Your is a long-short fund. How is the positioning right now in long versus short?
The markets have rallied quite a bit. When we see that rally from about 16,000 to 18,000 levels, it has been pretty sharp and quick. Also amidst that, last month the global markets were pretty weak. The data which is emerging out of the global markets is quite confusing and thus what we are doing at this point in time in terms of the market positioning is that we are increasing the hedges gradually and we will wait for the market to either consolidate or correct before we go in and do some fresh purchases.
You are someone who watches macros, micros and joins the dots globally too. What are the worry lines on the market in your view?
The biggest worry line is the so-called transitory inflation. Earlier, the whole consensus narrative was that inflation was pretty transitory but looking at the cost pressures across commodities — base metals or even softer commodities — it appears the inflation can be much more stickier. If that happens, then we will see some amount of action pretty quickly on taper and two, in terms of the interest rate hikes which earlier was envisaged by the Fed to happen in CY23, may happen earlier.
If that happens, then we may see some amount of sentimental negative on the markets in terms of the valuations. That is the risk we are looking at and that is coming out from the global side not from the local side.
After being in slumber for almost 24 months, one more stock has started moving up. It is ITC, especially the consumer end of the business. People are finding it promising on attractive valuations and the business. What is your sense on consumer stocks overall – Nestle, HUL and consumer end of the business?
Consumers have been market performers for long and the worry in the recent past was that the monsoons were a little erratic. However, late September, monsoons made up for it and the distribution of the rainfall has also been pretty okay. So in that respect, we are seeing some amount of interest coming back on to the consumers. However, my view is rather than consumer staples, I would prefer consumer discretionaries and within that, one may look at durables and probably autos as well.
Which area of the market is looking relatively better off in terms of risk reward? Are you comfortable in autos or could that be just a tactical sector and not a structural one yet?
The auto sector has been a relative underperformer for the last year or so. The talk was that because of the heightened commodity prices, the pressure on margins and at the same time the chip shortages which were making the sector a little vulnerable in terms of profitability and the performance. Have either of these two issues got sorted out? Of course not. Commodity prices are still very strong. However, the chip shortage is easing after Malaysia also got back into play. We expect that to get sorted out and then from an investor standpoint, we would look at that. Now that every negative has been factored in, the upcoming festival season and some good numbers on the auto companies can lead to at least a tactical play in the shorter term. But from a valuation perspective from a two to three years, they are fairly comfortable in terms of how they are trading.
Do you like anything among the beaten down financials or financials that have not really performed like Kotak Bank, HDFC Bank? PSUs have already moved up led by SBI. Axis, ICICI have also done well. but Kotak and HDFC Bank have moved sideways.
That is a promising area, especially the private banks. However, from a banking perspective, the most critical aspect is basically credit growth. The moment we see some amount of traction coming back on a system wide growth as well as credit growth for companies, we may see this sector coming back into action. Also the asset quality pain which was there is starting to subside as well. Maybe good trade is available on the banking side but in any case, other financials like insurance companies or AMCs are what we also like.
There are three AMCs and yesterday Birla AMC got listed. Does it interest you or you have looked at the previous ones HDFC, Nippon, etc? Some people find them expensive.
No AMC is a fantastic business. The amount of penetration in terms of mutual funds as a proportion of the household savings provides a fantastic opportunity. At the same time, as the generation Z starts working and manage savings, incrementally we are seeing that the risk taking ability of those early stage investors is pretty high. That makes a great case for them to route their savings into the AMCs.
As we are looking at the SIP numbers on a month to month basis, we are pretty positive on the whole sector. Of course, the valuations are a tad expensive but given the amount of cash they are throwing every quarter and the return on equity on an overall basis, the business has good promise over the medium to long term.
What would please the market? What kind of focus or area should be touched upon in the Budget?
From a budget perspective, basically the fiscal state is pretty good as tax collections have been pretty robust. What we have seen till now is continued support from the government on the supply side. Of course, that is the focus area we would want to be continued in terms of incentivising the industry.
Also we would like the government to do more capex as they have adequate resources. At the same time from a market perspective and as an industry participant, we would always want a more favourable regime for alternate investment funds as well category three. But from an overall perspective, a continued focus on capex would be very encouraging.