“So, IT, you can see across the board, the sector is witnessing new highs. Private banks, at least select private banks are touching new highs. Digital commerce companies are doing well. They are all in new highs, so on and so forth. So, it has become a very stock specific market, whereas at the same time you are seeing retailing correcting sharply, autos correcting sharply, oil and gas correcting sharply, etc,” says Rajesh Bhatia, CIO, ITI MF.
What do you make of the recent market move? We have come a long way in the small cap index where all the damage was done in the month of October and November now seems to be flourishing.
Rajesh Bhatia: Yes, I think what we have gone through is a slowdown caused by the reduction in government spending and therefore, corporate results were sort of weak. It was probably the worst downgrade cycle that we saw since the COVID period. Having said that, what has emerged subsequently is a very stock specific market. So, there are a lot of stuff that is really touching new highs.
IT, you can see across the board, the sector is witnessing new highs. Private banks, at least select private banks are touching new highs. Digital commerce companies are doing well. They are all in new highs, so on and so forth.
So, it has become a very stock specific market, whereas at the same time you are seeing retailing correcting sharply, autos correcting sharply, oil and gas correcting sharply, etc, etc.
What was since March 23 for six quarters in a row, 18 months in a row we saw a continuous upside and that was broken in this quarter, the October to December quarter in which we are in. So, I think that phase of across the board breadth of market going up that has been broken and we are now more into the sector specific/stock specific rises and declines that is the context that we are living in at this moment.
Give me an example that where do you see the transition happening. Where do you think that there is scope for underperformance in next 12 months and where do you think there is scope for outperformance?
Rajesh Bhatia: So, more of the same. Consumption has been fairly weak and we are not seeing any triggers for that revival. Of course, there is some comfort that rural economy could kind of do well because of kharif and potentially even a rabi doing quite well, but consumption has really been absent and I do not think there are any government initiatives also to kind of push that.
Government is a lot more focused on the capex side of the economy. So, my sense is the underperformance in some of these names could kind of continue, the consumptions, to some extent some of the automobiles, etc. And whereas, what is exciting is the cap good sectors, the digital commerce sectors, select private banks, IT.
I think I am very excited about it as well. So, so on and so forth. I think more of the same is what you will see into the future as well. Having said that, there is an important event coming in January which is the appointment of Trump and that is a significant event which we must not underestimate and what changes it brings to the table, particularly rise in the cost of capital, what implication it has for us is something that we need to watch out for. But from a bottom-up perspective, this is where we are seeing the favourable places to be and the sectors to avoid.
Just curious to understand your take on Trump 2.0 and what the implications are going to be for emerging markets such as India.
Rajesh Bhatia: So quite a lot. So, I do not want to be going to the alarmist side of possibilities that a lot of people are kind of talking about. But just to make the case, see, my sense is that the Fed Reserve has already maxed out the money supply. In a normal economy, the fiscal deficit in the US is as high as it is and it should not be this high. This is a current account deficit country. So, a lot of the macros are not really giving you any space.
The fact is that from whatever I can understand, of course, interest rates are, 10-year treasury is at 4.2, but even if the normal fiscal deficit manifests itself, people are expecting 10-year treasury to go to 5. Now if your risk-free rate is 5 and if not higher, then if you look at the mind of a FII, he is getting a risk-free at 5, he has to hedge the Indian currency, let us say that costs 2-2.5%, so his benchmark is 7.5% minimum return. Now let us say if he comes to an emerging market, he probably wants another 5% or 10% kind of a return for the risk that he is taking.
Now, if the market is expensive, then he or she is not likely to put incremental money. What that means is that the demand side for equities in India from the FIIs could remain soft. You also should consider that US with corporate tax cuts, with deregulation which Trump is promising, etc, is going to be even more attractive.
So, the reason for them to come to India goes down for the next possible future, which means that, like I said, the demand side for equities from FIIs will remain subdued for quite some time to come. And as you can see in India the supply side is very active. So, LG is coming up with an IPO, Hyundai is coming up with an IPO, multinational wants to sell stock, private equity is selling stocks. Indian promoters want to sell stocks.
So, the supply side is quite active, whereas the demand side, at least from the FII, is not going to be as favourable. What that tells me is that the price earnings expansion is very unlikely as you move forward. So, we are all betting on now how earnings trajectory will take place for equity returns as you move forward
