Investment Strategy: Sit with very dangerous long-term stories now; be a little more aggressive: Venugopal Garre
Markets may be under pressure today, but Nifty’s year-end target is around where the index trades in April. Do you want to meet that target of 17,500 to 18,000?
This is a very good question because normally giving this argument of flat returns or indices staying flat usually tends to be very difficult because returns are always expected in both directions.
Since July last year, we have been of the opinion that very limited returns must be made in the bull market and that we will probably end up in a flat and limited situation. We also doubled that opinion in January. This outlook where we highlighted a very similar target price, the point of view was simply that in this environment there is a lot of potential risk.
Initially it was about higher valuations and then potential global challenges emerging, in particular the volatility we are seeing. But at the same time, our argument is that the risk of a hard landing seems low, given where we are after a few years of near-zero macroeconomic growth in absolute GDP terms.
So what makes this argument to stay flat, which in itself is a very powerful argument, is that if you look at what’s going on in the world, there are a lot of these doomsday scenarios lately. Raw material prices are exorbitant; volatility is gaining ground, there is a war going on. Look at what is happening globally for yields and inflation control measures are supposed to depress demand one way or another.
India cannot escape all this. The thing is, whenever we have seen such situations in the past, we have also seen quite sharp corrections for the Indian markets, lasting six to eight months, which we have termed as a bear market. Now, this time around, to a large extent, we’ve digested a lot of that news feed which itself is kind of a pretty underlying interesting trend.
If you expect Nifty returns to cap and stay in that kind of range themselves, how do you see FII’s momentum changing? In the last financial year, they sold shares worth Rs 1.4 lakh crore. So far in April, they are net buyers of over Rs 7,000 crore. What do you tell your investors? Is the era of creative storytelling over?
Creative storytelling will always remain. When the macro does not support, it is necessary to create stories to bring hope. Hope is always about cycles, long term secular potential and things like that. It’s not going to go away. This is in any case the reality of the equity markets because we tend to invest according to the future, rather than what is happening today or in the past. In the context where we are at this stage, the question that we would still ask ourselves is why stay in equities?
This is a question many global fund managers, especially those with the ability to take positions in specific countries, have pondered. To some extent, there have been capital outflows of $14 billion to $15 billion over the past six to eight months. Gradually, these challenges from a stock market perspective are continuing around the world. It’s not like India faces more challenges than others. It’s something that ultimately could ease those outflows unless something really changes in the domestic macro picture.
What are the hiding places? What spaces are you still overweight in and recommend buying in?
That’s a good way to look at it because, unfortunately, we’re tied to markets. Most of the markets are mainly centered on indexed funds and they must have positions. So the change is that you have to be very stock specific. There are always upward opportunities in all possible markets and that also applies at the moment. But it will depend on individual funds. It could be a very different process of thinking about what they like versus each other. But the main model is income certainty.
This is very important when looking at equities at this stage and, more importantly, how far away are they from volatility or potential global macro risks. These things are probably very important. Now we have tried to assemble our portfolio. So we’ve been running this portfolio for two years as a paper portfolio and we have 13 stocks, 12 longs and one short. But the idea that we had as a theme when we thought about these actions was mainly these two things in the model.
But at the same time, I am of the opinion that the turnover must be very fast. Short-term stock-to-stock rotation will need to be a little more aggressive in this environment to generate that extra alpha you would like. Sitting with long-term stories at this stage is very dangerous if you don’t really have a short-term catalyst. So it can’t hold up in this phase of the market.
The other thing we emphasize is to also take a sectoral context. When we build that sector backdrop, which really hasn’t changed much over the last eight to nine months and the reason being the market hasn’t changed and it’s overweight industrials and financials, the recovery domestic cyclic plays. But within that, we’ve just reduced our industrial exposure a bit at this point, but we’re still overweight.
Other than that, we’ve been pretty cautious on consumption and it’s still going. We moved digital stories to an underweight in January, now we are more neutral. That’s the industry context, but it’s not a recession-proof industry view. It’s more than one point of view that’s okay. There are some challenges ahead, but a macroeconomic recovery will eventually take shape over two years.
You talked about a recession. Obviously you are following US yields very closely, as the US bond market seems to suggest that a recession may be on the way in the next couple of years?
Yes, that is correct. The problem has been discussed a lot. There is plenty of evidence of how things formed in the past when such episodes occurred. But my concern goes beyond these quantitative measures which give a certain vision of the future, in general, the inflationary risks are generally quite visible. It’s unfortunate, but once you had to create a forced downturn from a demand perspective by these interest rate hikes that maybe could be measured, but there could be quick hikes from time to time another if inflation is not contained.
This is a challenge in a global context. India may not escape it either, even if our global ties are not that important. But there are still ties from a currency and flow perspective and things like that. The change is therefore not really formal. But there’s kind of a shift in the RBI’s stance on how they view interest rates and that gives us a signal that it’s better to signal a potential that we’re going to take such measures in the future rather than saying that we are not going to do it. It’s a good decision. He always keeps the markets in order.
When it comes to deconstructing the entire construction, materials, or this real estate space as a whole, the high energy and freight costs cannot be ignored, especially for some of the smaller developers as well. where commodity prices are disproportionately higher. How do you play this metric in light of these concerns?
That’s a fair point. But steer clear of potential near-term challenges, where we’re going to see input cost pressures or higher prices dampen demand a bit. So we’re underweight building materials because that poses a short-term challenge, but at the same time industrials is a very different space because industrials generally have the ability to pass on prices through their covenants price variation and things like that.
Moreover, we are not overtly dependent on real estate. We are still dependent on government contracts or private contracts where there are fewer challenges from this point of view. This explains why we are overweight Industrials despite the challenges and underweight Building Materials at this stage.
Now, that doesn’t mean we’re negative on long-term real estate. I believe that from a cyclical perspective, there is room for real estate to do well over the next four to five years. Normally, when the real estate cycle starts, it tends to last longer and the same also works in reverse.
What is the outlook for the automotive and automotive accessories industry that will face challenges similar to those you have reported?
Automotive is very uncertain and we were underweight last year. We went neutral at the start of the year and as there was another bout of volatility, we are still not very constructive on automotive as a whole.
Yes, there could be challenges both on the supply side that emerge from time to time as well as the push on the cost side that is slowly going to be pushed to the consumers. As for auto accessories, they are outward looking and we need to see how much of exports in general will be affected if we are going to see a global slowdown. So it’s a situation with automobiles in general, but there’s only one thing that keeps me from being underweight in general based on national histories.
If you look at overall auto volumes, we’re still at levels that were there three or four years ago. It kind of protects the downsides beyond a certain stage. In addition, some companies’ margins are at their lowest in 10 years. It’s probably a positive potential in the background, which keeps us neutral.
Does the Indian market have superpowers and that explains the resilience?
Oh! yeah, I mean, it’s amazing that we’re having a war, we’re seeing supply issues globally, we’re seeing where yields are moving. Overall, there’s inflation, there’s $14 billion to $15 billion of FII outflows. We digested it all, I think that’s a very powerful statement. Another thought I would like to leave is that the odds are still in favor of bull markets in India. Look at the 25 year history.
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