There is an acute power shortage in China. Also, the dollar index is spiking up as too many macro variables are moving too quickly. How would you assess the global situation?
There are a lot of moving parts right now. Globally, things are becoming slightly more negative as far as India is concerned, the commentary coming out from the companies is becoming even stronger. Post the second wave, as most of the states and cities started opening up, the demand has come back very strongly and this momentum is feeding quite positively as far as the overall outlook is concerned for most of the corporates.
But what is very important is that some of the global macros are going to create some amount of temporary disruptions as far as the risk taking abilities are concerned. There could be periods of volatility for the emerging markets going forward. That is definitely bound to hurt India as well. But in terms of visibility of growth and stability of reforms — India stands pretty strong.
Given where we are in terms of valuations, there is very little room for error and there could be some bits of volatility but on the whole, we believe that the long term outlook for India is turning positive and hence as far as equities are concerned, investment should be looked at with a long term view.
The near term expectations need to be tempered down because of the attendant risks. The time is right for the investor to realign the portfolios. We have seen lots of speculative trades taking place. On the whole, the long term picture for India looks okay. It is the short term where the expectations need to be tempered a bit.
How would you adjust your portfolios assuming a slowdown in China? Do you see demand and supply change in a dramatic manner?
The second largest economy of the world is going through a bit of slowdown and that certainly will have ramifications. So there is a big impact globally but at the same time, let us not paint this whole scenario with one brush because there are parts to the story which benefit India. Across various categories and segments, Indian companies are getting more enquiries as people shift from China. That is the positive aspect of what is happening.
The other bigger macro change is the policies are creating some amount of fear in the minds of investors which is also going to lead to some amount of risk from those economies and can lead to a bit more allocation to economies where there is stability over the longer term. So all these facts should be taken into consideration when we are thinking about what is happening in China.
On the other hand, temporary imbalances could get created. Soaring energy prices and some of the key raw materials prices may go up and that is going to cause problems for some of the Indian companies which use them as the key inputs. Plus freight cost is going up and that is one of the key concerns most of the corporate are very clearly sounding off.
I believe that companies which have the ability to pass on the cost increases will fare a bit better but the companies where the ability to pass on these price increase will have to take them in terms of their margin impact and I was hearing what you have mentioned about the very heightened expectations on earnings and very marginal room for error. Wherever the companies disappoint over the next two quarters because of the margin pressure, we could have some amount of nervousness on those shocks. But on the whole these are temporary imbalances which should normalise as some of the supply chain normalises going forward.
One sector where you have really created a lot of wealth for your investors is the chemical sector. It was a play on India’s manufacturing ability. How do you see dynamics of the chemical and the manufacturing sector changing?
There are two ways to look at it. I will take the chemical industries as an example because that is something which is in a way directly affected by what is happening in China and that is a growing industry.
The relevance of that industry is actually becoming more in the global context versus where China is. China is giant and we cannot say that we will be able to compete with China in terms of where we are today. But companies have emerged bigger and stronger and some companies in speciality segments have become quite dominant.
We are still small in the global context and hence some of these companies are sensing continuing opportunity and that leading them to spend more on capacity expansion. If we take a block of three for the last seven-eight years I have been tracking these companies, in every previous block of three years, the spends by these companies have gone up. That is a clear indication of their confidence in business momentum. So this is the bottom-up view.
The other aspect is there are many key raw materials which these companies are still sourcing from China as a base and that is where the challenge is going to be in terms of the profitability for the next one or two quarters, till the time these raw material prices normalise. So, the business momentum is strong, but profitability may show variability over the next few quarters. On the whole, confidence visibility is high.
The third aspect is the valuations which is where one has to take a call. At some valuations, the margin of safety becomes lower. We have rebalanced our portfolios. We have booked profit and in some of these names, we have reduced our weightage. But we have not exited the segment because we still believe in continuity of the business prospects. Valuations are high but as the visibility keeps improving, over a period it will keep creating values for the investors.