Some of the new age tech companies like Paytm, Nykaa, IndiaMart saw their losses deepen, although Zomato managed to reduce them. Would you add consumer discretionary to that list, maybe less auto stocks? How will valuation as well as earnings risk persist in this space?
I don’t think consumer discretionary has a very similar case. They are supported by income. These companies have been around for years and have gone through economic cycles. There are commodity games that have a few big good quarters, a few bad quarters. Look at the steel. It is a sector that was considered a dog, but which is now presenting itself with spectacular figures and excellent performance.
PSU banks have underperformed since 2008 and are only now coming back. We just lost money in the PSU banks but we will realize that as the profits come in. The whole principle that profits drive price is set in stone for me and sector by sector you can see it. It is only when the markets go sideways that they come across this awareness. This is the cleaning process and this is when portfolio turnovers occur.
In a bull market, all is well. There is a saying: Is ke gadha ghode se tej bhag jata hai (very often the donkey outdoes the horse) in a bull market because it’s all about storytelling. When the markets go into consolidation the narrative ends and that’s when people start looking at earnings and that’s when you start to see this type of repricing.
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I think it’s a very interesting space for us as investors. It’s a space for us to review our portfolio. We could also have made mistakes or the colors or performance of certain companies would have changed. There will be new achievements. Commodity prices are rising and we need to see which companies can pass it on, which ones can’t pass it on and it becomes a really good time for us to rethink our portfolio and replace it because that’s where the leaders of the next stage of the bull market has settled.
I think the next leg of the bull market ahead will be much smoother as it will be much longer and elongated than what we have seen in the last couple of years. The last year or two has been what I call a real short, oversold rally. But I think leadership will emerge in this consolidation and the sectors or stocks that deliver in these difficult times will ultimately be massive leaders.
So these are interesting times. This is a time when we do a lot of research. A lot of turnover could occur in the portfolio, but this will also establish the legs or base of the trend ahead. I foresee a very big bull market beyond this consolidation.
When do you think this will happen and what do you think would be the factors that would lead to this bull run?
We really do not know the factors that will come. Today the headlines are crass and it’s somewhere it’s Russia, Ukraine so there’s so many macroeconomic factors that are at play whether it’s Iranian and US stocks that will ultimately provoking supply is all about raw materials. This is very, very important because commodities are the basic fuel for inflation right now.
I have a feeling this commodity inflation is keeping prices up and the inflationary pressures are going to trickle down to the Fed’s liquidity policy that the markets are stocking up on. My concern in the morning is definitely how commodities are moving because if commodities are in a state of euphoria or momentum, we will see that translate into inflation.
This game is really what is important even if I have the impression that there are excesses in the short term on this side too and there would be a correction but the game of raw materials, the game of inflation and the policy monetary are the big macros that are going to be driving.
The markets will tell us which companies can adapt to the new environment. The numbers will come out and it’s our job to react to that. What Russia is going to do with Ukraine is beyond me, but in the end for me, what ultimately matters is what is my portfolio, what are the companies and how do they operate? This is how we look at markets and this is how we look at trends. But these are interesting times to do a lot of research and a lot of portfolio turnover.