What explains this weakness? We made it to 50,000 on the Sensex and since then, it has just been one way slide down for the last four days and globally as well?
It has always been about flows at least for the last three months. Our valuations are in record territory and you need to let the fundamentals catch up with the valuation. But having said that, I would not make a big deal about a 700 points or 4-5% correction in the Nifty after an almost 30% vertical rise since October.
The only concern has been that at least for the last few days, we have seen a little bit of selling by FIIs and given the levels that the markets are at, we need the FII flows to continue. So, that is something I would continue to watch. But a 5% correction in general is nothing to worry about though I would keep an eye on the flows.
In case of IT, it seems to be a very strong show across the board. What do you like among the IT stocks?
IT has been surprising us on the positive side for almost three quarters now. Apart from IT, the broad theme that we are playing in the portfolio is the focus on external looking sectors which we believe would continue to outperform for at least a year or so. This is because the recovery in the western economies will be relatively faster than India. So while India will recover on a low base in FY22, the kind of stimulus and the monetary policies that the western countries, especially the US and Europe had adopted, mean that their corporate recovery is going to be much faster. IT is benefiting from two or three things. One is faster general recovery which means corporate spending is coming back fast.
Secondly, the whole work from home environment and the necessity of work from home has forced companies to rejig their whole infrastructure for communications. On the other hand, the consumers have changed their buying patterns and are buying more online. So not only are the online companies investing more on consumer experience, they are also trying to improve the digital experience and cater to higher volumes.
But even the normal companies have had to scale up their communications and IT infrastructure to enable work from home. These are the three tailwinds that we see for IT and that should last for a while.
Every brokerage from Citi to CLSA, from Jefferies to Morgan have a consensus view that markets are trading above the historical averages. The market cap to GDP is now above 1 and when that happens, either future returns are low or negative.
Absolutely. That is our view also as far as the large cap indices are concerned. For a couple of years, the returns will be probably in single digits or thereabouts. The way to look at it is to see whether there are stock picking opportunities in the market. While the Nifty was at a record high about a week back, we are now probably 4-5% lower. But we are still at a decent level and the returns have been quite good in the last one year or so.
The whole move has been driven by 15 or 20 stocks even within the Nifty. So, beyond the top 20 in Sensex and Nifty, the returns have not been that great. The midcap indices are barely at January 2018 levels which means that beyond the top 20, stocks valuations are not that stretched though as an aggregate the markets may look stretched. So there could be enough scope to pick stocks from the midcaps and the smaller caps. That is how we are approaching the situation.
Howard Marks says you cannot turn a blind eye to what is happening in the world. He is of the view that there is excessive speculation in the market. Do you think this is a risk we are ignoring?
You can certainly say that for the US markets. There is a kind of craziness out there in the US markets and that is probably also because of the systems that they have. I do not know how you can allow shorting of a stock that is more than 120-130% of the free float available and those kind of systems are more robust in India. The kind of leverage that we have in the system, the kind of margining system proactively being done by Sebi and the exchanges is far more robust.
So that kind of craziness, that kind of froth I do not see in Indian markets because one way of looking at it is to see volumes and there is no frenzy in volumes here. So I would not extrapolate that phenomenon for India. While overall valuations are expensive on the large cap indices, they are not in a manic or a euphoric zone as of now.
Where is that you still find valuation comfort and are still willing to buy afresh even in this decline?
There is still value in some of the private sector banks. However, before going overweight, we would want to wait for the March quarter disclosures. We were significantly underweight on banking six months back; now we are much less underweight, almost neutral. But before going overweight, I would really like to see the disclosures and NPA trends for the March quarter. There is value out there because ultimately the growth rates of private sector banks are going to be high given that PSU banks do not have the capital and so private banks make for a really good long-term story out there.
IT looks good at least for the next couple of years. Even in auto, we have seen corrections in some of the four-wheeler names and even two-wheelers have not been that expensive. That is one theme which given the strength of consumption, we continue and that can be played.