That thunderous rally we witnessed in the metal space raised hopes of a resurgence in Chinese demand and that really fueled the rally across the board!
We have seen a very strong pullback in both India and the US Much of the rally was driven by action in metals stocks and to some extent the broader market as well. We just hope this lasts a couple of days because it’s not like we’re back in the bull market.
Do you expect banks to lead the recovery? Look what happened to the Bank Nifty yesterday. The metals shone and monopolized the limelight. You can’t take your eyes off the Bank Nifty either.
Banks have been a big part of this rally which has been driven by short hedging. We can all see that the flow picture is not looking so good and even the Fed’s comment is not as supportive of market sentiment. So having seen almost a 13-14% drop in the index level and a much bigger drop in the broader market, we are seeing a bit of a relief rally and it may last a couple of days but we don’t expect a sustained recovery in the broader market.
It makes sense to have a selective approach in terms of identifying sectors and companies where there is a price correction along with some clarity on the earnings picture and those that are relatively resilient. But we have to take into account the high beta nature of the industry. In the event of some type of correction, there will also be a slightly larger correction in the banking sector. We think that names like , , are showing much more resilience and their operating figures have also been good.
We don’t think that even if we see a 50 to 75 bps rate hike in India, it would matter too much in terms of core operating parameters. Of course, the treasury side will take a hit, but overall this sector should do well even in an environment of rising interest rates.
There is darkness and doom in the world. Everyone is going back to the US dollar. There is a reflation trade there. But the BofA fund manager survey says that cash levels with fund managers are at the highest level after 9/11 and the world had started to shut down after 9/11!
The events following the Fed hike, the way the dollar index has moved, and the way interest rates are inching up clearly mean that for equities as an asset class, it will not be a ride. easy. We have all seen the big bull market rally in the last two years and the genesis of that rally came from the type of money that the Federal Reserve pumped into it.
When we see the reversal happen, when the markets have gone up and we’ve seen how some of the broader market companies have gone up in the last couple of years, we’re essentially seeing a reversal of that and it’s very important to navigate this phase. be a little careful because a big 20-25% correction in the index level in the broader market can wipe a portfolio down 20-30% and that is what we have seen.
We think this will create opportunities as well because there is a 12-3-14% correction at the index level and a 20-25% correction at the equity level, which means some good companies where earnings are strong are being made improvements and where the earnings visibility looks reasonably good will provide those opportunities. But one needs to have cash and the right state of mind to be able to participate there.
Is LIC worth taking a leap of faith? It’s cheap, the safety margin is strong, the downside may be protected, but is LIC worth taking a leap of faith? It is a company that has so far complied with its social obligations. Can they meet shareholder obligations now?
I’m a little disappointed with the gains. Having seen the price at a very reasonable valuation, we can put this down in part to the way the markets have turned lower after the problem. We think LIC offers great value given the overall franchise, brand recall and the way everything is positioned. But we have to keep in mind that insurance as an investment is not something that gets a lot of hype in terms of earnings growth and stock price movement.
We have all seen how even the private insurance companies have really failed to deliver in the last couple of years. So a patient investor looking for a two or three year composite history, maybe 12-14%, would make sense to have an assignment to an LIC or some of the private insurance companies. But if you’re an active investor looking for more growth, it probably doesn’t make much sense to bet on these types of companies.
So you said no LIC?
I am saying that for an active investor looking for growth, LIC is not the right choice. If you’re a value investor and comfortable with two or three years of 12-14% compounding, it definitely makes sense.
Are you saying that you have more ideas where the money can accumulate more than 12-14% in the next two or three years? If you find it boring, then I’m sure you’re aiming for 25% growth compounds?
Absolutely. When it comes to equities, people are looking for higher growth and within that, whether 15% growth or 18-20% growth is realistic is debatable and that will depend on what kind of market phase we are in and what kind of underlying stock selection. one is doing. The normal thing is that expectations are high and how we see a great like the one we have seen in the last two years. Typically, expectations tend to rise slowly, and as a more corrective phase is seen, those expectations become much more realistic. It is a dynamic market in which one will have to set realistic expectations to avoid major accidents.
Will the biggest trigger be when the individual companies break up?
What we have seen at ITC is that the outlook for other businesses such as agriculture, paper, packaging and hospitality has improved dramatically, and at the same time the revenue source of cigarettes is experiencing volume growth and decent cash flow.
The only weak spot might be the FMCG business where due to entry cost pressure there will be a bit of disappointment but in today’s market people would prefer businesses where the downside risk is very limited and where a boring 12-14% growth and where ITC definitely fits in and is an undervalued stock due to the kind of lackluster price movement we’ve seen over the last two years. There is sub-ownership and that would make it a bit more resilient in these types of market scenarios.