JP Morgan has started upgrading some stocks in China today. In fact, JPMorgan also upgraded European stocks over the weekend. We have seen DCA Research and other global research firms move toward overweight stocks worldwide. Do you see qualifications in a case where things are probably entering a standard area?
I think the China stock story is very different. They have started falling far ahead of the Indian market or even the stock of Indian technology. They began to decline in 2021 or perhaps the end of 2020 due to Chinese government intervention in the technology sector and therefore have their own story. Indian stocks have been revised. The correction probably started in October-November 2021 and continued and probably accelerated somewhat after the fourth quarter issue.
We don’t think so. We actually held a low weight position in the sector just before the start of the results season. We have had two great years for technology stock in India. 2020 and 2021 were great years. Nifty IT has delivered about 50-55% YoY performance each year. Street has significantly upgraded its numbers in terms of revenue and expanded its PE coefficients.
The PE multiplier has expanded because revenue growth for first tier companies has almost doubled between FY21 and FY25, FY24 vs. FY2015 and FY20. There is also a very low interest rate system that has led PE to multiple expansions. Some of these things are unravelling. Interest rates are set to rise fairly significantly in the United States and elsewhere.
We think earnings are probably going to see a downgrade cycle and we have probably seen the first episode of this where margins have come under pressure and so a margin-led earnings has been cut. Demand-led earnings are set to decline in the second half of FY23 I don’t think the price is there yet.
So, I will not rush to buy stock of Indian technology right now. Yes there is a digital paradigm, a digital transformation service, acceleration that will last for more than a year but in the next 12 to 18 months there is going to be some cyclical speed breakers. This will come from U.S. enterprises because they are being hit by margin pressures and as a result, there will be pressure on IT spending. Broadly speaking, this is an adoption of the IT sector in India and in between, I will probably keep as far away as possible from the tier two companies that I think will suffer the most.
What are your thoughts on comparing some of the corrections with others at the moment? Can you draw parallels between quality income vs. rate growth cycle at this time? Is the assessment comforting to you or not yet?
I don’t think I’m feeling very comfortable because we’re talking about the way we’ve been assessed now and where the potential corrections can go. I have noticed major improvements in the 2001-2002 time frame. That was when you saw the shallow recession in the United States that resulted in an increase in the rate that happened before.
Then we saw the GFC crisis in 2008-2009 provide fairly bad returns. Some corrections like Nifty 50-52% in calendar year have been corrected. There was a correction of the type from the top to the middle teenagers in the numbers. This time, we have probably seen a very high inflation rate in the United States for the first time in the last four decades.
The other thing that is probably on the positive side is that domestic money is flowing. This is a kind of paradoxical force that will probably make it much stronger than we had hoped before, and it will probably mean growth. Much more than people expected.
The other is the flow of money. While FIIs are selling, a fair bit of domestic money is holding the market but it remains to be seen how long it will last. These forces are probably going to be an amendment, but it doesn’t have to be like the amendment we saw in 2008.
You have many companies and sectors under your coverage. What are the pockets of energy where rationally modified and compared to those risk rewards?
I don’t want to go right now and fish the bottom and so if you don’t have a three- to five-year vision, you probably can’t ignore the big correction that the market is going to see from the top in the next six to 12 months. . If you have that 3-5-year vision, maybe someone can ignore all of this. But if you are an institutional client who is struggling with daily NAV and monthly and quarterly performance, then this is the time to not focus so much on performance.
This is the time to actually focus on saving capital and I would probably think that the way to build a portfolio would be to try to move to semi-cash type stocks. Be very defensive and from that point of view, one should weigh a little more on some consumer staples and the pharma is a place that anyone can see. Maybe some of the private sector banks that will probably get hurt but not so much because the valuation has stopped quite a bit.
These are some areas where I will probably focus in the next 6 to 12 months and probably lose weight in IT and NBFCs. Neutral areas will be cement and such areas I mean consumer consideration and things like that.
Market midcap, smallcap status? How are you doing theme analysis there?
We were originally a midcap, smallcap house and we had the strength to say that, but in the next 6 to 12 months, the kind of market I could possibly predict, I would probably think you should weigh more in quality big caps. Because no matter which sector you are in, the amount of loss will be the least.
So if you take a 6 to 12 month view and are very focused on near term performance, I would say switch to quality large caps because this is where you will save a lot more capital. But if you take the three to five year outlook, I’m sure there are a lot of midcap and small cap stocks that will correct some of this recession and come to a level that will be very attractive.
I would say that you have to save cash to buy in those companies for that kind of return profile. So as I said, save cash now but if you ask me what the stocks are I will pick multiple of them. Across the board, if you look at the midcap, it is an area where we can focus a lot more on the midcap based on consumer considerations. There are many such stocks that we can see – QSRs, multiplexes, retail companies, and even some small midcap banks.