery definitely reduced as different parts of the country went into lockdowns. So the strength of recovery is clearly being watched. The thesis of the market going back to the earlier highs is contingent on the recovery continuing to be strong. So that is one.
Second and with lesser inflation because with the other big ingredient in the market valuations sustaining, where lower interest rates are lower. We did not have a cut in the last policy. Now people are saying we may not have a cut in the next policy, given where inflation is. Those would be the two big things to watch out for in the domestic context. Globally, given the steps by the central banks to further keep the liquidity high is something that would have effect on market
Given the bounce that we have been seeing in broader markets, would you also start to expand some of your picks or would you stick to those frontline names given that the uncertainty also continues?
The broadening of the market is very good news, in part, because of improved retail participation that has stood out. For the first time we have seen retail come in in the manner that they have in the market for down and out. The kind of confidence retail has put on the India growth story has a lesson for all of us. People believe it is a positive, it is not a negative.
Between February middle and August middle, what changes have happened in your portfolio because of Covid and market sell off?
So, what are the space that seem to be growing and what are the spaces which are expensive? Our portfolio was nicely positioned for Covid but maybe it was a tad more expensive, maybe it was a tad more conservative. So, de facto, if you see our positioning then and now, you will see close to 10% have been taken off consumption names and that is going into technology, pharmaceuticals, chemicals and retail oriented financials.
With the moratorium overhang, don’t you worry about banks and financial institutions which up till now have made great franchises on the retail portfolio whether it is Bajaj, HDFC Bank or even ICICI Bank?
Look at it this way. The expenses would also be lowered and this is something that we are hearing that since expenses are lower, for many people, the ability to service debt is that much higher. The other way of looking at the same thing is are we looking at at a much stronger economy than the pre-Covid one in FY22?
Typically the answer to that would be yes. We are talking of April, May, June kind of a period next year and while I said that already in the festival season, auto guys are planning all-time record production. So there is some degree of conservativeness in what I am saying. It is not an aggressive statement. Now if we believe that the Indian GDP levels, the growth outlook would be similar to what we saw pre-Covid, then that would be achieved only with people back on jobs and that will be achieved by salary cuts getting restored.
Already, you are hearing people having to pay more to get back on jobs and there would also be some amount of increases as well. It is this distinction between near term which is full of uncertainties versus slightly medium term, 7-8 months down the line. If 7-8 months down the line, as an economy we achieve pre-Covid level, then there are several tailwinds also backing us and chances are that this would be achieved with people back on jobs with similar or higher salaries.
If the retail lenders have done a good job of selecting their borrowers, then those borrowers should be good enough to sustain for the interim period. So my sense is the fears on bank losses or NBFC losses are higher than what would actually happen. Yes there may be a timing mismatch and so in banking and financials, there is one parameter which is GNPAs that is not the same as loan losses.
If a guy gets okay to pay three months later, he will put the money back and if it is supported by some restructuring, etc, it may not even figure in GNPAs. My sense is the fears on the financial space is significantly higher versus what would happen especially for better financials, retail focussed financials and this is a space which is even today significantly lower than the highs that they have achieved and it does provide an opportunity especially as the economy recovers and attains normalcy.
Here are entities which are not able to raise money and would hence not be able to pump it in. So be with the businesses which are retail, who are today having less leverage than the pre-Covid peak when they raised money in the interim. Those guys should be much better positioned.