What did you make of Monday’s trading session? The banks lagged behind, was trading with a cut?
The market is now struggling for leadership because most of the sectors have gone up quite considerably and for the most part, the frontline companies, the ones that had lagged the most, had begun to show some signs of life. Therefore, we have seen action in companies like Coal India and some of the other metals. Not that the metals are lagging, but they have taken a bit of a breather and therefore since we are looking for rotational trades, we are looking for some sectors to lead again. But frankly, the level at which the market is now, finding new leadership is going to be a tough task and I would suggest trading with caution from here on.
While the markets are struggling for leadership, we have also seen the return of the smallcaps. The smallcap 100 index is flirting with 2008 highs. A few weeks ago, we were talking very differently about the broader markets. How can one play this change in momentum?
There is this niggling fear that there will be a resurgence in interest rate or more importantly, a drop in liquidity. More than anything else, while we have had a huge growth in the midcaps largely because they have underperformed very dramatically over the last few years and that has played out over the last one year or so, whenever liquidity begins to dry up a bit, that is the sector that gets hit the most.
Even in terms of valuations, midcaps are not cheap now in comparison with the largecaps. So, both the arguments that were in favour of midcaps — that there was surplus liquidity and earnings and growth was becoming a little more broad based across the economy and that was not reflecting in the price. Anyway, the sectors had underperformed. All of that is now out of the window. The smallcap group has done exceedingly well, the valuation gap between them and the largecaps is more or less done. The liquidity, if at all, from here on, has a chance of actually drying up a little bit rather than expanding from here on.
The case therefore for smallcaps and midcaps is becoming a little harder to make. It had eased off a little bit but again as we are looking at higher levels, the rotation continues. I am not surprised that it has kind of rotated again into the small and midcaps and hence the caveat that do assume that there will be some change in the direction not very far out in the future. At that point of time, when you are looking to exit small and midcaps, the gate is narrow.
We are extremely careful that if investing at these levels, one has to be confident that the earnings growth over the next two-three years will pay for whatever one is buying and that one is willing to wait for that long.
Zomato has decided to stop grocery delivery services. It is a sensible move to ease off from businesses that are not doing well and they are making a conscious effort to do so.
Strategically, it makes absolute sense because they have a reasonably meaningful investment in a company which is doing the same thing and which has been doing it for a while. So it does not make sense for them to be duplicating whatever Grofers is doing.
They have a big enough challenge in terms of being able to justify the kind of numbers that they are operating at and the more losses they make in experimenting with new business models, the tougher it becomes to turn to positivity in terms of their EBITDA further down the road. Overall. strategically, it makes absolute sense. They need to consolidate their leadership where they are already present and make sure that they can start getting a positive bottom line out of their main line of business.
The delay in the JioPhone Next launch pretty much confirms that chip shortage is affecting consumer giants, electronics as well as auto companies. Unfortunately it is happening ahead of the festive season. Have the markets been a bit slow in recognising the ramifications of the chip shortage and how can one play on it?
The market has recognised it now for quite some time because most of the companies have been talking about it as reasons for delays; the auto sector especially has been fairly vocal about the fact that there has been a shortage of chips. Many companies have therefore said that they are postponing some of their launches or at least their production schedules are getting hit quite badly because of that.
It is not surprising that Reliance has also had the same problem. I would argue that Reliance may have yet another problem because whenever one is launching something new, it is very complex and it is really difficult to do on a timeline, there are bound to be some glitches. I would be fairly sympathetic towards their need to take a little bit more time.
Frankly, in the case of Reliance I do not think it makes material difference because the price difference between what a smartphone costs and what it is likely to cost under the new product that they are coming out with is going to be so dramatic that it may make changes in the rest of the world as well, not just India. A $50 dollar smartphone is not something that is easily available and something which Google is pretty much supporting totally. Therefore, the experience of the users may not be significantly different from regular smartphone users.
How do you play the chip shortage? That is a more difficult question. One could go short but one does not want to do that in a market which is running up. On the other hand, we do not manufacture chips of any kind here in India. So, there is very little one can play on the upside. One could look at buying some of the semiconductor companies in Taiwan but I think it is too late for that as well. I do not think there are any easy ways of playing that really.
ESG funds entered JSW Energy on Monday. JSW, in fact, hit an upper circuit. But it had been outperforming its peers in China as well?
ESG is a fairly interesting piece of work right now because a fairly major change has happened in recent times. Mr Tariq Fancy, who was earlier the chief investment officer for sustainable investing at the world’s largest mutual fund, came out with his note saying that ESG investing is actually a placebo and is not likely to work at all. In fact, it may actually lull people into believing that what they are doing is good whereas actually they are harming the environment.
That is something that needs to be debated far more widely than it is being done. The current criteria for ESG positivity is very loose and not very well defined. The studies are at best whimsical. One may find that cement companies are not even viewed with suspicion for ESG whereas 100% of their cement is equivalent to the carbon dioxide they reduce. They are basically reducing calcium carbonate and taking the carbon dioxide out. So, almost 99% carbon dioxide is released but have you heard anybody saying that that is an ESG problem?
As I said, each one has its own whimsical views, but obviously they represent a large amount of money and if for whatever reason, they have decided that there is a company which is worth investing in, for the near term at least it will move the price.