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How should one look at the world right now?
Equities have had a pretty significant rally all across the world, over the last one month. But this has come in the absence of any major fundamental economic improvement. It has been accompanied by the declining sense of concern about the factors which were worrying us a little earlier. For example, today we have the likelihood of the phase I agreement being signed by US and China if not in November, certainly in December. We have a much lower likelihood of a no-deal Brexit.
Even if I look at the geopolitical tensions in the Middle East, they are having increasingly lower impact on some of the key variables like oil prices. The most recent terrorist attacks on the Saudi Arabian oilfield resulted in a tiny little spike in oil price just for a few days. On these factors, over the past one month or so, the quantum of concern that the investing community had, has declined. It is likely to remain so for the medium term, over the next two to three months.
Are you referring to geopolitical and trade war concerns?
Absolutely! Geopolitical and global trade has led to a significant influx of money into the emerging markets, which is quite visible in the way India or for that matter the Hong Kong and the Chinese market and north Asian markets like Korea and Taiwan have behaved.
What do you make of the domestic picture? This morning, we are tracking what Moody’s are saying, but we try not to read too much into it?
Right. The point I made initially was that this market rally has been accompanied by no major change on the economic front. That is exactly what the domestic situation in India is like. We have had a significant slowdown by the time we get the September quarter GDP numbers in late November. It will possibly be reinforced from the kind of industrial production that we have seen recently.
It seems that we are in this slowdown phase. It is in an extended slowdown phase which would obviously have a recovery at some point of time. It would not be a V-shaped recovery and while there are some minor green shoots in certain sectors, like chemical exports have increased. some auto companies which are now beginning to report minor increases from the festive season, but those are really few and far between. We have to watch out for a much more broad-based economic variable recovery to conclude that this rally and the valuations are sustainable.
How long will it take for an across-the-board earnings recovery to come by?
I would say at least two to three quarters. If I look at this particular result season, the consumer companies have done reasonably well. We have seen reasonably good numbers from retail-focussed private sector banks and similar numbers from possibly IT companies which the private sector banks are close to. That is about 20% of the market; the consumer companies are about 10% and so on. That takes care of 30-35% of the market capitalisation, giving a sense of some earnings recovery or at least earnings stabilisation that we are seeing, which may be correct but for that consensus earnings estimates to recover significantly, we will have to wait for the concerns about non-performing assets to get really behind us. We will have to wait for a much more broad-based consumption recovery. It seems unlikely in the near term and at least in this quarter.
Would you buy stocks after the recovery or before the recovery?
That is a real tricky one to answer. There are certain sectors where I am willing to stick my neck out and say that these are the kind of stocks that may be bought even before a very concerted sign of recovery comes in. These are the kind of sectors where the long- term picture seems okay despite the short-term downturn that we have seen.
I would rather use the present downturn as a buying opportunity in classic consumer discretionaries or four-wheelers in the auto sector where the penetration levels are so low that notwithstanding what happens over two to three quarters, the next five to seven years looks reasonably secure.
You are not worried about electrical vehicles (EVs)?
If we look at next 10-15 years, electric vehicles are likely to have a much larger footprint than they had today. In the context of India, the situation would be slightly different from what you would have in the relatively developed pockets of Asia. We do not really have the charging infrastructure today and to set that up in a reasonably cost-efficient manner would possibly take much longer here than it has taken over there.
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