Why is there this disconnect between the economic headlines and what the Nifty seems to be doing to those 10-15 odd stocks?
Yes, you have hit the nail on the head. It has been so very polarised. While the narrow largecap, the Nifty or the top 100 probably are at an all-time high, the midcap index is probably like 20-25% below its all-time high. The smallcap index is about 30-35% below its all-time high. So, while the top 8-10-12 stocks have driven the markets, it has not been a very across-the-board sort of movement. It is not something which is unique to India.
The US data also shows that the top 10 tech names have given all the gains this year to the S&P 500. A lot of the other stocks have not done as well. So, it is a very polarised market and while it is at an all-time high in the Nifty, it does not feel like like that for a lot of investors.
What should one do? Keep on looking at the Nifty and feel bad that my portfolio is not going higher because if the gap is very wide? Either the Nifty has to come down or other portfolios have to go higher?
Yes, it is more of the second. You got to have a diversified portfolio. If you went back, say two years ago — in end 2017 and early 2018 (January and February) there was a huge frenzy in midcaps. Flows were very strong in midcap and smallcap stocks which had premium valuation.
That seems to have corrected quite a bit now. So, if you look at a broader sense of stocks, they would do well over the two, three years than a very narrow set of stocks that you are seeing dominating the market at this point of time.
What is going to happen? Are the markets going to align themselves to the economic data and the headlines or do you think they will completely choose to ignore them?Would the broader market play catch up eventually?
Certainly, we do not expect the present state to be the status quo. If they thought that we are stuck at 4.5-5% GDP for the foreseeable future, we would not be where we are currently . What has happened is that a number of stocks and sectors have been ruled out by investors — anything which has got to do with the government.
If I am a construction company, even though I see good order books, the government itself is doing much more work on roads infrastructure, but the payments are not so great in coming by and their working capital is under stress. There is some issue in getting financing from banks.
If any sector has connections with the government in any particular way, the investors are slightly cagey about that. And that is across sectors. Which is why this flight to a certain set of stocks in consumers or financials which are independent of any of these policy related uncertainties.
The markets certainly do not expect 4.5-5% growth will be the status quo for a long while. If that is the case, the market would not have remained there. The government has been doing a lot of things, which have more medium-term impacts. The reduction of tax rates going forward, ease of doing business, a new labour code which is being drafted. So all of them are going to have a positive impact on businesses but they are not near term, short term impacts. The market expects that ultimately all that will come to pass, will be good for businesses. But in the near term, the market can see some revival on account of rural demand.
We have seen higher food prices driving inflation to 4.5-4.7% and even though they are middlemen, but still a good chunk of that does flow to the farmers at the end of the day. Plus, government is spending on rural India. Certainly we see rural recovery in the near term, probably sometime in the first and second quarter of CY2020.
So you can avoid the real estate players but bet on surrogates for that for a recovery in the economy.
As an investor what do you do — buy more of those 10-15 names or try and hunt and dig out from the broader universe and look at more bottom up stories within those sectors?
As a fund house, we have this looking at the right valuation when we buy stocks. For example, in our portfolio. you will not find those very expensive consumer stocks. We have been somewhat neutral on the consumer space but you will find the cheaper consumer names in our portfolio. So yes, we are more diversified. We are not so concentrated in those top 10 or 15 names and we are playing for themes over the next 18 to 24 months.
We are finding good opportunities for example in cement, which is one space we like. Building materials is another space that we like in our portfolios. So you can avoid the real estate players but bet on surrogates for that for a recovery in the economy. That is how we can play those cyclical names in our portfolio.
Is the judgement or the collective wisdom in the market right or wrong?
Fund flows clearly drive the markets one way or the other. So strong inflows from FPIs or local investors certainly will take the markets higher. In the last four years, the earnings have not come but one has to disaggregate that data.
It is like a four-cylinder or a multiple cylinder engine where one or two cylinders have not fired at different points of time. If you go back probably five years ago, IT was not doing very well, there is a slowdown in IT, there was talk about digital disruption all of that and IT had its tough time. Pharma subsequently, because of generic pricing pressure, FDA inspection; financials also had issues in different points of time.
Autos clearly have not done well. For the markets as a whole, earnings have not been delivered because nothing as all things have simultaneously kicked in so what the markets okay let me pick and choose stocks so I will go overweight financials or underweight financials at a particular point of time. I play IT overweight or underweight IT so I think that is how…I still find fund still doing better than the market because the active allocation across sector, across stocks so markets as a whole have not delivered oh! absolutely but I think by picking and choosing, you can do better than the broad market.
But already we are seeing earnings downgrades. There is a strong correlation between earnings and nominal GDP and to the extent, as nominal GDP is under pressure it will have an impact on earning at the broad level. So the markets will go back to what they were doing which is pick and choose across sectors and stocks.
How long is it going to take before we get there and are these really the right levels to get into some of the stocks given that we do not seem to have that clear conviction yet for the broader markets?
Yes, whenever the recovery happens in the economy — may be a quarter or two down, it will be a sharp recovery. I do not see a long shallow recovery. There are two reasons why I say that. One is that inventory has been pretty much been cleaned up out of the system. If you look at auto inventory, three months, there were 10-12 weeks of inventory with dealers. That has come down to probably a couple of weeks now.
In consumer durables likewise, one of the reasons credit growth is not there is because SBI Chairman day before yesterday the same point that working capital demand is weak because inventory is light in the system which is a positive. When recovery happens, there will be a triple positive whammy.
Likewise, some sectors are sitting light on leverage. They have actually reduced leverage and substantially repaid their debt. Whenever the capex cycle happens, they have the ability to fund capex by taking on more debt. Whenever recovery happens, it will not be a very slow, shallow recovery, we will see a sharper recovery. One potential source of recovery could be the rural demand coming in the next couple of quarters, hopefully. We do not know when, but certainly whenever we say recovery, it could be sharper than we think.
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Expect a sharp economic recovery in a quarter or two: Rajat Jain, Principal AMC have 1691 words, post on economictimes.indiatimes.com at December 5, 2019. This is cached page on Talk Vietnam. If you want remove this page, please contact us.