Do you think there is anticipation of further recovery and the gloom and doom is fading away?
Well I think there has to be recovery after what we saw in April, May, June. Whether that would be a sustained recovery with strong earnings growth coming through, I do not think so at least for this year. The real challenges for the economy are still to be seen. We will have to see the strength of the festival season.
Of course, the moratoriums are going to end and we will probably know only in the first quarter of next calendar year Jan-March 2021, where we are in terms of the wider impact on the businesses. Clearly the winners are going to be large businesses and large caps in this environment. Small traders and MSMEs will continue to face pressures and that is not going to go away until we see a real vaccine and a stable medical solution coming through.
There would be rallies in this market, partly driven by some news flow which may not be totally or fully understood but that is what it is. I would not say that we are seeing the end of all kinds of challenges to earnings.
Should one get excited about small and midcaps post the regulator’s reclassification of multi-cap funds? The excitement got a little tempered after Sebi clarifications last evening.
The economy was in a slowing trajectory even before the March event of Covid for the last couple of quarters and therefore a wider and strong GDP growth environment is what drives the small and medium businesses in any economy. Clearly that is also the case in India.
Would I say that this announcement is going to give us some floor to the midcaps? Maybe in the near term yes. Would that mean there is a structural rally on that to continue for maybe more than a year? I would not be in that camp. There are still big challenges to continue strong economic growth and earnings growth for this market. Better to be focussed on largecap stocks which have the resilience and the capital and the wherewithal to change their business models if necessary. So all said and done, that is where we are right now and this is just a short-term rally in the midcap and the small caps.
“Other than the rural story, please focus on the well capitalised private banks like ICICI Bank, HDFC Bank.”
Where do you see the big opportunities coming in? Would you say that the rural theme in particular is here to stay and that is where money is going to be made even further from here?
The rural economy is showing signs of strength, the virus has not impacted the rural economy as much but that is still early to say. We are seeing close to 100,000 new cases come though every single day. Clearly there is widespread community spread also happening right now as we speak. I would think that the rural area, especially directly driven by the strong agriculture performance we expect those stocks will do well. We would be in the camp. Escorts will do well, Bajaj Auto will do well. We could also see a rebound in some of the other four wheeler names so look out for how Maruti proceeds after the October November numbers come through in the festival season and therefore that is something which is clearly interesting to watch.
Other than the rural story, please focus on the well capitalised private banks. Those banks have raised capital at good prices at multiples which give them comfort. So to that extent, the well capitalised private banks such as ICICI Bank, HDFC Bank are also good.
The question is these banks are well capitalised but they should lend because you have raised capital. If you will not lend, how will you do business?
Obviously nothing happens unless you do a turnover and for the banks, the turnover is putting out fresh lending into the economy. So that is a good question but we have always seen that the bank lending for private sector banks is higher than the market growth. They are always gaining market share in lending. If you are telling me that there is going to be not even 10% plus lending of the private sector banks maybe the system lending will be weak but on a two year basis, I would definitely think that the CAGR in terms of private sector’s lending would in the region of double digits and above. Not maybe this year if you take an extreme negative bear case, but over two years that is what the market should be discounting.
We could definitely see lending come through at 10% at least for the well capitalised private sector banks. If we are not going to see that then why are we even discussing midcaps? That means the broader economy is going to see more growth as bank lending growth will be single digits both for the private sector and of course the public sector banks then clearly it is much more doom and gloom then anyone has been forecasting or thinking about.
Do you think markets could go back towards utilities, metals, infra — the typical value names?
I would say the market definitely wants a longer rally and a longer rally is not going to be driven by the same names which have rallied for the last five years. Therefore the value names which have missed out on any kind of rally will come through at various points in time as alternatives to the standard names.
Do I think that this is a good trade on a two year basis? I definitely want them to be a good trade because that would mean the market will actually hit new highs with valuations of the cheaper stocks actually rallying rather than the expensive stocks getting more and more expensive. So long story short, yes I want that to happen.
Do I see a broad earnings rebound this year? I will answer this question right upfront; not this year. The real answer to a broader rally will come between December to March quarter when we hopefully see some kind of a vaccine come through.
Experts are saying by the end of this year or the first quarter of next year, if we see a vaccine come though. We can definitely hope for a broader rally and some of these value stocks coming back. Despite that, cement looks interesting. We have seen much better than expected earnings come through and that should be the case also for the rest of this year.
If you were to take a holistic view what would be your preferred plays sector wise?
In consumers, a broader consumption theme will still run so to that extent Marico looks interesting even ITC looks interesting as a value play but it will probably be range bound until we see the Feb budget. Consumption still remains an important theme.
IT will remain interesting especially if we see a stronger rebound come in the US post the November elections so that is an interesting theme. The big question mark of course is the capex plays. I do not think that capex rebound is happening even in the first half of next calendar year. It will probably be the earliest in the second half or later after that end of the next financial year. We will have to wait for a wider capex rebound to come through.
It will still be a broad narrow market and a broad basing of that market can happen if growth comes through in the second half of next year.
For an investor, it continues to be a tricky to manoeuvre the dichotomy between the consistently higher move on the index vis-à-vis the realistic growth scenario in the broader market. Is it best to just continue to stick to a handful of those names?
For investors, the challenge is what kind of timeframes they are operating in. If you are operating in a six-month time frame, which some investors would focus on, then it would definitely be a narrow range of names. To take a big bet on India, one will get clarity in the first quarter of next year, when we see clarity on the vaccine and on the strength of the economy.
We would also be past the fiscal deficit bad news that we are going to see in this current fiscal where we will see all ratios go out of whack. All of this means that right now, it is still a defensive narrow market with largecap focus. We will take a call on where we are headed post Feb-March for a much wider play and broad basing of the market.
Where are the contra opportunities in this market?
Sandeep Bhatia: Narrow down the focus on all the sectors which are ground zero, the most impacted by the coronavirus situation we are in right now. That will not massively change for this year. Even if there is a vaccine, the fact that it may take a year plus for the vaccine to be administered across the large population and then people to have confidence to come through.
Properties in the large metros and both residential and commercial have gone for at least two years. At least the values would be very weak in terms of rents per square feet or value of the property per se. If you look at transportation, airlines, hotels — probably the second half of next year is when we will see sequential strong growths come through. So by March, we see at least a vaccine come through and that starting to get administered in the next financial year.
As I said the entire process of administering a vaccine in the country as large as India is going to be a multiyear phenomena. So to expect these sectors to come through very quickly would be quite optimistic. The earliest I would see them coming is the second half of next calendar year.
Is there merit in looking at the metals?
Of course yes. These are tailwinds which will continue at least for this calendar year. The metal sector is driven by the fact that the rebound in China is probably the best in the world right now and will continue to be so for some more time. These sectors can be played in but definitely these are the short term opportunities between two to six months until we see clarity on wider growth coming through.
Cement to that extent is much better. It is a more domestic driven sector in India than just a metal sector which takes prices from global markets.