The market is not keeping pace with reality but how much is the mismatch?
Everyone is trying to correlate the economy with the market and they might just be running off different trajectories. So to that extent this correlation — running ahead, running behind, big gap between — the two is probably a forced comparison. If you were to look at it from a pure economy perspective which is what corporates are reporting, you are clearly seeing a sense of relief for them that May have to be better than April then June would have to be better than May. There is a reasonable amount of optimism that the supply side has now more or less come back on stream. We have to watch more carefully as far as the demand side is concerned.
Explain the point which you were making regarding the demand environment and earnings?
From a demand perspective, people have looked at supply and what you are looking out to is demand and how it plays. Companies are relatively moderate and they are being cautious. They have not been very aggressive with guidance and quite honestly I do not think they know better but I think that is where the crux of it lies, which is what is going to be the shape of demand that you get right?
I think there has been a big fixation in trying to get the level of demand. It is hard to call. The drivers of demand is what one should try and focus on and at that point in time, there are certain calls that you can make in terms of the nature of demand that you can expect.
Your other part was in terms of markets and the fact that they seem to be elevated particularly relative to the state of the economy. To some extent, that is a global phenomenon. Also it is a function of the amount of money that has been printed by banks and by the government and to some extent, that is going to be a certain level of support as far as markets in general are concerned, simply because of the extent of money that is being pumped into the system.
Trying to force feed the correlation between the economy and the market at this point in time is a little strained. There will be a disconnect but I do not think one should necessarily make too much out of it. There are independent drivers out there and at some level, they have to be considered but maybe it is a little early in the game for that.
How should one go about designing the portfolio?
What we are looking at is, one we have this hypothesis that there are going to be shapers of demand depending on events that have effectively played through at this point in time and then we have themes that are coming out of them. That is the way we should be driving the portfolio that we run with or that we would suggest.
There are basically five themes that I find interesting. The first is structural over recovery because where you are seeing structural shifts, they are easy to play, you are more comfortable getting overvalued as it were in a conventional sense. Also, here you do not run the risk that if the recovery is slower, you may see a massive drop.
The second theme is really what I would say we need over what deflation that is fundamentally happening in terms of incomes for individuals. You will end up seeing a need over want scenario which is basically a safer place to play. It is just playing too much discretionary because it is safety first in terms of how spends will tend to happen.
The trend is critical in the way we are designing our portfolio is the belief that businesses will be able to structurally cut costs very sharply. We have seen some of that in the first quarter numbers that have come through. I would tend to believe that it is something that is going to get extended.
You track global macros quite closely. What are you making of the way commodity stocks have started rallying not only in traditional metals but soft commodities also?
One of our bigger emphasis in the portfolio and particularly the way we have revised it over the last couple of weeks is actually to have a much greater bias for global cyclicals than we have for either domestic cyclicals or domestic consumption.
And there are simply two reasons for it, particularly on a relative basis; the first is the amount of money that has been put in by fiscal authorities, the second is how much liquidity the central banks have pumped in. The third thing is very important as the lockdowns have been less extreme relative to India. So on all those counts, while one does not have a very clear picture of what will happen from a medium to long term perspective, in the nearer term it is actually going to be played on some of those demands, some of those price levels and therefore some of those businesses.
In our model portfolio, we have taken a distinct overweight view on global cyclicals. So, things like metals and commodities, including soft commodities have also taken a pretty aggressive call as far as some of these Indian businesses which are catering heavily to global markets where the export ability and momentum can be quite large.
From our perspective, the relative pump priming of global markets is something that is going to drive the economic recoveries quicker and from the near to medium term, it is an area of portfolio weightage that one should actually look at overweighting.
Medium term, once inflation starts rising and there are other challenges, will they start getting a pullback? You will need to keep an eye on that but that is a later day issue that one should not be confusing oneself with at this point in time.
In your report you make a point that the market may appear expensive but relative to money supply, it is on the lower side. Do you think that since almost 40% of our benchmark earnings come from abroad, that may also play out? Is that a correct way to look at it?
At some level yes and you clearly design your portfolio for stuff like that. The fact that there is a relatively large share of earnings coming in from the global side is a little bit of a hedge for overall earnings.
The thing to keep in mind is that some of those commodity elements are also input costs and so 40% would not be the net impact. It would probably be a little lower but to the extent that you have foreign earnings, you should skew yourself towards that. We are already seeing it in a lot of the data. As far as global economies are concerned it is stronger than what you are seeing from an India perspective.
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