All indicators are suggesting that the second wave will have an impact on both demand and output. How come the market is not recognising that?
Covid has became an inflection point for many corporates to completely rejig their businesses, reduce their cost structures and improve productivity. There was no visibility (of earnings) when Covid hit us for the first time and so corporates had to respond to that very aggressively. They went into survival mode. The phenomenal capability of the top 200 companies to manage margins and business amidst this situation is being reflected in the market now.
Markets are forward looking. Earnings have surprised on the upside, despite what we thought in the early phase of Covid. In the second phase of Covid, companies know how to manage the situation. The market is willing to overlook this (second wave). In fact, stocks of companies which are most impacted are actually doing better than companies which are relatively less impacted. So the market is telling us that it is not concerned about what is happening in the short to medium term.
Is the market pricing in FY23 growth? The headroom to make money now could be limited
A new economic growth cycle is starting. There will be fits and starts in between. It does not mean the market will keep running away. It may happen that Nifty consolidates and stays within a range, but the rest of the market catches up. There are scores of sectors and companies which are breaking out of long years of consolidation and downturn.
So let us not look at the market only from the prism of Nifty. That is a big mistake that many investors are doing today. They look at Nifty and say the market is nearing 16,000 and so let me book some profits. I think that is a big fallacy. You got to start looking beyond Nifty.
This is very similar to what happened in 2008-09. The scars of a deep correction always remain for a longer period of time. You keep feeling that the market bounced back too fast and I will look like a fool if I enter the market at these levels.
You are bullish on two themes – cyclicals and platform companies. Aren’t they both on two ends of the spectrum and contradictory strategies?
They are not contradictory but complementary. Our big picture theme is that digital and cyclical are likely to do well.
Digital trends are taking hold. Digital transactions are increasing and every business is going digital. The onslaught of e-commerce is a secular trend and Covid has accelerated it dramatically. Therefore, it is a big trend that we cannot miss in our investment thesis. We are very bullish on IT services and the entire internet cohort platform companies where they are using technology and internet to accelerate growth. While we keep debating about GDP shrinking by 8-10 per cent, many of these companies are growing at 30-40-50 per cent.
Online brokers have added 8 to 10 million new accounts. They have been growing at 50-60 per cent. Many internet companies and delivery companies are growing much faster than the GDP. All that is being enabled by technology.
At the other hand of the spectrum are sectors like metals, power and infrastructure that went through a very severe leverage cycle. Even auto and auto ancillary companies were not doing well before Covid. The headwinds are now likely to become tailwinds. So whether it is capital goods, metals or autos, there is a huge opportunity to make money.
Now the macro environment is becoming favourable. I think we will see the private investment cycle pick up. When I speak to CEOs of capital goods companies, they say that they have not seen this kind of an order book situation in the last 8-9 years. The momentum in these businesses is coming back. So when these stocks are going up, I think the market is giving you a message. It is up to us whether we want to pick up that message or not.