Clipped from: https://economictimes.indiatimes.com/markets/expert-view/dont-try-to-be-the-rabbit-tortoise-is-good-enough-in-this-market-basant-maheshwari/articleshow/83603746.cmsSECTIONSDon’t try to be the rabbit; tortoise is good enough in this market: Basant MaheshwariLast Updated: Jun 17, 2021, 04:57 PM ISTSynopsis
“We are ‘obese’ on metals. But for the regular investor, insurance is a good sector. One can make money year on year.”
“We are basically nothing. We just look at Dow Jones, we look at the US Fed and they tell us what to do and so we are a second derivative order of what the US market is doing. If the US Dow Jones falls 1,000 points, I do not think we are going to survive; if they go up, we also do. We are surviving on borrowed money basically,” says Basant Maheshwari, Founder, Basant Maheshwari Wealth Advisers LLP.
What would you say about the sort of bullion move that we have had in the last 12 months? How should an investor approach the market at these valuations? What are the things that one has to be careful about?
We have to look at the market from an Indian perspective. This is not our bull market. I would consider it to be our bull market when our banking and financial services do well. What is doing well are sectors and companies not directly related to India. For example, one auto company is doing well while Maruti is struggling because the other auto company has operations in China and Europe and other places.
It is true PSU banks are doing well but they are doing well on disinvestment hope. IT is doing well as well. And they have got nothing to do with India. Pharma is doing well. These are Indian companies with exports to the US. Metals are doing well and we have got nothing to do with metals. Just look at the price decided by LME or China and then we start selling. But what is doing well? Cement was doing well. It has come down a bit but cement will again recover and do well because that is very very basic and rural India would do well. But broadly it would be our bull market when banking and financial services do well.
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Stock score of Tata Consultancy Services Ltd moved up by 1 in a month.View Latest Stock Report »So we are basically nothing. We just look at Dow Jones, we look at the US Fed and they tell us what to do and so we are a second derivative order of what the US market is doing. If the US Dow Jones falls 1,000 points, I do not think we are going to survive; if they go up, we also do. We are surviving on borrowed money basically.
Last evening, the Fed showed signs of hawkishness and they opened the doors to pulling the plug on cheap money. Do you think this could put a pause on the rally that you are seeing in the Indian equity markets?
The US Fed is a very mature regulatory body and they just do not come to give a shock in the midnight. They would normally prepare you for what they are going to do and the markets also would get prepared. They normally send out feelers through speeches, conversations and interviews so that nobody gets the shock when the US Fed actually does something really strange and surprising.
What they have said is that in 2023 they would consider hiking rates and 2023 is still two years away from here. I do not think we should be discussing what the Fed did on Monday or Tuesday as that had a limited shelf life. But they have shown a direction for the next six to 12 months. I think the party would last but like all parties, this too has to come to an end. But to look at inflation in isolation as an enemy is wrong.
If inflation comes with growth, the world can manage inflation. In 2004-2005 to 2008, the Fed kept raising rates but global markets kept on going up because there was this celebration of growth and there was this new concept of emerging economies and BRICS. Inflation is a warning but if you are getting growth with inflation, we will take it every time.
In the last five to six months, we are seeing a little bit of growth and a little bit of inflation as well. Would you say that we are in an okay spot right now and for how long can liquidity keep with this bull run and keep pushing stocks higher?
Globally there is growth. In India, because of the Second Covid Wave and because of other factors, we are yet to reopen the economy and test the waters. But this liquidity time will go on for a little longer than we think because it is like cycling where you cannot stop pedaling and assume to be still moving straight as you are going to fall and the Fed understands this. They have inflated everything. They are not saying they would not push in liquidity. Taper actually means the liquidity that would be pushed in would be regulated. But I do not think the Fed would do anything to upset the apple cart. What I am more interested in is after four years, the US goes for an election. So I do not think in 2023, 2024 they would like to upset the status quo because just like farmers are important to India, investors are important to America.
You have traditionally been known to invest in NBFC and banking space. How long would it be before the banking sector or NBFCs would do well?
Banks would do well when the economy does well, right now the economy is closed. We opened up but then it is going to take a lot of time. You can survive one lockdown as a small SME or as a normal middle class guy, but surviving two lockdowns back to back for Covid or whatever reason is not any easy task for anyone. So just to give you an example, if my factory is shut what do I do? I withdraw money from my insurance, from my FDs and I pay my labourers off and I keep the show running. But if it is asked to be shut down for one more year, where do I get the extra cash from?
We would have to watch and see how India actually recovers but the basic economy would do well because the government expenditure would come in and so steel, cement and those kinds of stocks would do well. But the SMEs would take a little longer to recover. The good part is that the metals are on an upswing which means that the domestic economy should do okay.
As metal prices have started to go up, do you believe investments will happen in core economy stocks? Power, oil stocks have all started to do well. What is the market pricing in there?
Metals are going up and commodities are going up not because we are actually investing in core assets but because China is consuming a lot of these metals. We get the benefit as a shareholder of metal prices. As a producer, the metal companies get the benefit when China buys metals but the consumption is not happening in India. The consumption is happening in China and China is actually directing the entire world. It is on a big expansion spree and you are just getting the benefits from there but from our perspective, core asset expenditure is still some time away because I do not think we are in a position to actually push that pedal. I do not think anything is happening in India for a hurry but yes, the metal prices that we get are an offshoot of what other countries do.
Till now, it was just China which used to push metal prices but now it is Europe as well as America. The prices of steel in America are the highest for now. In Europe also, steel, aluminium are in demand. This time, it is a three-pronged demand structure; Europe, America and China but obviously China is the big daddy of them all. It consumes about 50% of what the globe produces. It is more about China and America.
You said banks, financials and those will only do well once the country sort of reboots. How far away are we from that? When will you see that pickup in banking and financial stocks?
Strangely I think the answer is vaccination because if we do not vaccinate enough, we are going to have another lockdown after two, three, four months. If we vaccinate faster and if we open up, Indians won’t take time to come back. We saw it after the first wave. People had written obituaries on a number of stocks and companies and sectors and said this is dead forever but we recovered. We were held back again because the second wave struck us.
As we open again, we are going to pedal ahead fast but if we do not vaccinate quickly, the Third Wave is a possibility. Six months away from now, things will be fine. There will be just two struggling quarters.
There is so much liquidity coming out of America. Most of that money has found itself into banks or emerging markets and once you invest into banks, banks have to lend further. So, it is a vicious cycle. There is a cost of holding deposits, there is a cost of holding money. As a result of all those reasons, if we take a six months’ view, we will be fine. In those six months, I assume the Fed would not upset the applecart.
Even though our vaccination drive now is not as quick and expansive as we desire, the markets are still at record highs. Do you think that we have already discounted the improved vaccination rates? Are we ignoring the possibility and the potential of a third wave?
No, markets are on record high becauseInfosysNSE 0.99 % is going up, Reliance is going up,TCSNSE 1.33 % is going up. The top notch private banks are going up and it has got nothing to do with what is happening back home. They are more US facing companies. Nifty is a collection of 50 odd companies, out of which 10 companies predominantly direct how the Nifty is going to move for the next several days or weeks. In the two indices, even if you remove the HDFC Banks and the Kotak Banks and take the second line banks like RBL Banks and the IndusInds and for that matter removeSBINSE -1.34 % and take the second line PSU banks, that is the real India. So forget the top five banks and look at the bottom 15 banks and you will get the real India.
Once that starts to fire, that would be the time when we will say India is recovering.
Let us talk about the rise of the retail investors or the so-called robinhood investors. How would you look at that?
Let me accept at the outset that when we do not understand anything we sayteraNSE -2.61 % toh yaar kismet se paise ban gai, yeh lucky hai, robinhood ne daam bada diya (You are lucky. You are making money thanks to Robinhood investors!)
One of these Robinhood investors at the age of 27 would become a fund manager of some hedge fund and he would also go and buy stocks and just because he is a hedge fund manager, we would give him a lot more respect. I think Robinhood is here to stay. We are working from home. They have got a lot of cash. The stimulus money is there and they are driving prices. We have to find the new Robinhoods. Earlier, it was the FIIs that used to dominate the markets but right now, it is the retail investors.
Just to give you a data point. Look at the stock futures position. It was about five lakh contracts just before Covid and dropped to about one lakh, one-and-a-half lakh at the depth of the problem. Right now it is at eight-and-a-half or nine lakhs. So I would say that the entire retail community is trading. But another way of looking at it is this is a predominant force now. The FIIs are normally short of stock futures right now. It is the normal retail guy who is sucking in all the shares from them. So whatever we tell them, they are driving the entire market.
It is true some of them will lose money but today’s Robinhood is a far smarter guy than what somebody 30 years back. When I entered markets 30 years ago, I knew zero about anything. The kind of intellectual discussions these guys do one year or six months into market, they have actually hastened the learning curve. What used to take us maybe six years to learn, these guys are grasping it over in six months or six weeks.
How would you look at hard assets?
Hard assets could be defined in two ways. One is the precious metals which basically is only gold. In India we consider silver to be precious but globally silver is also known as an industrial commodity. Gold is a perpetual inflation beating asset and so let us forget gold for a while.
The secondary assets are steel, aluminium, copper, zinc and alloys. There is another wave of buying happening there because of Chinese demand and asset prices also go up when there is inflation. But the real thing is when asset prices go up, there is inflation. So if the Fed governor were to say that inflation is higher in 2021, we are comparing 2021 to 2020. It is a statistical comparison and so obviously asset prices are high.
So if you are assuming inflation to be higher in 2022, you will assume all these commodities will be going up even further from here. If you assume zinc, copper and lead prices are coming down, then there would be no inflation. But if the Fed governor thinks that there would be inflation in 2022, it is good news for the commodity manufacturers. If the normal retail guy is bullish on copper, he should be looking at companies that have copper mines and not companies that are just converters.
So if there is inflation, commodity prices do well at least in times of industrial recovery. If you have a 20-year view, then gold will do well for inflation. If you have a three-year view, in base metals, the ferrous metals and the non-ferrous would do well.
What is your view on Indian infra names – , be it power or cement?
Most of the infra companies are stuck at the NCLT rather than on the ground, doing some infra work. Only the top notch ones are doing well. It is the same with real estate stocks. They were much into debt and they got into BOT scheme because they just could not tell investors that there is no growth. So they converted capex side model into a capital intensive BOT model. Most of them do not have the working capital and the available funds to deal with the present situation. When steel and other metal prices and zinc prices are in an upswing, infra companies would be thinking twice before bidding for an order. But the hard infra would still do well — the airports and ports.
But apart from that, in road construction, flyovers and bridges, the government has to take the first move. If the private sector follows, that is good enough. So if you look at infra stocks that are going up, one of them is going up because it has just come out NCLT and that is not a great space for the country to be in.
What are the sectors you would be overweight on?
We are overweight on metals. We are obese on metals. But for the regular investor, if you want a 5-year, 10-year view, look for the best insurance company and buy the stock and do not put too much head on it because these are stocks where you will make money year on year. In the race between the tortoise and the rabbit, do not try to become the rabbit, tortoise is good enough in this market. Surviving is winning.