stock market crash | volatility | Investment strategy: Using volatility in the first half of the year to slowly get into the right stocks rather than investing all at once: Trideep Bhattacharya
What message are you sending to your customers? How far could the crisis extend?
The situation in Ukraine has worsened over the week and as a result short-term volatility is going to be high, but we ran thinking that the first half will be full of moments like this where we will have moments lows like where the markets would react to the jolt of some of the events which could be a sudden rise in interest rates, some deterioration in the geopolitical situation and things like that.
So to that extent few calls today afternoon so far but yeah the customers are a little nervous and the message we’ve been sending is that overall we expect this that the first half of 2022 will be volatile, driven not only by geopolitics but also fears over inflation and rising US interest rates among others. In the second half of the year, the earnings recovery would begin to take shape. We advised investors to use the volatility of the first half to invest gradually and steadily rather than on a lump sum basis.
If crude stays high for a long time due to these concerns because Russia is a major supplier in the global crude basket, then will the macro for India go wrong and how can your assumption be challenged ? Have you taken a closer look at emerging risks?
Absoutely. Overall, our current thinking is that Oil is high given the geopolitical situation in Ukraine. But looking further ahead, can the geopolitical situation remain weak for maybe a few weeks or a month or longer for sure? Yes he can. But can it stay the same for the next three to six months? If I had to take an estimated probability estimate, I would probably say no. And if that’s the case then that’s a short term anomaly that we’re seeing in terms of the spike in the price of oil as well as a few other commodity prices because they’re driven more by supply than demand . Thus, we believe that beyond three to six months, this inflation will fall.
The other aspect is that right now the market has also priced in some level of rising interest rates, whether it’s in the US or India. If inflation seems to spoil the economic recovery, it is clear that central banks would be more accommodative regarding the interest rate scenario. I think the macro situation is a bit fluid, adjusting over a period of time and we are clearly watching closely.
We are not macro experts, rather we focus on companies that have good pricing power, can weather this turbulent period keeping their margins or earnings intact to some degree. That’s how we’re looking at moving on, but we think it’s more of a three to six month problem than a one year problem. If it goes beyond that, it is certainly a cause for concern.
What is your sense of flow? SIP flows and large HNI retail flows have been very sticky and in a sense have supported the market so far by absorbing FII sales. Do you see a risk of this number falling in these times or will it continue to support the market?
Part of retail and HNI flows is structural. Given the relative attractiveness of debt versus equities, many people have been drawn to equity markets over the past year and some of this trend will continue over the medium term. But at the same time, in some stocks, with low institutional holdings and which have done considerably well, in the past, there is a good foam carried by part of the investment community.
I certainly see that in a regime where interest rates rise slightly, that moss will disappear over the next three to six months and so we need to pick equities over macro themes very carefully in the current environment. On the net balance, I see some foam moving away from the market. I think some of this will be structural and will stay with us and act as an additional cushion, particularly when the FII flow remains weak.
What do your numbers tell you? Where do you see indications that the numbers are so good that at prices 5-10% lower, you’d like to add that into your fund?
Let me present a few data points that are a sum total of the conversation with companies as well as the research we have done. For the first time in the last 10 years, we saw that private sector investment intentions were significantly higher than what we are used to. It’s basically four to five times that of the public sector, which won’t come immediately but will come over the next two to three years. This is a very important data point to note, from a company’s capital expenditure perspective.
Secondly, we also hear that on household investment or the real estate part of the economy, inventories are declining at a significant rate and as launches occur, coupled with the fact that interest rates are still low, there is a fair amount of demand that companies in this segment are seeing and related sectors like building materials.
Thirdly, for the first time, while there has been a double digit salary increase for the first time in 15 years, I see a figure quoted around 15-17% that has happened over the last year or which ultimately at some point will lead to consumer spending. So those are the fundamental data points that make me think that if you take the two to three year scenario and look slightly beyond the near term, the fundamental picture of the Indian economy as it relates to the private cycle or household spending is really looking robust and hence the assumption that we are playing through our wallets.
Private sector investment demand and a rebound in credit growth are the themes we are playing in our portfolio which are corollary to what I have just mentioned. That’s why the focus is on medium-term earnings potential and we’re seeing some change for the first time in a decade.
The mid and small cap basket has traditionally always traded at a discount to large caps, but in the past two months it had moved to par or in some cases even more premium to the universe. large caps. Does this correction also bring order to this relationship?
In the last 12 to 18 month rally that we have seen, mid and small caps have closed the valuation gap that existed between large, mid and small caps and therefore the way valuations are synchronized with the appearance of the fundamentals of this set of companies. . Therefore, from an investor’s perspective, we’re trying to figure out in which companies, regardless of the cap, how the earnings upgrade story is likely to play out over the next two to three years.
Some of the scum that has been the small cap valuation premium has corrected and don’t expect them to return to these levels. Going forward, stock movement may hinge on stock-specific earnings upgrades, downgrade stories regardless of market capitalization, but more specific to the company and theme they play on.
Do you expect the market to be higher by the end of the year, 10 months from now, compared to where we are today?
I think the first half is going to be quite volatile, from the second half until 2024 when we have the national elections, good favorable economic winds will help us. Some of the data points in this context like business investment, household investment, household spending – all of these themes will play out over the next two to three years.
At Edelweiss Mutual Fund, we pick bottom-up stocks and are used to taking advantage of this correction or volatility in the first half of the year. While waiting for the dust to settle, you have to position yourself on the right titles to be able to play on the recovery which, in my opinion, will last two to three years. This is how we think the stock market will go.
In this context, 2022 would be a more volatile year than we are used to, especially in 2021. We could see more in March and probably in the first half. The second half would be relatively quieter than the first half.