Alternative strategies of Avendus Capital.
Historically, we have seen that whenever global markets reacted to a Fed hike or a move in the dollar index, Indian markets panicked. If Nasdaq has fallen, Indian markets have fallen almost as strongly. This time, it’s different and my problem is that when things look different, they rarely last?
You’re right. It’s never different, right? It always reverses back to the mean. Everybody thought it’s a US problem, it’s a Nasdaq problem and therefore our markets may be more resilient, but I agree with you that at some point it will go back to fundamentals. The sales are coming and they are going to arrive quickly in the Indian markets and sectors. All profits are going to be discounted. I saw some great results yesterday, but I’ve seen analysts revise their forecasts down. So this is going to be the next thing to hit our markets. We haven’t even started tightening the Fed yet and that’s another thing. It is as if the Fed is playing one game and the market is playing another. Somebody is playing the wrong game and it’s the Federal Reserve and that’s where the problem is and that’s why the market wants to go down because any way you look at it, earnings have been downgraded globally.
India will start soon and therefore market valuations have to contract from where we are today. The good news is that this could happen before the Fed really tightens its belt further and that action could be over by the time we start seeing those 50bp hikes over the next quarter or so. So that’s a bit advanced. I think the pain is yet to come.
I still don’t think markets understand the unintended consequences of tightening. Just look at China. It’s a very good example of what happened when they tightened up and what they’re trying to do now, but it’s too little too late. The economy is already reeling from the property problems they have.
The Street right now is divided. On the one hand, there is this opinion towards banks and cyclicals because the industrial recovery is just around the corner. The other view is that IT has also been sold and, globally, things also seem clearer for that sector at least. Which is better to trade for the next six months: the comfort of banks or the comfort of IT?
I don’t think I’ll be comfortable with either of them for the next six months. Different factors will affect those sectors. Obviously, the forecast downgrade will mean that companies will be in a bit less expansion mode going forward. Commodity prices will fall and that is the other area that will start to affect earnings and obviously expectations of any real growth in Indian earnings in general.
I don’t think the banking sector will see an increase in loan growth yet. Unfortunately, the IT sector will be tagged with US growth stocks in terms of sentiment and that is an uphill battle when you have sentiment against the sector. I’m not saying I wouldn’t see value at some point, but not yet.
The only trade we have at the moment is hotels, travel to India which continues to do well and is also a global factor. People travel more internally. They don’t go overseas as much, but that’s the only real discretionary spending I see holding up, if not accelerating right now.
What is your perspective on the L&T engineering conglomerate? Reports seem to suggest that the company is very well positioned to transition to an ESG-compliant business. What are your expectations for L&T in terms of earnings and long-term prospects?
The fact is that ESG is always in the news, but they shouldn’t be alone in that. All companies in India should look towards ESG and comply with some of those policies. I don’t see that being advantageous to them in terms of valuations. I have always considered that this sector is about the growth of awarded contacts instead of execution because execution has always been very difficult for these companies and translate into final profitability.
So if the order books are picking up, that’s where the stock prices will follow and right now they have reasonably good order books. This time when the capex cycle picks up, I’m not sure I’ll be looking at L&Ts and BHELs. I’ll look at maybe different subsets of the capex cycle, like Siemens or Honeywell. They could be better positioned in this next capex cycle.
What is your position when it comes to Reliance Industries? What is the outlook on the type of movement we have seen in the stock price lately? Are there more legs for face up?
It’s a great long-term game. Obviously, he’s benefiting from higher oil prices in the short term and margins as well, but his two telecom and retail businesses are really going to be the kind of flagships going forward and we’ve yet to see them at some point. for the next year or so.
In short, valuations are going to be much higher than we probably think today. So it’s a great growth story and it’s not going to go away. Everyone is going to want a piece of that cake at some point. But Reliance is well established and now has large market shares in both. These companies are going to get huge cash flows and so has it all at this point. All broker reports updating them are fully justified.
We are seeing renewed buying interest in two-wheeler stocks. Is this simply a short-term momentum play given that these stocks fell sharply, or do you think the fundamentals of the sector are changing?
It’s a combination of both things that you actually said. It was the hard hit sector, it had dropped quite significantly and valuations were starting to look a bit more convincing. Bottom fishing at these levels will continue. Obviously there is a bit of a tailwind for a four-wheeler company like Maruti and the whole auto sector where we have seen the yen depreciate quite significantly.
That has been a helping factor for the sector and also exports are picking up or have done so more recently and that has helped the entire sector. The only concern I have in the short term is individual stocks where currencies could have a more negative impact. I’m thinking more of the pound being so weak that you could say it’s a benefit to them in terms of exports from the UK and the translation of those gains obviously has an impact as well.
Those are the kinds of things that concern me in the short term. But also speaking of currencies, it is worth noting where the pound and the euro are compared to the dollar, which probably indicates two things; one that Europe and the UK are going to go into recession very quickly and the fact that, because of that, interest rates may not rise as fast as they will in the US over the next quarter. That’s what the market is trying to price in those currencies because I can understand why the yen is weaker.
The government there and the monetary authorities have been actively saying they want to keep bond yields low and that obviously means the yen is going to be weaker against the dollar and the carry trade is probably doing pretty well there in terms of moving money to the United States.
But in Europe, I don’t think any of the central banks want to do that, so it has more to do with the growth prospects for Europe which could have an impact on some of the auto parts companies within the sector.
What is the outlook for the entire energy space given the type of movement that we have been seeing in crude oil and commodities? How do you see its long-term prospects?
There are two parts; one is the risk of raw materials. Metals are one area where prices have possibly peaked now. As there’s a big slowdown in demand with what’s happening in China and across Europe in terms of discretionary spending starting to weigh down due to higher energy and food prices.
The destruction of demand for raw materials and metals is going to happen in the next six months. I would probably put oil in the same kind of category, but the supply of the demand is still in favor of the demand, although it is still a mismatch. I don’t think that’s going to come back too quickly because of what’s going on with Russia and Ukraine.
I can see oil staying higher for longer and in fact could go higher if there are more problems between Ukraine and Russia. The energy sector will probably not see any downgrades, but possibly upside if this continues for longer. So it’s probably one of the few sectors to hide in right now unless something more favorable happens. But at the moment, this is probably one of the few sectors, along with the reopening sector, that one should have very short-term exposure to. Commodities can therefore be divided into two, with oil being the more favorable part of the commodity sector.
What about car accessories? Is it safer with accessories?
I’d go for auxiliaries right now. It’s a little mixed up and I’ll tell you why it’s a little mixed up. If I think about discretionary spending, and I would probably think that we could keep our new purchases a little bit longer and therefore probably spend more money on their existing vehicles and therefore maintenance and therefore good for accessories in that sense. .
But the margin pressure they will face this quarter and next will be significant. I don’t think the forecast has been lowered enough to offset where stock prices are. Those who have companies abroad or export abroad will export to a very weak market where prices remain high. So margin pressure is going to be more significant than it has been for some time.
But I would probably stick to auxiliaries for the time being.
(Disclaimer: The recommendations, suggestions, points of view and opinions given by the experts are their own. These do not represent the views of the Economic Times)