COVID-19 has led to uneven and discontinuous changes in the business environment giving rise to what we term as “business thermals” – similar to the natural thermals which result in eagles circling the sky effortlessly, Rahul Singh, CIO-Equities, Tata Asset Management, said in an interview with Moneycontrol’s Kshitij Anand.
Q) US Fed plans to keep interest rates low for a long time. What is the kind of impact it will have on emerging markets like India as well as the currency?
A) Emerging market performance will be driven by how USD behaves. One of the big rallies in EM happened between 2000-2008 when the USD was weakening, and the trend reversed over the next 10 years.
While there are fundamental reasons for the USD to weaken from hereon, one of the scenarios which can go against the EMs is if COVID-19 normalisation takes longer.
In that case, EMs will have very little ammunition to prop up the economy and the US will have an upper hand given the reserve currency status.
Q) It looks like it is raining IPOs — we saw bumper responses for both Route Mobile as well as Happiest Minds. There are many more IPOs lined up such as Angel Broking, CAMS etc. It looks like the lull of IPOs is ending? What are your views? Any IPO which you are particularly excited about?
A) COVID-19 has led to uneven and discontinuous changes in the business environment giving rise to what we term as “business thermals” – similar to the natural thermals which result in eagles circling the sky effortlessly.
Corporates who can demonstrate the ability to tweak their business models in order to “stay inside the thermal” can generate superior returns for shareholders.
We have identified four business thermals as – 1) Import substitution from China, 2) Changing Consumption habits, 3) Digital transformation, and 4) Redefining Workplace.
Any listed stock or IPOs in the above segments will have the potential to do well.
Q) Market seems to be walking on a tight rope as geopolitical concerns as well as COVID-19 cases are not coming down, but yes there is some hope of a vaccine but that too is still some months away. Are we nearing the peak – we could have a touch and go moment with 12K and then fall?
A) We prefer to focus on the bottom-up sector and stock selection rather than excessively focusing on the index as that can also be driven by a narrow set of stocks as happened till July.
Markets have been more broad-based in August and September as midcap/small cap valuations appear relatively more reasonable and investors become more confident of the unlock trajectory.
The Nifty50 is trading at a PER of 17.5 times FY22 which is not too cheap nor too expensive however there are still risks to the FY2 earnings if the recovery takes longer.
It will get a clear post-festival season as to how much of the recovery was because of pent-up demand and what was the lasting impact on consumption patterns.
We are also likely to have a better picture of the banking system stress in terms of NPLs and restructuring.
Q) The 50% rally in the Sensex, and Nifty was largely led by roughly 10 stocks while the rest of the market suffered and that is why there was no jubilation among the investment community. Now, when the tide reverses could these stocks face selling pressure and investors should at best book profits? What are your views?
A) It is difficult to generalise the large-cap and midcap as asset categories – they are not homogenous. In large-caps, there are quality stocks and there is value – ditto for midcaps.
Instead of treating them as homogenous categories, investors will be better off identifying the businesses which are benefiting from the new dynamics and/ or managements that are nimble enough to take advantage of that by entering new adjacencies, cutting costs or a combination thereof.
We are seeing examples of that both in large-cap as well as mid/small-cap. Having said that, it is true that small and midcaps are trading at relatively reasonable levels and a lot of the post-COVID-19 tailwinds are in areas lie pharma API, digital transformation, electronic manufacturing, and e-commerce which are represented more in the midcap and small-cap category vs. large-cap.
Q) Warren Buffett, the man who pioneered buy and hold investing, just made quite a fast billion bucks from a type of investment he once mocked. It looks like value investing is also changing with time and Warren Buffett is leading it even at the age of 90. What are your views?
A) Traditional value investing framework has been challenged due to the low cost of equity which is a result of ample liquidity and secondly and more importantly, the new-age business models especially in technology and the Internet have much lower capital employed as compared to the old economy businesses.
That results in inflated ROEs and the combination of higher ROEs and low cost of equity has resulted in much higher valuation benchmarks than we have seen in the past.
So, one has to recognise the changes that have happened in the type of businesses that dominate the markets today vs. 20-30 years ago.
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