Over the last 2-3 weeks, apart from the last 2-3 sessions, we have seen a very solid recovery in the Indian markets. Is it too early to say the bottom is in or will this volatility continue?
Yes, the jump was obviously very fast. We’ve seen rapid upturns in international markets, particularly in the US. We’re seeing some profit taking now before some Fed talk towards the end of the week. It has impacted global markets and with a strong dollar, India has clearly come under some pressure.
We’ve seen quite a bit of foreign inflow into the market over the past few weeks and it’s no surprise that profit-taking occurs ahead of a central bank-type event.
From the recent low, the gain has been 15-16%. Do you think these are the new normal levels in the Indian market as inflation dynamics are benign? China is in a mess; The earnings weren’t that bad. Do you think Indian markets would settle at plus or minus 5% for the rest of the year?
i would agree with you Longer term, Indian momentum still looks very attractive as other countries in the region do not have as supportive fundamentals as India. Chinese stocks have traded near the lows, while India was not too far from the all-time highs last week, and valuations to some extent reflect better prospects for the Indian economy than in many other parts of the world.
That said, yes foreigners are buying this market and also have periods when they are selling the market, but one of the other major benefits for India is the increasingly large domestic purchases. As the financial sector develops and continues to expand there will be volatility, if global markets or developed markets go down a notch then India is unlikely to be unaffected. But I agree with you that barring major international events, the Indian market appears fairly well contained and should not be as volatile as we have seen in the past.
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How do you think the market would move in terms of inflation re-pricing? In the first half of this year, markets began repricing stocks that would benefit from inflation and penalized stocks that would lose due to inflation or high commodity prices. It looks like the opposite could happen, according to the Reserve Bank of India governor. In this case, could one fall back on consumer discretionary, materials or FMCG companies?
Yes, it’s pretty extraordinary. What we’ve been used to over the last 30 or 40 years is where you got markets like India, which traditionally has an inflation problem, and then, say, the UK. where yesterday one of the major investment banks predicted that UK inflation will be 18% next year. If the RBI is right, inflation in India will be close to 4%. It’s an extraordinary turn of events and you’re absolutely right. I think the market was quick to price in the winners of inflation and now we are going through the same process of pricing in the winners of deflation. But yeah, I think putting that aside, I think the longer-term view for a lot of the commodity plays still looks pretty optimistic to me. It is the same with the energy space. It will be a difficult task for the RBI to reach that 4% level but the market is clearly forward looking and is starting to price in that possibility.
Last time we spoke, you owned Indian Hotels; They had contact with the car and discretionary papers. In the last 40-45 days since the recent spike, have you been holding onto your long positions or have you taken some chips off the table?
We try to be long-term investors. The hotel sector is interesting both globally and in India. The trends that have benefitted from these counters over the past few months are still there. I think it’s a fascinating space and needs to be continued. Yes, international travel will come under pressure given the cost of living issues we are seeing in many developed markets, but the overall hotel space remains interesting both in India and globally.
Is It a Good Time to Be a Contra Buyer in IT? Do you think it might get pretty dark before dawn breaks?
A certain handling of IT is still useful. In the short term, all sectors go through periods of good valuation, overvaluation, undervaluation, etc. IT has obviously been on the road to success for a long time, however, some of the trends remain very supportive in the medium to longer term, but obviously brokers are making a call and it’s their job to do that but having a balanced portfolio with some exposure to sectors benefiting from a falling rupee and structural outsourcing trends and other factors that are very supportive of the business over the medium to long term suggests that some exposure to this sector makes sense.
Traders can perhaps be a little more nimble, but long-term investors investing in this sector make a lot of sense.
Every country follows a different interest rate dynamic. A significant slowdown is likely, at least in Europe. America is about hard landing or soft landing, not growth. Only in India do you see growth. So isn’t it better to buy into inward looking Indian companies such as banks, discretionary or pharmaceutical companies with a strong local presence?
I totally agree with you. If I just tip my hat from the perspective of foreign investors, when you look at investing in a market like India, you focus primarily on the domestic history. The consumer side of the economy, the financial sector, consumer discretionary, etc. are the most attractive areas.
This isn’t a new story and some of these areas remain quite expensive in the medium to long term, but I totally agree that the domestic side is probably the more attractive. But from an overall portfolio perspective it’s always good to have a bit of balance and also to have some sectors where India is a big exporter on certain sides. This trend is likely to increase over time. So not 100% domestically focused, but with a bit more balance it’s a sensible idea too.