Where is the party in the market?
It’s in crude. It has been extremely painful in the equity market and it is not just India. In fact, in India, the fall has been much less. Look at global markets; S&P 500 is 25% off, Nasdaq 35% off and these are indexes which are really hiding what is below. We may see our portfolio down 18% . Most people’s portfolios are down a lot.
You are down 18%?
No, I am saying the index is down 18%. But the way indexes are composed, that is the way it is. So the pain is there but one has to understand the headwinds. We had once in a hundred year kind of pandemic. We hardly came out of it and there is a war – once in 75 years European war. And now, we have once-in-40-year inflation!
But one thing Covid has taught me is that human beings have the ability to recover. These are man made problems. Human beings will solve it. Yes, where and when is a different story but I personally think that there may be a little more pain but it is not the end of the road. In India specifically, the stocks have fallen comparatively less in a falling market, and will be the leaders of the next bull market. India would emerge as one of the most preferred equity markets globally. I think our standing in the whole pecking order will change post the recovery.
I used to think like this but when I see the FIIs selling, it just makes me wonder are we different?
Let me just explain this whole FIIs selling. I have the view that most flows to India come as a subset of being in the emerging market basket. The MSCI emerging market index topped out in Feb of 2021 at around 1445. Now, it is around 1000. So Emerging Markets topped out in February of 2021. FII flows turned negative from March-April 21. The fact is that they are not singling out India to sell. They are selling because the basket is getting sold and the basket has its problems. Look at China. Russia is part of it. Countries like Sri Lanka or Pakistan all are part of it. These are all areas that have a problem. So the emerging EMI index is down 30%.
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We are in a bear market. You fall 20% and you are technically in a bear market.
Those are numbers which everybody likes to give.
The minute you use the word bear market, it could be a long prolonged cycle of either pain or downward returns. So is this the beginning of a bear market? We have not seen a bear market. Are we in for that kind of a setup?
Negative news always sells…
Are we in that setup?
No I do not think so. After yesterday’s fall, I do feel that we have a little more to slip – 4-5%. I think maybe 14,500 on the Nifty. We moved 3% intraday yesterday. It is not something massive. But I feel that the market would then consolidate for some period of time. The reason is that in the last decade, we always had V-shaped corrections whenever the markets fell.
And V-shaped recoveries pretty much.
Yes and recoveries because when the markets corrected, the Fed stepped in. This time the Fed is not stepping in. I am really not scared in terms of time because what will happen is even if markets spend time, quality or outperformance will be visible; stocks will still make 52-week highs. Yesterday morning also stocks were making 52-week highs. So there will be some segments of the market that will do well and in the larger context, even if global markets go into a longish period of consolidation, India will be one of the stocks that will hit 52-week highs first. I feel post this correction, the pecking order will change. India will move many notches higher in this whole emerging market basket. Yes when the flows change that is a very big macro scene, but in that, our allocations will go up substantially.
But the only tricky thing is crude and that impacts our lives and also the country, the economy and equity markets. It is just not coming down. Is there anything on the charts that makes you feel that we can come off?
No. Every morning, the first thing I look at is crude price and there is disappointment because at $120 plus or minus $2, it is just stuck there. If you ask me, that is a true sign of a bull market. So crude is definitely the centre of the problem. Since it concerns all of us, one needs to look deeper. It is not my area of expertise but the world has got crude totally wrong and that is in terms of the geopolitical leadership.
They went out and banned one of the largest exporters of energy that is Russia without understanding where the alternatives are and we have not been able to pressurise OPEC to increase output. So, we are hurting ourselves a lot more and the world is realising it. Putin is not at risk, their economy is not suffering.
Is it fair and logical to draw any correlation between crude and Nifty or the MSCI emerging market index?
No I really cannot draw any correlation. I look at commodities as a whole. Crude definitely because it has not fallen. In the case of metals copper has corrected 20-25%. Metal stocksare off 50%.
is off 50%. is 50% down…
This is where this debate of technical versus fundamental comes. You are a trend follower, You would say I will not buy weakness because the trend is against us. The fundamental expert would say I am going to buy something which has fallen the most, because that is getting cheap. How do you differentiate?
It is a total mindset game. It is actually a personality trait. It is not about fundamentals or technicals. It is how we view things, how we view life. I am one of those guys who buys strength.
So the strength is not there in metals, IT, banks. Are you buying banks?
Banks also are not strong. There is a perception that banks are strong. What is strong is autos. What is strong is public sector undertakings.
I would look at defence stocks. There are these pockets and there are niches. I run a PMS. A disclaimer, I have vested interest. I will tell you to look at bearings, a very niche play. There are only four, five stocks and they are touching life time highs. What you will notice is that even in these points of pain– there are some FMCG stocks touching lifetime highs. What I am trying to tell you is that I am one of those guys who buy strength.
Would you buy FMCG then because the strength is there?
There are one or two stocks out there and I added one very recently.
Ex right, because that is a discovered story?
Yes, that is a different story. When markets fall like how they did yesterday, nothing will hold but even if markets stabilise, I see a lot of stocks continuing their march up ahead and there will be opportunities thereabouts. When the pullback comes, nobody knows.
Is it time to go all in?
I would think at around 14,500 or so. Personally, that is the level.
So if the market goes to 14,500, you should increase your allocation and reduce your cash. But can the market go even below 14,500?
One shouldn;t go short now? Too late for that?
I would think so. Selling and shorting because very often when markets fall like this, it is not Fed induced but there are short covering rallies and short covering rallies tend to be fast. I do not think this is a great risk reward ratio in terms of selling or short selling.
And if you are sitting on cash, put it to work closer to 14,500 but do not raise more cash?
I would not think so. I would not say that these are levels to raise cash. These would be levels to deploy and if someone has even a one-year time horizon, I think we will come away with handsome returns.
For an overall market recovery, banks will have to perform. They have also corrected in this recent fall. When will that tide change?
Banks are a consensus bullish trade but the problem with banks is that they are fairly over owned also. Post Covid, we realised that the Bank Nifty or banking as such has been a relative underperformer. It does not sound perfect. I know that there are fundamental reasons why what I am saying may not be great but I do not think banks will outperform.
At the end of the day as an investor, I am looking at relative outperformance. For the last three, four, five years, we were in a very narrow space of the market consisting of some very high quality, expensive stocks.
I spoke about some sectors, I repeat I have a vested interest, it is defence stocks, bearing stocks, some FMCG plays, some engineering infra plays, some capex plays.
Autos is becoming a central theme?
Everyone is under owned. Nobody has that in their portfolio. I look at trends etc but also there are some unloved trends.
Absolutely. These are not really contra because the stocks are doing something else but the fact is our mind is fixated on certain themes which were winners of the last bull market. Our bias is the last winner, our bias is the previous high but the fact is that every bull market will throw up new leaderships and I feel a new bull market will emerge post this.
It will not be a vertical move. It may be a little more sideways and a little more elongated but a lot of sectors and themes will do well. Interestingly, these sectors and themes will not be those that did well which we are used to and where there is consensus. There are some very small niches that are emerging and I find them very exciting.
So 14,500 on the downside. What could be the upside?
The market has come down in three legs. This fall since October was not a one shot kind of market. I personally think that the whole geopolitical thing which is the Russia-Ukraine War, was not there in October when we topped out. At that time, we were talking about supply chain issues. On top of that, came the Ukraine war. All thought it would be a three-week war, then a three-month war and now we hear of a three year war.
The fact is the world is moving and nobody knows when these things are going to end. They are very dynamic and that is what the market is reflecting. I personally think that this whole sanctions things, especially in the area of crude that you mentioned, the pain point the world is coming to the realisation that it is hurting us more.
Look what has happened to Sri Lanka? Look what has happened to Pakistan? These are countries which are getting knocked off for a thing where they do not even share a border. They do not even know where they are on the map. The fact is that the world is realising and once this inflation, once people come to these western countries, they have very big balance sheets, they can take pain longer but at some point in time, they are going to feel the pain.