Since we spoke a few days ago, the world has completely changed. We are at $110 a barrel of crude. Where are we going next?
In the current uncertain climate crude prices have increased due to Russia sanctions and in the short term they may rise but we believe once they get above $120-125 there will be destruction demand. From a market perspective in the short term especially for India which is a big oil importer it can be choppy but for anyone with a three year time frame the next six months would give good points entry point because we’ve seen time and time again that it’s the entry points for good companies that matter in terms of performance.
We were talking to another speaker a short time ago and he continues to argue that this is at best a deep correction in an otherwise intact bull market. Do you also think this is just a correction in an otherwise intact bull market or do you think this could very well mark the peak of the bull market?
We believe that we are at the beginning of a new cycle. In India and most parts of the world except China, over the past seven to eight years, it was not an investment cycle. What’s happened over the last decade is that China had overinvested and the rest of the world had underinvested and we’re seeing the reverse as China goes through this course correction where it’s reducing the excesses of the real estate cycle or other sectors of the economy.
But the rest of the world is encouraging investment, so it’s still a new cycle. What’s happened is that despite the overheating that’s happened because of all the supply bottlenecks from the Delta variant last year and some of these issues that are happening right now in Ukraine, things should settle down in the next three to six months.
Inflation should be at a much more acceptable level and people would then be less worried about central bankers. Central banks are deliberately behind the curve and they want to keep real rates negative, whether in the US or India, because they want investment to pick up in the real economy. This trend is still continuing, deflation is a bigger concern, job creation is a bigger priority here for central banks in Asia, especially in India, than inflation. Inflation would be a short-term problem. Inflation is going to be much higher, but it will certainly come down from the levels we are seeing today.
If you think inflation is a short-term trend, aren’t you adjusting your portfolio to this pro-inflationary trend that is developing in the energy, commodities and metals markets?
In our portfolio, for the past 12-18 months, we have been geared towards this new investment cycle and the cyclical recovery. Thus, the portfolio is overweight on banks, industrials, etc. After a strong rally three or four months ago, we pulled money from these names because they looked a bit stretched and the Fed looked a bit hawkish, but the base case scenario remains Remains that inflation peaks somewhere at the level that was before this crisis around June and now we can extend that for three to six months. But in the next six months, inflation is expected to peak.
When this peak of inflation occurs, some of these cyclical stocks should do well. We have seen a recent rally in commodities. We’ve been playing commodities for the past two or three years, but we’d be a little cautious here as we still see weak Chinese property sales and inventory accumulation. If the net export figures rise from China, some of the commodity prices could calm down. After being bullish on commodities for two years, we would be more cautious here.
Is it time for defensives like pharma again? They underperformed last year. T also went through a correction?
Clearly defensive stocks would be where to put your money for the next six months and then we will have opportunities in the growth part of the market. Growth here means the cyclical recovery part of the market which would be banks, autos and industrials. These would be the names to add for the next cycle in the next two or three years.
Within defensive stocks, Apollo Hospitals could become one of the first hospital stocks to enter the index. The Street is a little split on whether or not to play in pure play pharma or healthcare services in the context of the performance of some of these stocks and the growth projections they are sitting on in the post- Covid?
We preferred hospitals over generic pharmaceutical companies and our regional funds have tons of hospital exhibits, be it Indian hospital exhibits or regional hospital exhibits. Our view was that there could be a temporary period of stagflation that is happening right now. These hospitals have good secular demand and they should take advantage of it. They’re sort of a reopening play and people should come back and then they go for these much-needed elective surgeries, which are hugely cost-effective for hospitals.
Valuations are attractive. There was good operating leverage that will play out for these hospitals and we continue to love the hospitals here. Selectively, one can look at the pharmaceutical industry, but a bigger problem stems from this erosion of generic prices in the United States, which would maintain the multiple ceiling for pharmaceutical stocks. Between the two, we would prefer hospitals with pharmaceutical names.
The fact that inflation is here and demand is slowing is not tomorrow’s trend, it is yesterday’s story. Now, investing doesn’t work by looking at yesterday’s history; it works by looking at tomorrow’s trend. What we are discussing today, how much is it in the price?
FII was worried about the tightening of rates and that is why they reduced their exposure. What happened in the last couple of months when the FIIs were selling, the Nationals, Retailers and HNIs were buying and these are not very strong hands.
There needs to be a bit of capitulation there and the way we were discussing hopefully capitulation happens in the next four to eight weeks and then we’ll see the economic data improve and stock prices stabilize. The reason I say the economic data has improved is because we are looking at GDP data for the last quarter, but the last quarter was ruined by Omicron.
As offices and schools open up there’s a lot of economics that’s tied to these guys getting their salaries and sending money home and the rural economy getting income extra where the expense begins. So there’s a virtuous loop that we think will play out in the next six to nine months and a bit of inflation is good. Higher nominal GDP means higher wages and that money would end up being consumed because people haven’t bought cars in large numbers for the past three to six years.
So there’s a huge pent-up demand in the economy and that should come to fruition, and then we have the government doing whatever it takes in terms of creating new jobs, which means higher wages, and that’s t is obviously another set of demands that arises.