Edited excerpts from a chat:
What is your outlook on Samvat 2081? Do you think Nifty would give double-digit returns in the new year as well?
We don’t like to predict where the Nifty will go. We hope it does well, of course. But there’s no way to predict. It’s better, in our view, to respond to what takes it up or down. Results, earnings, geopolitical challenges, elections – all play a role in the shorter term, and macroeconomic changes work in the longer term. We’re more confident in the long term, that India will do very well and equity markets will beat inflation in returns. But we aren’t sure of the short term, and one year is a very short term. So all we can predict is that we, and you, will be Happy on Diwali!
As market cycles change, winners keep changing. Given the key events lined up – RBI rate cut cycle (which will eventually begin in next few months), US presidential elections, etc – for the next one year, where do you think the puck is going to be in Samvat 2081?
The only thing we can say is that some of the uncertainty will go away – who’s going to be the US president, the contours of the Iran/Israel conflict, the changes in Europe and the US on interest rates and so on. But who will the winners be? We can’t predict that in advance. Certain sectors, such as IT services, might benefit from the going away of uncertainty, as new budgets will come into play. Defence companies could see an additional push as geopolitics takes centrestage. However, a lot will depend on near term flows, which seem quite negative right now.
Tell us which pockets of the market do you see most of the opportunity lying in the new year.
We still love the core Surge India stocks (Surge India is the name of a portfolio we run here). These involve domestic manufacturing, defence, semiconductors and auto as we believe local efforts to push manufacturing and the fact that the world is insular will push Indian industry to a better position. Additionally, the strong financial and physical infrastructure creates pockets of excellence for companies building in these spaces in India, and they remain a focus point. The premium consumption story in India is still getting started, and we believe that this will also propel forward in the next few years, especially in durables and services. We also focus on energy independence and import substitution as key themes in the portfolio.
Do you think earnings can be the biggest risk for the market? The Q2 earnings season isn’t turning out to be good enough, particularly given the elevated valuations that the market is trading at.
In the short term, earnings is a risk and has been demonstrated by the first few companies that have announced earnings. But it’s a quarter and we should see rebounds by early next year. The short term risk on the market is high, and has always been high. For the short term, the price will give us a better indicator of a move and of short term sentiment.
Is domestic demand, which was one of the biggest drivers of earnings growth, giving enough signs of slowing down? Can this festive and wedding season change the narrative?
At some level, the good rainfall should revive demand in the rural segment. And air travel, premium consumption and transportation seem to be reasonably well in demand, though there is a slowdown in car and two wheeler sales. The nature of this change may also get impacted if the stock markets correct, because of the wealth effect, where people spend less when they see their portfolios get hurt.
What is the kind of strategy that you’re following at this stage of the market where Q2 results are leading to downgrades and impacting market sentiments?
We might generate some cash when markets fall, in order to buy into stocks that we have wanted to buy earlier but haven’t been able to because of higher valuations. Beyond that, we look at companies for how they see the way forward, and many times, the longer road is clearer than the shorter term. In those cases, we may retain ownership regardless. However, in our algorithmic strategies, we just follow the system.
Do you think that the correction in PSUs and capex plays is now nearing its end before the market starts focusing once again on the 2025 Budget?
Again, we hate to predict when journey’s end or begin. The correction will end in hindsight only, according to us – so we’ll only know it’s over when it’s truly over. There are still heavily overvalued PSUs, and there are still heavily undervalued PSUs, and most of the capex led growth is ahead of us. So while the short term is murky, the longer term is more targetable for investors. This will require stomachs of steel, as a metaphor for dealing with the volatility that seems to be coming. To be fair, we haven’t seen much this year or the last; a true sense of volatility will be when markets move 20% down, quickly, which is both risk and reward for equity fund managers.