Betting on 4 themes; better not to jump in now

Rahul Chadha, Ex-Mirae Asset Global, says the “state election verdict was clearly very positive for the ruling party and that gives expectations that we will have policy continuity post general elections also. What we see is over six-nine months, FIIs would increase exposure to the largecaps, particularly the banks.”

It’s a party for you either way because not only is India doing well, so are the US equity markets. When do you think FII participation is meaningfully going to come back to India because once that comes in, then we are looking at further upside from these levels and a lot of upside I guess?

The state election verdict should give some comfort to the FIIs. From an institutional perspective, there was always the risk of downside in the markets because the valuations were not so cheap and to be fair, there are parts of the economy which have a bit of slow consumption.

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The state election verdict was clearly very positive for the ruling party and that gives expectations that we will have policy continuity post general elections also. What we see is over six-nine months, FIIs would increase exposure to the largecaps, particularly the banks.

Everybody is of the view that FIIs will come back. What if they do not come back? There is no compulsion they will come back.

It is a function of time. This is something we have discussed. What is happening globally is there is a slowdown and one has got to look at the numbers. The US was the strongest economy, but the fourth quarter is going to be slow here also. Say here in New York, we have had a good feel of what is happening in the US. Travel, tourism, eating out are doing well. Healthcare is doing well. Outside that, things have slowed quite a bit here.

Europe is in a deep recession. China has slowed down considerably. If you look at parts of the world, things are a bit slow and again with US 10-year yields at 4.5% plus, that reduces the attractiveness for equities. What we saw in the last month was a relief rally because there was extreme pessimism and people thought that the Fed would come and cut rates quickly. It has to be seen how quickly does Fed cut rates and what does it mean for markets in light of the growth slowdown.

What is it you believe in particular just keeping in mind that the election outcomes are likely to be some themes that would be beneficiaries in the coming months in the year ahead. Are the capex related or PSU related themes likely to be strong beneficiaries?

Absolutely. I think some of these themes, financial, capex related themes one would look to buy now. But I would rather say that rather than jump and buy now, over the next three-four months, one will get entry points because globally the backdrop does not look very strong from economic perspective, from a market performance perspective.

So, if the global markets are subdued or down, it is highly unlikely that Indian markets would significantly go up. What would happen is they would do their job by not falling and that is where some of these sectors which have done very well industrials and the capex themes you talked about, real estate, will provide good entry points. The dips would not be significant, but 5-10% lower for some of these names would be good long-term opportunities.

Does it make sense to rotate 15%, 20%, 25% from mid and smallcap stocks to largecap stocks now?

No doubt about that. A lot of retail frenzies happened in mid and smallcaps. This is the other thing we have discussed in the past. Investing is also about your downside protection. Look, the retail investors have made a lot more money than circumspect institutional investors like us. But institutional investors do a bit of downside protection also. So, that is where it makes sense. Having made so much money in these midcaps where valuations are expensive, growth is yet to rebound, it makes more sense to move to the largecaps where the risk return is a lot more favourable and downside is the lower should globally there have been accident. You can protect your capital a lot more.

What do you think will be the biggest moving part for 2024 apart from elections?

It is when the policy easing happens and more importantly when the economy improves. See, at the end of the day it is the earnings which moves markets. Markets can pre-empt anticipate but if let us say the policy easing does not happen which markets are expecting in June and Fed holds on to the rates till the end of the year and growth keeps on slowing down, then it is likely that the markets are headed down before the move up.

What is important is when do you get the broad-based growth recovery both globally and within sectors or across sectors.

If you have to construct your India portfolio fresh now for the next three years, how would you construct it?

Continue to like financials. Financials have been one-third of our portfolio. So, within financials, let us say 25% banks, put 5-6% of insurance. Some real estate. One can be tactical about real estate and if you get a correction over the next three-six months, add to that. So, between real estate, financials and insurance, lies one-third of the portfolio; then would come industrials. 10-12% goes to industrials, infrastructure and capex themes. Again, interesting bets would be metals.

Six months from now, I would be tempted to take a contrarian bet on metals. We have seen these metal companies go for a significant capacity increase in India. Globally also, if the economies bottom and growth recovery improves, the realisation should be higher for these companies Outside that, we have always liked consumer discretionary plays, some select auto names or again Zomato. Consumers have been about 20-25% of our portfolios historically.

If you have given a relook to some of the inflationary concerns, particularly playing out for the rural theme as well, how do you look at a bounce back within that space?

Inflation is going to ease out, already data is coming that goods inflation is eased out. What you are seeing is because of the cuts done by OPEC, oil is at these levels, else oil could have been 20-30% lower. But because of the global demand weakness, the goods inflation which was there in 2020-21, etc, is now slowly going away. So, I do not think inflation would be a significant concern and as inflation somewhat eases, pressure on consumer wallet which we saw over the last two years is going to ease and that is where you will see the revival of consumption, particularly in the rural parts or the bottom section of the economy or the population.

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William Murphy

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