Markets are hitting new highs again, at least the Nifty is. But given the current scenario and valuations in the market, is it wise to risk it all?
Abhishek Basumallick: The markets have been a little expensive for some time. Globally, we are the only market other than the US where we have strong GDP growth and strong business performance. I doubt that the Indian markets will become cheap anytime soon. We may see temporary corrections now and then and that is normal in a bull market. But I don’t think valuations will be very cheap anytime soon.
And what about the broader markets? This time, the rally that is going on in the broader markets in particular is very different from the previous times when we saw the rally in the broader markets. There was a sense of panic or a feeling that this rally would turn into a bubble in the future. This time, the quality of the companies in the mid and small cap space seems to have improved.
Abhishek Basumallick: Two things are happening at the same time. First, we see a pretty healthy sector rotation every three to six months. We don’t see a particular sector or group of stocks just go through the roof. Something that goes up a few times, a particular sector, and then cools off for a while.
For example, PSU stocks have cooled off a bit, both defence and railway stocks. These were all doing fantastic six months ago. Now people are talking about IT. In the IT sector, for example, there hasn’t been that much in about a year. Now IT is picking up, pharma has picked up. So there is sector rotation happening and that is keeping the market healthy.
The second important point is that we are constantly seeing new IPOs, big and small, all types and sizes, which absorb a certain amount of liquidity in the market. So both of these things prevent the formation of any kind of bubble in the markets.
You said there is constant change or sector rotation. What sectors do you find attractive for the next phase of the market rally?
Abhishek Basumallick: IT seems to be recovering. Chemicals look interesting, so do pharma, auto and auto components. I am quite bullish on the Indian manufacturing industry, not just for the near future but at least for the next three to five years. India is very big on manufacturing and we are slowly seeing changes. The earnings season is just starting, so we are attending a lot of conference calls that companies are doing and we have been listening to a lot of manufacturing companies talking about increasing capacity and shifting orders from China to them. So that is a clear theme. It is not going to happen overnight. It will take five years, maybe even a decade to show results, but that is a very important and dominant theme going forward. The PSU sector is now taking a breather. Is this just a short-term blip in the PSU space or will it continue? Will the rally gain momentum in the future?
Abhishek Basumallick: I don’t want to differentiate PSUs from other companies. I would much rather look at the companies, whether they are PSUs, whether they are privately held, based on the industry, based on the business they are in and how they are doing in it. For example, in the power sector, whether PSUs or non-PSUs, most of the players have done well because the overall sector has had a tailwind. The same is true for defence.
It’s not that the PSUs have done particularly well. It’s the sectors where the PSUs dominate that have done well. In the banking sector, there are very large PSUs. SBI, PNB and Bank of Baroda are very large and significant players in that industry. When that industry has cleaned up its books, it has done well. A lot of the benefit, of course, will go to the larger players. In this case, the larger PSU banks. But if you look at the PSUs, irrespective of ownership, whether they are public or not, it’s the PSUs whose sectors have done well that have done well.
You are quite optimistic about rural consumption. Do you think we are seeing a positive structural change in consumption, given that companies are now talking about rural demand increasing and doing better than urban demand?
Abhishek Basumallick: If you watch the post-COVID period, you’ll see that there was a lot of economic hardship in rural areas. We’ve seen what we call a K-shaped recovery. Just in the last quarter, we’ve heard from companies that rural businesses are back on the rise. Whether it’s consumer goods, food and beverage, or snack companies, that’s where the green shoots are starting to show.
Once the rural area starts to pick up, it will impact many consumption issues. This will affect two-wheelers, footwear, small items and daily consumer goods. The most important thing is that the rural area will increase the incomes of a very large number of people, which will then have a multiplier effect. There is a reversion to the mean in the rural area. The area is getting back on its feet. We have to keep watching how things develop. But the next two to three quarters look much better than the last two to three quarters.
Which area do you not like? Which area do you think is not so attractive at this point in time as we have seen different sectors moving in lockstep with the markets?
Abhishek Basumallick: I’m not very optimistic about metals, although the market doesn’t seem very worried. I think demand, at least global demand, for steel and other products is significantly strained. The capacity and production that China continues to have is not something you can just wish away. That’s one area I’m a little concerned about.
