We have been on the wrong side of FII selling, we have been on the wrong side of Paytm listing. Suddenly for a market where everyone thought nothing could go wrong, are we slipping a little?
Yes, so to some extent that’s how markets work, don’t they? This is something we wrote about in our report in early September, where the headline was overly dragged. One of the things we noticed was that the proprietary India Bull Bear Index was flashing red. It was indicating a bullish run of 98-99% and we thought maybe it was time for the market to cool down and that was when we were going to the Fed meeting.
In the quarter ended September, we outperformed India by about 10% or more than the US and now in the quarter, India has underperformed almost the same number, slightly less. We had a big last quarter excitement which was more specific to India, when globally, we were in a small fear of growth. All kinds of things were happening; Commodity was closing in, mainly led by India. So it means something in reverse. This is the way I want to think about it more than anything else.
What could be the trigger for the market now – earnings, budget or inflation?
The great thing is that most companies we talk to are confident of a pretty positive comment on demand. However, our opinion is that this may be colored by the fact that in the last two, three months – September, October, November – we have probably seen some demand for return as well. As the festival demands. Whether or not any of this is sustainable is a really big question.
The answer to that question is something we are likely to get around January, when the numbers start coming in December-January beyond the festive season. The early part of the next year is when we start getting the answer. This is the most important thing because we will then probably be called a post covid economy. If we are in a post covid economy, what does that economy look like? We must not forget that this is a more than 18 months long bull market starting from March 2020, which has come from the actions taken by the central banks as well as the governments, due to which the demand remained strong and we have a very strong Post covid economy. globally. Now that logic is not tested because everything we saw was closed by the market in the form of one time, covid affected, this wave, lockdown etc.
Until we have a third wave, Covid stops being an excuse. If covid stops being an excuse, then we really start to be able to see what the post covid economy looks like. The other thing to note is that even when we compare to 2019, I would say September, October 2018 and say whether the data is so up or down, we forget that the last half of the second half of 2019 is very good. Was. Weak period for the economy. Things only started around January and February 2020.
The finance minister had taken a big tax cut around September-October 2019 as the economy was relatively slow. That base also gives way. Once we get into December-January-February and these high-frequency economic numbers, as well as company numbers, start to matter, that’s a really big deal because it decides that we start our EPS upgrade cycle. continue or not. We have seen a very limited decline in the last few quarters. It’s a welcome change from the almost-given downgrade that we used to see after each quarterly results over the past 10 years.
So it has changed for good. This has more to do with the fact that the current valuation of the market is indicative of very high expectations and those expectations will be tested during December-January-February.
Secondly what companies have mentioned is that many of them have taken confidence from this demand and are thinking or have raised prices after the festive demand or are raising prices to look into inflation concerns or cost inflation. Whether that demand was genuine and whether it will continue even at higher prices will also be tested. So a lot is at stake because from December onwards we can no longer use the pretext of Covid. This is going to be a reality check which the market has not seen for the last 18 to 20 months.
Do you think we are in for more surprises, more earnings rather than normalcy, which some people think could be a Chinese mob COVID event?
Vikash Kumar Jain: In a way you are trying to compare the economic picture with the stock markets. We need to be very careful while doing this. First, probably nothing catastrophic is going to happen for the economy; However, when we are talking about it we have to keep in mind, a huge factor that is the key to stock price movement is expectation. How we are placed against expectations will define how stock prices move.
One simple thing that I would like to bring back into the picture is that we may not see a significant slowdown or slowdown of the economy that we were talking about, but the pace at which the market is moving is going to be much higher than that. may be slower. have hope. If there is a disappointment on too high a valuation, it can have an exaggerated effect on the other hand and this is something we need to take cognizance of.
Very often we see stock markets turning right. For example, after the rally we saw from 2009 to 2011, there was a fair correction in the stock market and it wasn’t really baked by any major downturns to come, but simply because expectations were raised and a There was a reality check. Who said that maybe things won’t improve so quickly.
This is a phenomenon that needs to be taken into account. Of course, there are other factors as well. For example, as yields start to rise, how will equity look and compare to debt? This is something we will have to see. So it may be that the relative attractiveness of equities is down and expectations can get some reality check. These are two things we need to take cognizance of and the answer will decide which side we take.
But we need to keep in mind that we are on very high expectations and we should not close our eyes and say that yes we are in the early stage of economic recovery, it should be long lasting. Historically, looking at the economy and investing in stocks has not yielded good results and this is something that we need to keep in mind as expectations are a very important part when it comes to investing in stocks.
What feedback are you getting from your overseas customers?
Coming back to the September report, as we mentioned, India was out of scope. It was not just on sentiment, but if I look at other factors like momentum, valuations relative to emerging markets or East Asia benchmarks, all looked very stretched. The rally in the dollar index that we have seen in the last six-eight months is something that makes emerging markets less attractive anyway. This, along with what was happening in China, made the basket of emerging markets less attractive.
Now within that, if we find India too expensive, that’s another concern. We have to think about what was happening from July to September that really allowed our markets to outperform and it was an India driven rally and anything big happening globally, there were a few things that But India looked much better than other markets. ,
Also, unlike many of our Asia peers or EM peers, the second COVID wave peaked sometime in early May. Therefore, there was a steady decline in the cases of Kovid. It was slowly reopening which made us look much better on a relative basis. There were incremental regulatory concerns in China that made India look better again. Along with all this, the commentary also helped the markets from the point of view of the general perception of the Government of India. But a lot of it can be solved.
People are now asking whether valuations in China have become attractive enough and they are pricing in the risks people are afraid of. We have seen a trend of decent performance of the laggards in the last quarter, which has had an impact on the Indian markets as well. Secondly, as per the immunization as well as the COVID situation, many of the other partners that we have are looking much better as compared to the July-September quarter.
From a short-term perspective, overseas customers are not really jumping to buy India at this point in time. But we must not forget that in the last six-seven years, there have been four-five years when Indian domestic investors have put in more money than foreigners. So if FII selling turns down and home buying continues, that could be a fair point in itself. But I must admit that foreigners are not really queuing up to buy India like they were at the beginning of the year.
What is it that foreigners are buying? Paying retards, autos heating up again, maybe because of EV Play?
In the auto sector, we need to divide the space into sub-sections and each of them has its own drivers in the way the market is treating them. For example, it is two-wheelers where there is this concern around disruption which may remain to a large extent and this is where one needs to be a little more careful from a top-down perspective.
One is the four-wheeler segment where immediate disruption concerns are a bit less and the other is where the demand concerns we are seeing in China could lead to lower commodity prices. This is the second tailwind that people are talking about. However, the most important thing about auto is that we are still not 100% sure how strong the demand will be and how quickly the supply chain concerns can be resolved.
So those are some of the factors that one needs to consider but broadly we have to think about it from a top to bottom point of view, unless of course, a bottom to top view is welcome Is. While some stocks may have started showing value, the two-wheeler segment is not looking like a great player. There could be some very disruptive trajectories that could add to the concerns out there. Within four wheelers, it is more about demand, but there are other segments like CVs, tractors etc, where perhaps a fall in metal prices could have a slightly bigger positive impact than others and demand concerns are less. We love living in this kind of place. Of course, we have some bottom up picks in our portfolio for autos. They are doing well in this particular quarter.