Sridhar Sivaram, Investment Director, Enam Holdings, said that politics does not matter in the medium term.
Watch: Being stock specific is key; deteriorating macros a worry, says Enam Holdings
He also said emerging markets are worried about deteriorating macros.
Edited Excerpts: First up, political developments should one really bother about it at this juncture after all it is higher tally for the BJP, so would the market take consolation from that or will it worry that an anti National Democratic Alliance (NDA) formation is getting cemented?
So over a medium term, politics doesn't matter. You go back in history and check what has happened. In fact, I saw one of the journalist, who came on your channel recently said the markets love BJP, but that is not the case because, when United Progressive Alliance (UPA) II came the markets were up 20%.
So I think, even journalists have very short memories. So I will not worry too much about one state here and there, as long as the broader reform process is still in place.
Which may be a question mark right now given the way macro is positioned, which is why I guess the market is bit worried and you can also see that in the bond markets and the currency markets. So, I guess that is a cause for concern.
Are you worried about the way crude is headed or do you think that it could be a global US bond yield surge that could sort of have ramifications on the markets?
If you see the emerging market performance this year and you see the countries that haven't done well, both in terms of currency and equity markets, the old fragile five is raising their head again Indonesia, Russia, Brazil and South Africa. India not to that extent, but even India falls there, because the currency is already depreciated 5-6%.
MSCI is down almost 9-10%, the India MSCI dollar returns. So I guess it is factoring in somewhere there that, market in general for emerging markets, I am saying are worried about countries, where the macro is deteriorating.
Having said that it is not the same level as it was in 2013, I mean our current account deficit was 5% plus. We are much better positioned this time around, but crude is a worry and there are lot of other macro headwinds that that we are facing. I would say, macro is a worry and it is reflecting in the way the markets are behaving this year.
My point of view the thought I have is last year was such a good year for equity investors and domestic investors we have already seen that. I can see that on twitter, I can see that how people are complaining already about their portfolio's being down 30-40% in that sense your thoughts on the way some of the mid-caps have fallen and is there an opportunity here with the kind of fall that we have seen?
So this has been my view that 2018 is a tough year and you try and protect your capital and because of multiple reasons that 2017 was so good and the volatility in the market was so less. I was reading a newsletter recently that S&P 500, the 1% moves for the current year is almost 30 or 40 out of the total trading days, it is already more than the full 1% moves off last year.
If it continues this way, so I am just trying to highlight that the volatility in global markets have gone up. We had a very calm 2017, not only globally even for us. So, those sort of years don't come very often and when it comes, the year after that is always not so great. So, which was my view that protect your capital for 2018. Market had run up well ahead of its fundamentals. We are now seeing some micro improvements which is great, but we want to see that this continues for a few more quarters for it to sustain. So, I would say 2018 is tough.
So from now to the end of FY 2019 that is March, when the election season also will be on us, will you lose money in both bond and equities? Will you gain money in equities, but not so much so what would be the relative preference?
So it is a tough call to say whether you will gain or not. I would say it is better to look at stock specific. As we already saying that companies which deliver earnings, doesn’t matter what the macro situation is, there are periods when you play macro, where you know that the macro is improving and the market is not discounting that, say post taper tantrum 2013, when we saw lot of policy initiatives and you know you could play a macro trade this is not the time to play that macro trade. This is the time to be very careful with your stock selection and look at some of those and identify and invest. So I wouldn't bet on what will happen to the markets, because it is very tough to play too many moving parts. But easier for me to bet on my stocks.
Where do you see opportunities now because you know it is hard to pick stocks at a time when there is so much turmoil? You think fast-moving consumer goods (FMCG) automobile, consumption is the way to go?
We are all already playing the consumer theme. But if you ask me opportunities, we have been on this trade and it hasn't worked, which is the corporate bank theme. We think that the National Company Law Tribunal (NCLT) process is working quite well. It will surprise the market, it has its own challenges on the way, which is a lot of things are going on to the court. But we think once Supreme Court or any of the higher courts give a judgment, there is a direction to this some of these banks.
We are working with a 50-55% loss ratio for the entire basket. So, we would see some of the steel ones, where the loss is lesser, but when you come to gas based power plants the losses will be higher. So we are not going with this. We are not bullish because one of the plants where the loss was less than 30%, but we are going with the assumption of 50-55.
But even if that be the case, what happens is that these are assets, which are not generating any income right now. So your P&L will improve because once a new taker comes in it becomes a performing asset and then also on the balance sheet side your non-performing assets (NPAs) comes down, so your P&L and balance sheet both improves.
But this is a long trade, it will take time for it to play out. You need patience in this. We think of the corporate ones, the private ones are better positioned, because your collateral damage because of many of the other issues which are going around is lesser. But maybe some of the bigger public sector undertakings (PSU) may also benefit.
Which part of the finances other than the corporate facing private banks will you play and I am including the non-banking financial companies (NBFC), in that entire range and it is 40% of the market by weight? What is worth sticking to?
I do have my biases for many of the NBFC's, which I don't like. Housing is one of them because I do find that many of them are really not mortgage players because their corporate book is so huge. So I am not saying all of them. So I have been talking about this for almost more than a year that look at the housing finance companies. They are camouflaging what actually they are lending to and that is a challenge.
The consumer facing ones are much better because if you look at India's credit to GDP for the consumer as a basket is very low. So the opportunity here is good, provided you pick the stocks correctly. I am not a big fan of microfinance institutions (MFI) in general because I think they have their own challenges. Every time there is a loan waiver, we will see some issues. So that is another basket, which I will be careful.
Life insurance I just don't understand their maths, I mean paying 5 times embedded value whereas embedded value itself is a present value of the future earnings of the current business, it just doesn't add up. So, I have too many if’s and but’s in this financial basket. Maybe I am an exception in this, so I be very careful in buying what I like.
Coming back to the midcap theme one theme which has really worked wonderfully is the whole consumption theme and it has sort of managed to survive the last downtick as well. Do you think it will survive this one as well?
I think, it will survive because one - many of the consumption theme including staples had some issues, when you had this demonetisation and Goods and Service Tax (GST) issues. They are coming out of that and in many of the cases, if you look at global comparisons, the consumption as a percentage for that particular segment is very low. I would say consumption as a basket will continue, it will be a multi-year theme which will play out. So both discretionary staples, durables will be long. One have to look at the valuation, so you can pick and choose your companies. So it is not like everything is out of place.
Information technology is one space did you feel you missed out on it? I mean you have not liked it for a while but it has done so well?
We have difference of opinion in our own house. I still believe that this is a value trap and I have maintained this for over 3-4 years now because I don't see them actually adapting to the change that is happening globally. You look at information technology companies, say in China or many of the other emerging countries they have built massive companies and not just the Alibaba’s and the Baidu's of the world, even smaller Chinese companies have cutting-edge technology and whereas India has continued to follow this model of outsourcing and this wage differential trying to benefit from that.Only now people are talking of digital and I am not sure that the employees are equipped to handle this change, which is they had silos built for information technology, which is particular information technology company will have people who are specialised in testing, in system integration. When it comes to digital, you need a single person knowing all of it together. I would still be very careful cautious on this. 8-9% doesn't excite me and that is the growth they are guiding for.