Will the dynamic once again move away from small and mid caps?
In our view, the driving force behind liquidity to small and mid caps is the growth that is occurring in this segment of the market. Even if we look at Nifty’s earnings, again for this quarter we have seen very steady growth of 35% on earnings for the current quarter. This indicates that there is a tailwind of growth in all segments of the market and if that growth continues there will be liquidity flowing into that segment of the market.
In the case of small and mid caps, as long as this stable growth persists, we are not too worried, given the strong recovery in this segment over the past year. What we are seeing now is a bit of a speed bump and who knows, it could continue for a while. It is also good for the markets as we will see weak hands come out of the market if such a downturn occurs. It always pays to be a little cautious, but I don’t think the time is right to worry too much about what’s been happening in the markets lately.
What will happen to one of the hottest trades we’ve seen in recent times, the reopening trade? Look at the surges we’ve seen in terms of hotel inventory, travel agencies, catering businesses?
I can tell you this from personal experience and it is anecdotal. For the past week I was in Goa and the fun and lovemaking going on there was so much more than I had seen in the past. There is a revenge consumption going on. There is a frenzy of revenge that is going on and these are repressed feelings of almost two years. It is unlikely that it will go out in a short period of time due to some event that occurred in the short term.
In our opinion, this is a trend that will continue for some time. Even as we look at the nature of spending at the time of bottlenecks and now, we see spending shifting from goods to experiences.
In the experiences of travel, sightseeing, going out, drinking alcohol, going out to eat – everything will only get better and our judgment is that even though there will be expectations of a short downturn. term on this due to the new wave that is anticipated, it is unlikely that with each passing day and with each passing vaccine that is administered, we are going to see a situation similar to the first wave or even the second wave. With each passing day, we get closer to people who are getting used to it and finding a way out.
Within this current weakness a) what would you be tempted to buy by sector and b) would automobiles be on this list?
You really have to keep an eye on growth and wherever growth is going to continue over the next four quarters and thereafter for 1 to 3 years, this is the space to focus on. We believe that the trend of recovering credit and margins in the banking sector, as well as improving profitability, is a secular trend. It is a space that is promising. Of course, there will be consolidation and you have to be very careful about which segment of that market you have to look at. We would focus on the bigger players.
When it comes to home improvement and building material companies, we believe real estate is a space that is on a secular uptrend and is just beginning. We see an increase in volume in our judgment over the next 6 to 12 months. This should translate into higher prices as well, as inventory is going out of the system quickly and when it comes to automobiles, there are two perspectives through which one can look at automobiles. One is the uncertainty of electric vehicles and its impact on current incumbents and the other is the semiconductor problem as well as other logistical issues that automakers face.
In our opinion, the second problem is more temporary and at some point it will be solved and therefore the companies which are affected because of this problem in terms of unfavorable development of their share prices, retain their value. These spaces can in the next 6 to 12 months offer significant value. On the other hand, companies that will experience some sort of secular stagnation in volume growth due to the impact of EVs should be avoided. Many of these segments may seem inexpensive optically, but they may not be because at the margin their business could be burdened by the EV segment and we wouldn’t want to be in that space where the end value of the business is called into question.
This is how we would view the automotive space, but I have to say that there are opportunities in this market and gradually as the price action becomes unfavorable the opportunities can start to increase even more.
Whenever we have these kinds of uncertainties, safe haven gold starts to shine even brighter. We have seen gold prices jump since the release of the new variant. Is there an opportunity in gold related actions in the stock markets?
Most gold-related companies don’t have a lot of gold inventory on their balance sheets. They enter into contracts in which they source gold when they need it. So in a sense, they don’t really benefit from the gains in stocks. At the margin, what also happens is that if gold prices rise, there is an elasticity of demand and the consumer retreats and lets the price of gold consolidate over a period of time. , then go in and buy.
So in this regard, the rise in gold prices is not good for demand and really is not a material benefit to the stocks that many of these gold companies derive from the rise in gold prices. gold. In fact, gold prices remaining stable at some point are better for these companies. Even though this is a kind of high gold price, if it stays stable, consumers are used to this price and are ready to come and buy rather than seeing gold prices constantly rising. .