Somaiyaa says that a change in macroeconomics is usually accompanied by a change in style, sector and market capitalization, and that is what we are witnessing right now.
What exactly is happening in the automotive sector? There was a time when everyone was singing one song: that the automotive sector is a one-way street and there is bullish momentum going on. There was a lot of demand on the ground, but right now it is the opposite. We are seeing high inventory levels for most of these automotive players at dealerships. Sales are also not picking up. What is the situation in the automotive sector? How should all this data be interpreted when investing in the sector, which is very crucial for the economy?
Ashish Somaiya: We have to look at the entire five-year period. From 2018 to 2020, it was a disaster. From 2018 onwards, for example, there was an escalation of insurance costs. In 2019, there were floods and certain calamities, a credit crunch after the IL&FS default. And then, of course, there was the whole COVID lockdown period.
In March 2020, people were supposed to clear inventories and move towards Bharat Stage VI. The point is that the period between mid-2018 and mid-2020 was a complete disaster and culminated in COVID. And then, there was the reopening, easing of the credit cycle, inventory clearing and back-to-back launches of new models. A lot of things relaxed post-COVID.
So, maybe what we have seen from 2021 to about 2023 or early 2024, in two and a half to three years, we will see about five years’ worth of action and I don’t think anyone should be very surprised. So, one part of it is this normalisation because 2018 to 2020 was a bust. I would say it is a normalisation. We cannot go on extrapolating. At one point, we must have gone from less than 2 million vehicles to about 4 to 5 million vehicles now if I am talking about four-wheeled vehicles. That is the kind of change that has taken place in the last three to four years. So, it is more of a normalisation process compared to what was happening in the past.
Which sector is in favour now, because we have seen a lot of sector rotation? The fact that we are seeing FMCG outperforming, information technology coming back and a lot of brokerage notes favouring the information technology sector. People are trying to look for value in some sectors that they would have avoided a few months ago. So where do you see that safety niche right now?
Ashish Somaiya: Financial services. Some of the capital market Over the past three to six months, investments in the financial services sector have increased significantly. Secondly, we have been overweight in financial services and capital market investments.
Similarly, we talk about IT, but in IT more of small and mid-cap IT, for example, IT companies that work with BFSI clients. Then, if you look selectively at consumer stocks, as we invest across all sectors, we don’t have any style or sector bias. But if I look at the current portfolios and describe to you the overweights, the sectors that have gone up a lot and we are still overweight are industrials and manufacturing. But apart from that, we are benefiting from the sector rotation at play. This usually happens when there is a change in macroeconomics. In 2022, there was a change in macroeconomics, because in early 2022, instead of going down, interest rates started going up, the dollar started appreciating massively and commodity prices started going up. There was geopolitics and oil and metals wreaked havoc on the markets. Now, from that time till now, the macroeconomics are going in the opposite direction. The dollar has stopped appreciating, interest rate expectations are on a softening bias. I am confident that the rupee has not only stabilised but will likely show an appreciation trend. Therefore, normally, a change in macroeconomics is accompanied by a change in the style, sector and market capitalisation of the markets. That is what we are witnessing right now.
In the BFSI sector, do you see more value in banking names given the fact that they have underperformed the benchmark and the broader markets so far this year? Valuations are almost 15-45% lower compared to current historical averages.
Ashish Somaiya: Yes, there is a change in monetary policy. For example, in recent days we have been following the news that the first quarter of this fiscal year was the election season. After that, the government has started spending and relaxing controls.
Typically, if the government’s balances with the RBI were very high, then that part of monetary policy was a hindrance. Whereas now spending is coming back and all that. liquidity It is not being absorbed. Also, over time we will see the rate cycle change as well. So my view is that there is a lot of debate about the ability to take deposits and so on. If there is some change in monetary policy and some change in the monetary cycle, those pressures would be relieved.
It is clear that valuation comfort contributes to this. If we see a significant turnaround, as in the last month, we have seen foreign institutional investors buying consistently. This month to date, it is significantly positive on a net basis. The color of money could also influence some of these things. And yes, there is comfort in the large private sector banks.
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