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What are you making of today’s market movement?
We are in for some more correction. I am a little skeptical about the markets. I would be careful and it is more global. It doesn’t have much to do with the domestic situation. We saw a very poor manufacturing PMI number, which is literally the historical worst PMI we have seen on the manufacturing side. Tomorrow, you will have the service PMI, which will again be quite poor given the lockdown that we have had in April. So we will see a very poor second quarter for the global economy. The cues for the markets will come from the global situation and that is very clear.
The Indian government has not put together a fiscal stimulus; it seems like they will wait for the lockdown to end before the stimulus is announced. They will assess the situation further. But all the leading indicators are showing that you will probably get a minus 30% kind of print on the GDP; this will mitigate against fast recovery. But overall, our markets will follow the global markets and personally my thesis is we will see one more correction before we form a sustainable bottom, which could be quite sharp.
So I am in cash. I sold out most of my holdings and I am waiting out now for these markets to stabilize and to get some semblance of three things. One is containment of the further spread of the disease globally and in India. Second, what is happening on the cure front; is there any good news coming on the multiple tests that are happening, and third will be, how soon are we seeing the leading indicators showing that something is coming in terms of recovery. I think markets will gauge that much faster than all of us. They will move faster than us but I am willing to let go some of that recovery because right now you have more risk than reward in these markets.
I want to focus on aviation. Are you in the camp that is possibly betting on some kind of a bounce back even if it is a little later in the year? Or would you be very wary as we have had the likes of Warren Buffett completely sell out these names?
Even when Warren Buffett for the second time in his life went and bought airlines, we were quite surprised because they are very high on capex. The accounting is very complex with all the sales and lease backs. There is a lot of jugglery that happens on the accounting front. So you have huge orders placed and all of a sudden profits go up when actually the expense line should have gone up and it should have led to a lower profit.
So what we saw in airline stocks was a hope trade, especially in India. Government has done a small part in reducing the cost of aviation fuel. It is at historic low again over the last 10 years. If you compare it, we have really gone down but there is no demand as such. Tell me will you and I fly if tomorrow the airlines open? Only out of necessity people will fly. If somebody has to reach back home, he is stuck somewhere or if they have some very essential office work; otherwise on vacations and on leisure travel, you will not see travel coming back in a rush till you have vacations available and a better understanding of this virus.
So airlines I would say avoid; sell on every rise and get out. You will have other defensive sectors available if you insist on investing but airlines definitely are not looking too good. The kind of demand growth that was factored into these stocks are not going to come back. Of course, if they fall sharply, there might be some value that emerges but as a sector, I have stayed away because of the very high capex and very high regulatory impact and running cost that they are facing always.
What was helping these stocks was the huge demand and the growth in airports in India and the linking of tier-II cities. I think all that goes back by two years because of this lockdown and the kind of economic damage that we are seeing, people are going to go back one to two years in their net worth and you will not see that kind of demand growth coming in so fast. So poorer margins, difficult environment and uncertainty on demand returning are not a very good recipe for investments.
How are you looking at FMCG names currently?
If you see the global flows, they are going into healthcare, FMCG staples and are going into the big technology companies; that is the biggest US market as well as the Japanese inflows into the US markets. In our markets, after the last fall, we saw the sharpest rise in pharma and FMCG has held up. So FMCG is a defensive play normally and it tends to hold value. The valuation piece is there, but will you get very high returns at these valuations? Normal investment theory says no; do not get in at such high PEs as your chance to get returns diminishes. But India has been a counterintuitive market to some extent on the FMCG and we have made money on the FMCGs at these high multiples earlier as well. That is what gives confidence.
My personal situation is I am not investing and I am counselling people against investing. It may not be a very sharp selloff but you are going to see very strident voices globally. One part is the virus and the impact and second part is the economy and how soon it can recover. The third big part is Putin is in trouble, Xi Jinping is in trouble. Trump will not get re-elected as per the historical precedents; Gerald Ford lost the elections when he fought coming out of a recession, Jimmy Carter lost to Ronald Reagan in a recession year, Bush Senior lost the election because the US economy went into a recession. Here we are talking of a -30% cut; Trump understands that very well and you are going to see a lot of finger pointing and xenophobia taking over which will again make the markets very nervous.
So today I cannot say what will be the catalyst but before this year ends, I see these markets having one more sharp selloff and given that, I would rather protect capital for now because I cannot see where it will come from. The virus is known, the economic damage is known but this trade war 2 or this kind of very xenophobic nationalism we really do not know where it will lead to. So that is the only reason I am staying on the sidelines. Otherwise if you ask me to invest today, I would say pharma is clearly looking like it will really outperform. Financials, please do not touch because already three months of deferrals have been given to companies and individuals. Unlike the US where we know that as of April 1, 31% people did not pay their landlords the rent, as of May 1, it is nearly 51% people not paying their rents. In India, we do not have the data. It is a black box for investors. What we know is that banks have asked RBI for a further dispensation. NBFCs have asked till December to have a loan moratorium till then; so how do you value these companies? What are the NPAs for these companies? The market will not like this kind of uncertainty; so financials after multiple years are not a buy in India rather you should avoid them.
Pharma, FMCG are the defensives; select IT which will hold value and also midcap IT has shown some very good results last week. Midcap IT is looking resilient. I think those are the stocks you could pick up. Again, no index investing because there will be enough laggards in this market; there will be enough sectors which will see huge destruction.
Coming out of the lockdown, what we have seen from the Chinese example is that industries went back faster, but services did not come back. Services are taking much longer. People will not go to restaurants, people will not travel, no tourism, normal health checkups are suffering and education has still not come back. So big parts of the service economy have not returned to China even after 30 days of opening the lockdown. Industries have returned faster but the issue there is demand and in services, the issue is demand and supply. So we will see that play out in India also come June. So do not be very optimistic of a V-shaped recovery; that is my only caution. I am sorry. I am normally very optimistic. I am known as a perma bull but right now, the situation is looking quite grim to me; so I am trying to speak what my heart is saying.
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