Let’s start by understanding your thoughts on market valuations regardless of the trigger. We have gone through a reasonable end of the fix. How are the ratings looking at you now?
From a valuation perspective, clearly the market has become much more attractive than it was a month ago or where we ended up in 2021. We believe that pockets of value are emerging in the market right now.
What kind of discussions do you have with your customers about those pockets? Do you want to buy?
I think there is a lot of positivity from the home mutual fund purchase numbers that we can see every day. In terms of the specific pockets we’re seeing, the banking sector stands out as one of the big value propositions right now. What we look at is not just the value in isolation as a standalone number, but what we really like to look at is the rating.
Given the growth prospects and typically growth at reasonable prices or reasonable valuations, banks clearly stand out. They were trading at average valuations closer to 10 years. From a portfolio price or earnings-based pricing perspective, we see a rebound in credit growth and the worst of the credit cycle behind us.
We believe that banking is one of the most promising sectors. Aside from that, an industry known as pharmaceuticals is something that has had a rather tumultuous five-year period. But the ratings likely take into account most of those pains and even some positivity around the US business and can see significant traction around that particular part.
What kind of earning season do you expect for your universe of companies this quarter?
This quarter will likely continue the trend we have seen over the past two quarters, in the sense that sectors such as banking will continue to do well as we continue to see a reduction in the cost of credit. In addition, high-commodity sectors such as metals and energy are expected to continue to post sustained earnings.
Apart from that, we expect a slight rebound in the consumer discretionary segment from a volume standpoint. But of course they will continue to see some margin pressure. Given the current series of events, there would probably be some pressure in the first quarter of next year as well, but the key point will be the demand side recovery for the discretionary segment and therefore volumes will be much more important at this time. rather than the margins.
Which sector or which companies or categories of companies could stand out again this quarter in your opinion?
One of the sectors that stand out this quarter will be all segments related to the breakout trading. We are seeing significant growth in industries such as hotels, travel, tourism, film exhibition business, and retail. So, this is a particular space that I think investors should pay attention to and there will be a positive surprise there.
If we expand the horizon beyond the quarter on a two-year basis, which companies will see the healthiest earnings growth over a two to three year outlook?
From a two to three year perspective, technology as an industry clearly stands out because the underlying trends are very strong and globally, the digital transformation we are seeing will only get stronger as we move forward.
Secondly, the sectors related to the energy transition, which are basically renewables and the hydrogen and electric vehicle segment, will see strong favorable winds in the future.
The third sector will be the capital goods sector, as we are looking at strong government investments that will be complemented by private investments that come out of the energy transition, PLI, digitalization and the like. These three pockets will certainly see very favorable profits over a 2-3 year outlook.
Some of the stocks that are likely to make big gains from a large cap standpoint will include companies like Reliance Industries. Who have taken significant steps on the side of the new energy. We have seen the series of acquisitions they have made over the past six to eight months. Clearly this is a company to watch on the new energy side.
What does your portfolio building model look like right now? Can you share what changes you made there?
We basically went overweight on the consumer discretionary side. Some of the other sectors we like are the financial sector and the capital goods sector. These will be the three most favored sectors for us from a portfolio perspective. Some of the sectors in which we have been underweighted would largely be sectors related to commodities.
Do you think the best of the commodities sector is behind it?
Yes, we think some of the factors that occurred last year in 2021, such as the global recovery in growth and a lot of supply along the value chain, should relax. Of course, we have the current crisis in Ukraine. But many of these problems are likely on the mend as we move forward into 2022, and some of the inflationary pressures are expected to begin to ease. We should start to see that the discretionary consumption side, which has suffered greatly due to both very weak demand and strong pressure on the inputs, should start to see benefits on both sides.
What do you think of the mid and small cap market segment? Has it become ripe for the bargain hunt? What kind of themes are you bullish on in the midcaps?
We have always been a long way from painting the mid and smallcap space. We believe that medium and small cap space requires a much more bottom-up approach than the overall space, as probably every third or fourth company will be a different animal in itself and therefore we believe it is always useful to look at specific pockets and actions. specifications that will do well in the mid- and small-cap space.
That said, from the investor’s point of view again if you want to look at certain spaces, we believe that you have to consider spaces like textiles, chemicals that have a strong history of import substitution or export growth.
The Chinese market collapsed and flows, both FDI and FII, have run out. The triggers could be various. Do you think there is a case where much of that money could take into consideration growth-oriented emerging markets like India and we could turn out to be a beneficiary?
Yes, I certainly think there is a reason to do this, but it will be a much more gradual process rather than a gradual function as the Chinese market from an overall market cap perspective is much larger than India.
Also there is the fact that some of the companies are leaders in their own space in China. We believe that China as a market will gradually downgrade. We have already seen a downgrading round in that particular market and would continue to see that such downgrading is likely to occur as we move forward. But we believe that process will be much slower than we would otherwise believe.