It has been an absolutely wonderful July so far. FIIs have stopped selling, crude has reversed; do you think markets have turned and we are in for a better second half versus the volatile and a crazy first half?
For the first time we are seeing some positives in the market. Up till now, it was all negative. Finally, we are seeing some cooling down of inflation and oil prices specifically coming down to around $100 and we have seen the large FII selling abate for the time being.
We have seen some kind of a relief in the market in the last few days but going forward, one should not forget that there is going to be some impact on global growth specifically and there will be some ramifications of that in a few companies, especially some of the export-oriented companies. Coming to this quarter’s numbers, while we have got some okay previews from a few companies in the banking sector and on the consumer side, one has to wait and see how much slowdown we are going to see in the coming quarters and what impact it will have on earnings and downgrades to earnings.
I think we will get a better picture after this first quarter or probably the second quarter where it will get priced in. Markets have been in the fair zone. There is some risk in the markets because of an earnings downgrade and to that extent, there could be some downside going forward. I think at least for the next one quarter or so, things will still be a bit volatile.
I do not think we are out of the woods yet but there is clearly some kind of hope coming up. Specifically, India looks a little better. If there is a mild global recession and commodities come down because India is generally a large importer of commodities, that should not be too bad in the India context.
« Back to recommendation stories
I would have thought that with the $20 decline in crude price, a 50% decline in palm oil price and a 30% decline in wheat price, the market would be doing the cartwheels but that is not happening. Why so?
There are two reasons. One, clearly commodity prices are coming down. Commodity prices went up in the first place because of supply side issues. Those are getting to rest to some extent, but it is more led by expectation of demand slowing down and that is likely to impact growth which in turn could impact the top line growth for a few sectors.
While there is a balancing impact because of reducing commodity prices and margin improvement, markets to a large extent also look at the top line growth from a medium-term perspective.
It is the fear of growth moderating down in times of upside. If we look at the Indian markets’ valuations, we have not really seen such a big correction compared to what we have seen in global markets.
A lot of stocks have fallen quite a bit in the midcap and small cap segment but larger names not so much. While commodity increases led to a correction and the fear about inflation and interest rate hike, the fear about inflation peaking further is now receding and to that extent, the rate hikes could be moderate. But growth is likely to get impacted a bit and that is the reason why the reaction is not as euphoric as one would have expected.
The last time we were talking, you mentioned how you actually see the auto demand come back and the chip shortage easing off. It is pretty much on expected lines and it has played out in exactly the same manner. Now that auto has made a comeback, where within autos does your preference lie?
The auto sector has again seen a combination of easing in terms of the supply side constraints and commodity prices coming off. The demand is going to strong and that will drive the auto stocks high. We expect demand to be slightly stronger within the four-wheeler basket.
Two-wheelers segment is still recovering but is still not as strong as one would expect because rural demand is a bit weak. iT could pick up in the second half, if the agri output is good. But the demand there is slightly weak.
As for commercial vehicles, we have seen good demand and I would say that the strongest demand is in four-wheels, which should do better but on balance, the two-wheeler side the valuations are still attractive.
However, because of the disruption coming in form of electric vehicles and the competitive landscape beng still unclear, it could still be a bit tricky over there. Companies which have got a good strong product pipeline should be able to really gain market share and those are the companies one should be looking at in the auto sector.
Last time we spoke about how you are looking to buy stocks where correction has been significant. In the last month-and-a-half, where exactly have you added positions or been a buyer?
Some of the domestic centric discretionary companies had seen a good correction. That was because of slowdown in demand but also because of the commodity prices having gone up, whether it is consumer durables, whether it is the building material space or even in the consumer staple segment. We have seen good correction in all these spaces.
I think this is an area of long-term structural growth companies. Any correction because of the short-term pattern, is always a good opportunity to add to these names. So those are the names where we have looked at and built positions from a longer-term perspective.