How do you see the markets right now? What do you advise your clients?
Dipan Mehta: We are in a kind of delicate situation and those who have invested in recent months will have to wait until this difficult period is over. But these are great times to start a portfolio or add money to existing holdings and many companies have come in with decent numbers, given the tough environment they operate in. Their stock prices have corrected and now we see a lot of valuations reaching reasonable levels.
In many good quality companies, the risk-reward profile favors buying at this particular time. So now is a good time to gradually start making a shopping list. One could look at existing good quality holdings and add to that as well or if there are gaps in your various sector weightings, then one could look for market leaders in the industries in which we are underweight.
But I’m a firm believer that it’s part geopolitical, part inflationary and they’re all transitory effects. After six to 12 months you will see this period as a great buying opportunity and so I am quite optimistic for the future. Yes, there are challenges, but now is the best time to buy. You can’t buy when the markets are roaring and stock prices are rising 2-3% every day. This way you can buy at your prices gradually and at our own comfort and patience.
What are these pockets that you have identified where you see that valuations have become reasonable? Is it the computer pack?
Many sectors are reaching quite interesting levels. I am confident that the commodity cycle has peaked and should begin to correct at least some of the prices that have started to decline over the past few weeks or so.
It’s only a matter of time before commodity consumers like appliance makers, automakers and consumer packaged goods companies are able to bring their operating profit margins down to what they were average. Underlying demand remains pretty much strong and if the monsoons are good, that will certainly benefit a range of industries.
At the same time, larger weighting industries such as large cap banks are available at attractive valuations. We see secular growth momentum and big banks for the next few quarters or so and valuations are reasonable.
The same goes for technology, software vendors as well, but in software, our preference is for medium-sized software vendors. These companies maintain higher growth rates than large-cap software companies and they have certain risk factors related to customer concentration, but at a time like this when demand is strong enough and they win new orders of increasingly higher value, this risk is mitigated.
So I would say go for consumer staples like automotive, FMCG appliance space, building materials, go for banks, and go for midsize IT. Most importantly, go for good, solid companies that are leaders in their particular field or have a slightly differentiated business model and have strong track records of delivery on the financial front and good corporate governance standards. You can really choose which stocks to buy, which ones you’ve missed in the last two or three years, and go for those quality companies.
Are we just looking at the outlook for the broader basket of metals? We are witnessing a collapse that is playing out at all levels. We are also seeing a decline in commodity prices. Are there any key triggers you would watch for?
We remain fairly negative on commodities and clearly volumes have stabilized quarter-over-quarter, year-over-year as the results materialize. Although the numbers were exceptional as they benefited from very strong LME prices in the fourth quarter of FY22, but going forward we are seeing deep corrections in commodity prices and all this war on the inflation that is driven by all central bankers and governments. will have an impact on commodity prices.
So I’m very negative on the sector and as I said it’s time to look at some of the commodity consumers and put in place a countervailing strategy rather than go for the raw material producers. I know valuations are attractive on a price/earnings, price/book ratio and that’s really tempting; but if you look ahead six to 12 months later, we will see earnings start to drop significantly. So let’s be a little cautious on the metals side and look at the opposite side, for companies that will benefit from lower commodity prices.
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