When it comes to the broader markets, where would you start looking?
The biggest thing is that the economic recovery globally has been sharper than anticipated. If you look at the May PMIs for a lot of countries, they have come higher than expected and June has seen a further improvement with relaxations and opening up of economies and countries. So you have a combination of a very strong upfront stimulus along with a pretty sharp leading indicator and that is getting reflected in the markets.
Now how sustainable is this? For now, it looks like we have seen the worst in March and probably made the bottom. What will happen in these markets going ahead? We have to clearly play for a cyclical recovery. That is the big difference over the last one month in this market. Yes, April to June numbers will be dismal and July to September numbers will show a small recovery starting off. But the markets are looking at January and beyond and there you see that the economies have recovered well. So we are back to cyclicals now. Pharma, IT and consumption were the themes over the last two, two and a half months; it was more defensive.
I would say now financials are centre stage. For financials, the numbers coming on the moratorium in phase 2 are very good. Percentage of loans taking moratoriums are reducing and that is very good news for NBFCs as well as the banks.
The second big theme is public sector disinvestment. There is a lot of Street chatter that the government will unveil disinvestment policy. A lot of money is needed to bridge the fiscal gaps and you will have to sell the crown jewels. You are seeing mutual funds having taken positions in May already in the public sector and now the catch on rally is happening.
The third big theme that is playing out is the return of the not-liked sectors like auto and durables. We have seen two-wheeler sales picking up even in June. The 80% dealers that are open are talking of a 35% passenger vehicle sales and even commercial vehicle manufacturers are getting bid up. I would not be so optimistic on this but I think two wheelers and tractors are already doing well. Two-wheelers and cars will have a catch up phase over the next three to four months as the festive season kicks in. So, these are the three broad themes.
The stimulus coming in upfront globally has led to a lot of liquidity and that has helped. Second, the fall in the economies has been sharp but the recovery has been pretty good and that is helping the markets. Hopefully that will sustain and take the markets higher. Third, the change is from defensives and back to cyclicals and back to sectors like auto, financials, cement, paint makers; even to a limited extent metals. With China talking of a 20% growth in its credit book this year, you will see flow through into metals. A Chinese stimulus directly impacts metals; so metals also should do well. They have already started the rally but I think this is still the start and you will see more gains in metals.
Is there merit in buying commercial real estate-related stocks? I am working from home but eventually one day I will go back to the office?
It is very difficult to answer that. But going into this crisis, we had about $3 trillion available on the private equity side of unallocated capital and we had huge amounts sitting with pension funds, which was looking for yield. Now that the fixed income yields in the developed markets have gone down, we have a lot of players who are very interested in such assets. So it is not playing out like a normal market cycle. One is the amount of money that has been pumped into the markets, the direct intervention; be it in bonds or high yield ATFs, the direct interventions have helped. They have put a safety net.
And third, the direct lending to troubled companies globally has freed up quite a bit of capital to look at emerging markets and emerging markets are seen as the markets which will show a lot of growth next year and for a number of years to come given their position on the growth metrics and on their populations being young and growing. Those are few of the drivers. Right now NBFCs are doing well and even the housing finance companies based on that are doing well. The market is figuring out that there has not been a huge delinquency, the moratorium between phase-1 and phase-2 has seen a very sharp declining graph, which shows that there would not be that much trouble.
HDFC Bank has said that they have had a great retail loan month and retail loans demand is back. HDFC is saying housing finance demand is picking up again and quite surprisingly picking up mostly in tier-2 and in the mid housing segment and that is understandable. So it looks like we have got out of the troubled patch. That is what the synopsis is right now. Will this play out? I do not know.
Some of the smartest investors are still sitting on the side lines starting from Warren Buffett to Jeremy Grantham to Howard Marks. Howard Marks has been talking of investing in Indian distressed papers but has also said that he still finds the valuations quite high. So I would still bet with the Titans of the past though right now their stock is not very high but we have seen that game. We have seen that from 1997 to 2000, I remember Julian Robertson of Tiger Global who had given 85 times returns in his career shut down his fund and that was March 15 or 16 and the NASDAQ collapsed from March 31. Odd that it was the peak of the market. So these phases will come. Right now let us enjoy this liquidity.
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