It is well established that we are doing nothing out of the box and are only aligning ourselves with the global markets. But we have fallen quite a fair bit and given up all of our 2022 gains. A lot of the portfolio wealth has been wiped out in last 10 trading sessions. Is it time yet to buy the market just yet?
These markets are giving very misleading pictures because when we talk about the gains of 2022, if one looks back over the last three or four months, the markets have actually started trending in a range and this whole phenomenon started somewhere around September, October of last year. Every time they go up, there is a correction, albeit what we saw on Friday is a reverse of what we saw in the last week of December and the first week of January when we had a very sharp rise in the markets.
However, the markets by themselves do not really present a complete picture because the broader breadth of the market is down far more. I would say 75% or 80% of the market has corrected anywhere from 10% plus all the way to 40-50%. That is actually starting to present some level of value or traction in a number of stocks. Also do not forget these results also have highlighted one other thing that is the whole impact of inflation and its corresponding effect that we have seen in the margins of a number of so called consumer-based companies and consumable items which have seen a strong top line growth but margins having come into pressure.
So I think we are seeing a mixed impact of both, some of those companies have corrected a fair bit and we continue to think that this is starting to present very interesting opportunities for you; I do not think that we are back to the so-called one-way bull market. We will continue to remain choppy and volatile and continue trading in a range. Hence I think bottom up stock picking is going to play a far greater role in returns this year than they were last year.
What is happening with IT? Are the heydays of low hanging fruit kind of returns well behind us?
Well absolutely. The heydays of the low hanging fruit returns, the kind of valuation are gone. I used to be a tech fund manager and tracked IT from 2000 till now. The kind of business scenario that they have seen and the kind of re-rating that they have seen, I have not seen in the last 20 years. So we have seen a huge re-rating as far as IT companies are concerned. I do believe that they will continue to declare robust numbers even in the near future. However, I think valuations are taking a breather, waiting to see what next.
Now returns from IT will be a function of individual stock price and stocks delivering their numbers over the next many quarters. The re-rating is done as far as IT is concerned.
At the end of last year, we were talking about how money is moving away from tech into the banking space. But again there is a tad bit of pull back from the highs in the banking names. What is your expectation as far as the banking space is concerned?
We are very positive on the financial sector. Taking a little broader view, the financial sector has gone through a lot of pain from 2018 post the IL&FS crisis and we have seen a lot of mid tier and third tier banks running into problems and then we got hit by Covid.
I think after three or four years of consolidation and pain, the financial sector should start doing well as the economy is showing clear signs of pick up and we have seen the initial signs of credit growth pick up. However, this is going to be a sector where the large players are going to get even more dominant.
In the last few years, they have raised substantial capital. They have been able to attract deposits at very competitive rates which means the top, first tier borrowers will actually be with the top banks and then the second tier banks will be following through with slightly riskier borrowers and so on and so forth. We think the whole consolidation theme is playing out as far as the financial sector is concerned. We are very positive on banks and technically because institutional or FPIs are large investors in the financial sector, we are seeing this pressure in the last six months on this sector as they have been net sellers. However, this is presenting an opportunity and there is tremendous value as far as financials are concerned.
What is your take with respect to the consumption space?
Clearly some of consumer durable companies are going to face short term pressures as far as raw material is concerned and this comes on the back of the rural markets actually being sluggish for some of them. I think this is a temporary aberration and might last for a quarter or so. Plus, these companies have a long pathway in terms of their growth. They are of course defensive in nature and they are never going to show the kind of growth that you will see in some of the other sectors. But they have seen 15-20% corrections in many of the good companies. So if one takes a slightly longer term horizon, there is value there.
How are you looking at the entire auto basket? Do you believe that one would need to be a little bit selective when it comes to the auto space?
One clear trend that came from the earnings was the entire pressure on margins thanks to raw material prices. Also as far as two-wheelers are concerned, the whole rural demand slowdown has had a quite bit of an impact there. So from an auto pack perspective, as far as commercial vehicles and passenger vehicles are concerned, we are very bullish, led also by the fact that a) one is seeing the impact of the beginning of the capex cycle and infrastructure led spending and other one is actually benefiting from strong growth that we have seen in technology companies and the commensurate hiring.
All of this typically has a trickle down impact and all consumer sectors like auto, housing have started doing well. We are more specifically positive on passenger vehicles and the commercial vehicles segments.