Is there fatigue in HDFC, Kotak, Asian Paints? Everything which is considered to be the bluest of the blue chip is now underperforming!
The good thing with semi bear markets is that it gives one an opportunity to do more detailed research or to come up with terms like blue-chip fatigue. That is one of the charms of the market. A lot was taken as a given with these blue chips and that is where there is a little bit of shell shock in terms of market response. But from a longer-term perspective, if one looks at cycles and stocks, this tends to happen. It is not necessarily unique. It is just that we have not seen it for a long time because basically we have had a difficult economy.
When it actually happens, it creates reverberations but I do not think this is unthinkable. I do not think this is necessarily very bad in the overall scheme of things but there is a certain amount of pain that one sees at this point in time – both in confidence and at the index level. So, it is nice to have new terms. It makes the market more interesting but I do not think this would have been an unthinkable situation in the longer scheme of the markets and some of these stocks.
Are you telling your clients to think long term and that this is a time to buy? A sale seems to be on?
The worry with sales is that they keep coming every two months. We do not want that happening and we are recommending a strong sale-buy kind of a situation. But more seriously, there are a couple of things; one, it is providing opportunity with a certain set of businesses that are fundamentally very good and even though they have disappointed in terms of market expectations, the results have not necessarily been very poor.
That is one part and to that extent, it is exciting in terms of being able to get these stocks. Second, the market has been oblivious to some of the challenges in the underlying economy – be it the relative softness of demand in the domestic economy or macro pressures in terms of inflation and the risks of rates rising.
It is not as if the markets are down and they have gone lower and this is an opportune time to necessarily buy them. The markets have tended to be a little overvalued. The underlying domestic economy and the global framework has tended to deteriorate over the last couple of months and in that context, for some of these stocks, it is a decent time to buy.
But I would also tend to believe that in the near to medium term, the market environment is going to remain shaky. So will these stocks run away in the near term if you do not buy them now? I do not think so. Is it something one should look at from a longer-term perspective for riding out the nearer term challenges? Yes.
But blue chip stocks by definition are always supposed to make money?
Well, never say never can be a James Bond movie or it can be the markets but never say never.
But James Bond has also one title which says that Tomorrow Never Dies. Which blue-chip stock will never die?
: I would not say blue-chip stocks will never die but I think the reality is that it is the darkest before dawn in many ways.
Kotak Mahindra Bank and HDFC Bank have got everything going for themselves; their numbers are strong, their technology is the best, their fee-based income is the strongest. But they have not made money in this bull market!
But it comes back to the simple thing that we all talk about in markets. When valuations run very aggressively, then if there is either an hiccup with some of their businesses or in the economic surrounding, then there will be periods of either a lack of performance which we have seen in the past and sharpest absolute performance which we are seeing now.
I just think that at the end of the day, the reality is that valuations do matter to the extent of returns that you make. That is just being reiterated. Stock markets and making money in the markets is not as simple as it has been for one part of the market over the last couple of years. That is just leveling out. It is just normalizing and there is a perceived element of pain.
We are witnessing some pain but that is not normalization. We saw a hammering in the HDFC twins and Infosys. The kind of FII selloff is higher than the greater financial crisis?
One element where it is a little exaggerated at this point in time is the disconnect that we have seen between global investors and domestic investors. It has lent a certain amount of balance or sanity or just leveling in at the market level. What this highlights in a very sharp manner is the fact that foreigners have been quite negative on the market for reasons, not necessarily India, but markets in general, while domestics have been very positive.
The dissonance or the disconnect in terms of ownership of some of these stocks is what is causing undue pain at this point in time. That is why it is a little exaggerated. That is why we are seeing absolute losses to some extent, but these businesses are doing fine. Their structural positioning is actually good in terms of them being market leaders. The ruboff that we are seeing might be called normalization but in the grander scheme of things, it is a certain amount of normalization. We have seen reasonable returns over even a three-five year period and the multiples are still reasonable.
It is compounded a little bit by the holding pattern and the dissonance between domestic outlook and the offshore outlook. But I do not think these businesses have necessarily changed fundamentals. What invariably happens with markets is that bullishness follows what is happening with stocks and it tends to sometimes leave behind or overlook what is happening in the broader environment. In the broader environment, demand is soft, there is inflation which is not demand-led and there is a global macro that in an India context is turning negative from an Fx perspective and the current account deficit is widening.
So taking all of that into account, the stock outlook in India in general has been more sanguine than has been the economic outlook and because of this distortion in ownership, we are seeing just a certain amount of pressure on a bunch of stocks. I suspect you defined it more succinctly when you said blue-chip fatigue but I think there is another perspective for looking at it and this is the chain of events why you are seeing such developments.
The last time we met, you said very clearly that you would stick to your Nifty target of 18,000 for the year end and this is a year where you have to look at themes in the medium term, not too short, not too long. That time you were looking at tech and financials. What is your new medium term thinking at the moment?
Simply because we have been cautious at the market level and over the short term, neither tech nor the financials have tended to play out but given the pain that they have already taken, I would still stay with them.
Again, given that we do not have exaggerated upsides in terms of what we can expect by the end of the year since broadly there is a challenge with demand in economies and in the Indian economy, I suspect that these sectors are much more defensive or much less vulnerable to demand pains.
Even though the IT results have not been as good and the market has reacted accordingly, demand has not been an issue. It is a supply side problem. And if one were to have a problem, it better be a supply side problem than a demand side problem and to that extent, tech might remain soft for a little bit. But there is a certain element of comfort that demand remains very strong.
On the financials, there has been a little bit of a pricing and a margin issue to the extent that the market may be too optimistic but we are beginning to see a certain amount of demand come back.
Secondly, it is the larger banks which are tending to capture it. However, I would probably still stay there, given that as a market, one has got to be a little bit cautious. The underappreciated risk is on the demand side; the real risk is on the supply side which we are already seeing in costs and pricing and in inflation and the likely challenge that monetary policy will face progressively.
Should one now buy HDFC, HDFC Bank given the massive fall that they have had?
Yes, we would. We would.
You would right away?
You will buy both or will you buy one?
No, we will buy both. I mean in many senses now because you have a set major ratio, they will go hand in hand.
From a medium term perspective, the return ratio is what analysts and markets look at when return on capital and return on equity for HDFC Bank comes down and expands for HDFC Ltd?
We have some restrictions on the stock so I would not be able to delve deeply into it beyond our recommendation. Otherwise I would love to do it.