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While arguing that the China trade is a tactical one and not a long term one, India with its high growth trajectory has attracted its fair share of global capital, amid China’s buoyancy.
Edited excerpts from a chat:
Investors who were betting on PSUs and capex plays related to rail and defence are now hunting for new emerging themes. Where do you think the puck is going to be?
From a tactical viewpoint, money will now chase newer segments with reasonable valuations. Sector rotation seems imminent, and my sense is that the banking space will gain favour among market folks. Among structural themes, we like the electronic manufacturing service space, which will make handsome gains from production outsourcing and import substitution. A vast opportunity lies across multiple areas of manufacturing: AC, washing machines, refrigerators, toys, fans, lighting and other components, besides IoT and sunrise products in new areas.
EV stocks have been the focal point of many investor discussions but given the pace at which the space is growing, do you think it can give good returns to patient investors for 5-10 years and may disappoint in the near term?
To gauge true potential, it is imperative to study the EV space segment by segment.
In my view, cars and utility vehicles will see only a gradual penetration due to a variety of factors, including range anxiety, high prices, and lack of commensurate electric charging infrastructure.
EV penetration will be high in the two-wheelers and three-wheeler segments, led by passenger demand, and for buses plying on state government orders. We prefer incumbents like Bajaj (Chetak model) and TVS with (iQube) over Start-up offerings. The incumbents have better visibility in terms of new launches, overall positioning, and improving financial matrix. Bajaj and TVS have high management bandwidth and more sustainable models that will outlive PLi schemes and FAME subsidies.
Auto ancillaries also stand to gain from rising EV content in their base business. The likes of Minda Corp and Minda Industries, bearing companies like SKF and Schaeffler, and multi-product players like Motherson, have a bright future from catering to EVs.
The market has been largely worried over the impact of tensions in West Asia, shifting of FII money to China and high valuations. How strong do you think the China resurgence story is going to be? Is it just a tactical trade or a long-term play?
First and foremost, in the past, we have seen how India with its high growth trajectory has attracted its fair share of global capital, amid China’s buoyancy. So I am not worried about the growth resurgence in China.
Secondly, India’s weight in MSCI has been rising over the years and now stands at 2nd highest place in the EM basket. India and China hence would continue to be the dominant markets for foreign capital looking at emerging markets.
As regards China’s resurgence, we analysed the broad ratio of MSCI China and MSCI India over several years and found that China had multiple short-term recovery moves which lasted approximately two months before resuming the downtrend. Therefore, we believe that the China trade is a tactical one and not a long term one.
While the news from China has been largely negative for India as it has been sucking out liquidity, metal stocks have gained. How long do you think this can sustain?
Ferrous-linked stock gains were inspired by stimulus package announcements in China. Dealers stocked up during the golden week holiday season in China, but once China opened up again, we saw some profit booking. Post an expected subdued results season, we believe ferrous stocks will be ripe for a rally, as production cuts will be announced in November/December, which will be followed by Chinese New Year in January. Talking of non-ferrous stocks, we expect aluminium and copper prices to stay subdued and best avoided presently.
Given the valuations that we are trading at and the global set-up, how bullish are you on gold and silver? Where do you see the two precious metals headed in the rest of FY25 and is it time to raise allocation
I believe the rally in gold has only just begun. After nine years of enduring a bear phase, gold entered the bullish zone from mid-2020. The Covid pandemic, the inflation flare up, and geo-political turbulence like the Russia-Ukraine war, and now the Middle East conflict, has shifted investor attention towards gold. In the last three-year span, gold has outpaced Nifty returns on a CAGR basis. Silver too has been tracking gold and has been playing catch up in 2024. Given expectations of synchronised interest rate cuts by Global Central Banks, simmering geopolitical tensions, and a sort of gradual de-dollarisation by various nations, we remain bullish on gold and silver. The resounding fact that gold was able to hold ground even when real rates remained high conveys a strong buy signal for the yellow metal. We see it touching 2,900 in the next 12 months.
Smallcaps have been going through a tough time. Is most of the pain over or do you think more froth is left in the market?
Even after the deep correction, I still see a lot of midcaps and small caps devoid of any valuation comfort to invest in them. For the next few months, we will see downfalls in those stocks where valuations are 30-40x and promoter comfort is not high. Having said that, quality names with high business visibility and reasonable valuations will continue to deliver over 1-2 year periods. The Nifty will keep inching upwards, and large caps may take preference for a few months.
Take us through your expectations from the Q2 earnings season. Which sectors are likely to disappoint the most?
Q2 results are likely to see a flattish revenue and operating growth ex-financials, on account of multiple factors like subdued industrial activity in the wake of heavy rains this year, the Shradh period or the Pitru Paksha lull, besides the base effect of prior year. We reckon material companies like Asian Paints, JSW, Ultratech, as also a few energy-linked players like BPCL would report below-par numbers.