, Deputy Chief Investment Officer,
Westminster Asset Management
While we all want to see some red on the crude, that is not happening for sure but what about equity markets? Will it be more red before we see some definitive green?
Probably yes, some are getting excited that oil and some commodity prices have been coming off, giving a little headroom for central banks with some of their rhetoric and interest rate rises. Probably that is a little bit early. Yes, we are moving into this growth worry phase of central bank tightening and it is usually a very volatile phase. We will get these moments of both volatile and powerful rallies both on the upside and downside. There are still headwinds for markets. Analysts globally are still somewhat bullish and have not started to revise down their numbers aggressively yet. So, market valuations will probably start heading back up again but yes, it is still right to be cautious and whilst the markets have come off a long way. I am not sure if this is the time to be getting too adventurous!
The Indian story this time is different. It is appealing, it is growing, and inflation is not a large concern like what it is for European markets and for the US yet. But the intensity of FII selling is at record high, why is that?
Broadly speaking we have not really begun to see a massive redemption in equity per se. We have seen quite a bit of money coming out of the bond markets to be in the US but with less amount out of the equity markets.
Obviously with the dollar’s current state, it is difficult to build a case for emerging markets particularly also with the whole China question – has China bottomed out or will China carry on pursuing the zero Covid policy? So, with these questions still at the forefront, equities as a holding are quite challenged now.
We are seeing redemption pressure out of those that are in emerging markets with very little net buying coming back into the space. What we need to see is clearly some sort of policy change in China. Firstly, the dollar has started weakening off a bit. At that stage, one could see quite a lot of large pool money heading into the emerging market space and valuations have contracted across the board. The markets have come off quite someway.
Did you change your top three Indian holdings between January and now?
We certainly have, for example, in the US and European markets, there is a regime change to some extent and what led the previous cycle, would possibly not lead the new cycle whenever it starts.
Again if you look at India, the sort of areas I have always found attractive are more domestically focussed areas, We are going to get some more money coming back into the industrial space globally as well as India back into the cyclical areas but into less growth and perhaps more value orientated parts of the market that have been ignored for some time.
So, industrials and probably any portfolio manager must always have a good part of their allocation in India towards financials, the private banks etc. From an Indian perspective, the question comes back to what you do with IT and will that sector continue to do very well as it has done. I think it will continue to do well but possibly will not be the leader of the next cycle.
What is your take regarding the metals pack? We saw quite a bit of upturn on those counters at the start of the year, but the rally seems to have fizzled out there. Is there something more sustainable of an upside which one can expect over the next two to three years and do you think the best is behind?
That space is a very interesting one. The commodity sector as a whole with a few parts of the market that are holding up now clearly have been cracking in the last month or so, and obviously with growth concerns, but I think on a two- or three-year view, the complex still does look very interesting and obviously as I said there are some worries over growth in the short term but certainly on a longer term view.
We will see a pickup in infrastructure spending globally, we have still got ahead of us this huge amount of spending that needs to take place on the green economy and particularly in some developed markets where they are trying to reduce their
on energy exports from Russia.
So, we have got a lot of spending in a lot of areas which is quite bullish for certain commodity complexes. So yes, the area is interesting, it is just in the short-term coming under some pressure, but I would say that certainly if some of these counters carry on heading south then they are certainly getting very interesting to buy.
In the auto space, some of the two-wheelers are in demand after the recent correction. Some of the auto majors which have a high contribution in their revenue pie towards the rural end of the economy and are rather tractor and farm equipment majors, are the ones which are continuing to sit at a life high. Some of those which are passenger vehicle dominated, are also beginning to take off from the lows. Anything that you find interesting here?
It is best to stick to the leaders and obviously
continues to dominate in the passenger vehicle market. Again, a lot has been written about how falling commodity prices is of great benefit to these companies that are using a lot of steel and aluminium etc, etc.
Yes, that is a very short-term factor and I still do worry that we are not quite through from an energy market perspective with the oil going back down significantly lower.
I think the risk is skewed to the spike on the upside of something going on there, particularly for example if China was to announce a little bit more of the opening of the economy and growth, we will see oil prices spiking back up again in very quick order.
I do worry a little bit about some of those higher ticket items in that sector. For example, in Europe and the US, with the cost-of-living prices that are going on, the big-ticket discretionary items are certainly under pressure. The sector has been sold off quite aggressively and we are seeing a decent bounce. In the longer term, they are winners but in the short term, there are still potentially headwinds ahead.