investment strategy: the bull market is intact but more specific to equities; where to invest now?

“The bull market in metals is intact, but this space is extremely volatile and more than micro factors, macro factors have a huge impact on the behavior of metals stocks, not necessarily metals companies,” said Hiren Ved, Co-founder, CEO, Director & CIO, Alchemy capital management


Monday made us uncomfortable. Do you think we’ve peaked for the year or peaked until the budget and the market just whimper and whine now?
You can’t have both speed and direction. Long term direction is pretty much intact in my opinion. The long term bull market is very intact. But the speed is going to slow down now and the easy money is being made and we are entering the next phase of the bull market which is going to be a lot more measured and a lot more selective.

Every sector has probably had the opportunity to revise its rating, with the exception of autos and banks which are lagging behind the Nifty, but overall it was 12-18 months and we shouldn’t expect the kind of momentum we’ve seen to continue. But I still believe very strongly that we continue to be in a bull market and see those occasional corrective episodes that are healthy, to shake off any complacency. Markets will become more specific to stocks than they have been.

What could be the short- to medium-term impact of the Paytm IPO debacle? It’s a revelation for flagship investors, investment bankers and developers as well. How could they be so wrong?
Maybe two weeks ago I was asked this question about new-age tech IPOs and I mentioned at the time that you have to be extremely selective. We forget that the market is the temple of capitalism. Here, arrogance does not work. The market will reduce everyone to their size. It was a good lesson for everyone and all stakeholders in the IPO that if you don’t leave any advantage for the investors then one day the investors will vote very strongly and I think that is what is happening. passed during Paytm’s IPO.

I hope there will be more rationality and that the valuations will be much more reasonable. Many of the new entrepreneurs going public will find that everything is very easy when you do Series A, B, C, D and people are bidding up. But this is the final temple where the price discovery occurs. There are expectations to be met and if you don’t leave money on the table it won’t be a very easy race. The first expectations or the first experience of investors are extremely important. There’s a reason people say everyone along the way should be making money.

So what happens to two classes of stocks – the existing new tech companies that post Paytm’s listing and the so-called big banks that have suffered because of all the fintech scare. Do you see a re-evaluation there and in new tech companies now?
I think it’s still too early, because only time will tell how technology intertwines with existing businesses. In the area of ​​financial services, we believe that banks and fintechs will have to work together and because it is a highly regulated activity. Fintechs can’t build a liability franchise, they aren’t allowed to take deposits and that gives them stability.

The only way fintechs will make any money at the end of the day is by lending, because the ability to lend means a very strong liability franchise. What fintechs can probably do very well is create digital loans or transactions and then they have to find a way to make money and in India regulators are very friendly with individual investors or borrowers.

The margins are going to be extremely slim if they are just trying to make money on trades. There is no money in the payments unless the MDR comes back, but the advantage of fintechs is their ability to create loans digitally. You can’t lend because you don’t have a stable liability franchise. They will need to work with the banks to build a solid business model that makes them money. Yes, they have access to the data, but so do very smart digital banks. NBFCs also have access to data and nothing prevents them from acquiring customers digitally like an ICICI bank or a Bajaj Finance bank does.

The two will have to coexist and find a business model in which they will leverage each other’s strengths. The banks have the capacity and a strong franchise of liability. On the asset side, fintech companies are very agile and can deliver a superior customer experience.

So in the future, unless they work together, we also need to keep an eye on how the RBI or the regulators think about fintechs, because they don’t want a systemic risk to arise. It will be an interesting space, but it will evolve over time. SO, we still have to wait before things get better. It’s like what happened to the FMCG industry when Patanjali arrived. People thought it was going to devalue other FMCG players. Initially, there was a downgrade of FMCG players, but now everything is settled. People are not talking about the disruption of FMCG businesses because of Patanjali. I think something similar will happen to banks and fintechs. At first, there will always be a fear that fintechs may take market share, but things will calm down over time. It is still an evolutionary phase.

In the blink of an eye, metal stocks corrected from 10% to 15%, a title like Tata Steel went from Rs 1,500 to almost Rs 1,200, it was under 1,200 yesterday. Is the bull market in metals intact and if so, is it a good time to re-enter or add more positions in metals stocks now?
I think the bull market in metals is intact, but this space is extremely volatile and more than micro factors, macro factors have a huge impact on the behavior of metals stocks, not necessarily metals companies. The profitability of metallurgical companies is therefore still practically intact, but there are a lot of moving parts.

The stock prices of metallurgical companies are not necessarily a function of the company’s profitability alone. Many macroeconomic factors determine the behavior of metals stocks. For example, if the dollar index goes up, metals correct. If anything is going on in China, the metals are okay. Then again, there is good news and the metals are rebounding. It’s not a very smooth course, but I think the long-term structural factors that initially led to the rally in metals stocks are still pretty much there. There is decarbonization, China is reducing its capacity, but metal prices are very sensitive to macro news. For example, if the cases of Covid in Europe increase, people feel that there are blockages and it will have an impact.

So you have to be very careful when trading in this sector. You have to size positions if you want to make money in the metals business. If one can manage volatility and manage portfolio sizing, there is still money to be made in the metals sector. But if you think that from now on the metals business is competing with any other industry in terms of performance, then that’s a choice people have to make.

I think the metal companies will continue to do very well. Their cash flows and their profitability will always be intact and should increase and deleveraging is continuing, but it is very, very sensitive. We are entering an era where we will continue to hear about the rise in interest rates, the tightening of the Fed, the rise in the dollar index. These are things that will have to be managed if we want to stay invested in this sector.

There are sectors that have been downgraded and sectors that could be downgraded due to concerns about inflation and valuations and sectors that have been reassessed. Let’s talk about the areas where decommissioning could occur. It could be on the terminal value, because of inflation and it could be because of valuation. Where do you see this happening?
Generally speaking, when rates rise, typical growth values ​​are impacted as the terminal value is likely to decrease. But this is a very generic problem. You have to understand what the path to growth is. If the growth track is reasonably long, you will be fine. We could see a temporary cooling in valuations, but earnings growth must then take over.

The risk really is where you give higher valuations and you don’t know whether the benefits will compensate for some valuation compression or PEs that may occur. From now on, the earnings and cash flow trajectory of some of these growing companies is going to be extremely important. This is where you have to be careful. If you are in a high PE, high growth company, you have to be very sure of the profit growth trajectory. If the winnings go up, all is well.


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