Stock market: Be careful, it is better to sit on cash now: Dipan Mehta
Selling to HDFC Bank and ICICI Bank yesterday was quite heartbreaking. Is it a good time to be a counterbought in some of these banks because they are falling not because someone wants to sell, but because someone has an urge to sell?
This is a difficult question to answer, because what is happening in HDFC and ICICI is true for many other blue chip companies that are just falling due to the geopolitical situation. One should not just look at things simplistically because corporate earnings are going to be damaged due to the current geopolitical situation. Even if the war ends soon, the kind of isolation Russia will face will have an impact on commodities.
The biggest risk to corporate earnings right now is rising commodity prices. At the same time, global sentiment has been rocked by geopolitical events. We may be entering a new era where these geopolitical threats continue to arise, something we haven’t seen in a very long time. So on the one hand there is a question mark over earnings and on the other hand sentiment is impacted because of what is happening here. So maybe it’s time to be a little careful. If you have money in your wallet, just keep it. I don’t know how many investors are sitting on too much money per se, but tactically it’s better to have a safer strategy and just wait and watch and see how it all plays out. At first we thought it would be a short period of time, but it seems to be happening and that’s the reason for this kind of security policy at this point.
Over the past couple of days, global markets haven’t really crashed. They went up and down, but it wasn’t a 5-7% drop. Similarly, for our markets as well, we traded with a bearish bias but did not break through the bottom. Are the markets taking into account what is happening on the energy, commodities front or are the markets likely to fall with some lag?
It’s a slow process and we’re evaluating all these commodity price increases, but there’s still a long way to go because it’s just a moving target. The crude price of $100 was taken into account, then it rose to $110. If this war lasts another two to three weeks and new sanctions are imposed on Russia, including preventing it from exporting oil, who knows? It could go up to $120, $150.
Russia is also a key player in a whole host of metals. The whole supply chain, commodity markets have all been severely disrupted and we need to take this into account when designing an investment strategy. One cannot simply take a simplistic view that all of this will stop and eventually stocks will continue to rise and the bull market will resume. That would be a very easy approach and not the right one.
Things are getting more and more complicated for corporate profits and for businesses. We were just coming out of Covid and all the supply disruptions and now this has come into play. The impact this will have on trade routes, money transfers, exports to a key market are uncertainties of which we are not aware at the moment. So while our markets may not have corrected, the individual stock correction is largely occurring. Many stocks have also corrected by 25%, 30% and 50% and they may be at attractive valuations. It’s just that I don’t have very good earnings management or visibility for many companies anymore at this point.
I’m told the average values are almost at 2018 levels. Is that true for some of the mid-cap and small-cap stocks you own?
No, I do not think so. I still think the ratings are pretty fair. Right now, blue chip companies that have more than 15% growth potential are still trading at 45 times over 12 months and so it’s not that PEGs have compressed that much. Of course, part of the last 12 months has been impacted by Covid and rising commodity prices. Over the next six to 12 months, it does not look like we will see a big boost in corporate profits as commodity price increases continue and we are now facing weak demand in rural markets.
Rising prices increase inflation and may even begin to reduce urban demand. At some point, the consumer is going to feel the pinch, and then a lot of the pent-up demand has also come to an end there as well. So, when business is business as usual, the prices of goods and services, as they are, will certainly have an impact on demand.
We may continue to raise paint prices, but at some point it will start to affect demand and that is true for so many goods and services that the average person on the street consumes. Right now, looking at the headlines and the incoming news stream, we are in extremely uncertain times when it comes to corporate earnings. I like to focus there rather than valuations because valuations are going to depend on what future earnings will be.
If there is no visibility there and one has no conviction there, then what is the point of buying a stock even if it is available at low PE because earnings may simply not turn out the way you expect.
How are you going to play with that because for the quarter under review for a while we could see earnings at risk due to rising inflation, the behavior of crude and rising prices for other commodities ?
It’s true. That’s the point I’m going to make, that we’re going to see some impact on corporate earnings. Also, even if the war ends, what will happen with the sanctions against Russia? Are they going to stay, are they going to be relaxed, are they going to come back into the global supply chain? They are huge suppliers of metals and oil and all that clarity is not there right now.
I think the whole process needs to be understood a little better. I’m maybe a little bold to say that in a way we’re entering a new order, the way the reaction came to Russia’s decision, it reminds me of a cold war type situation and this is never good for the markets. Markets flourish when there is no uncertainty, when there is good global trade and commodity prices are calm, where there is less disruption, less uncertainty and greater visibility and all these aspects are one by one questioned. So with that in mind, I’d just like to be a little cautious and wait and watch and see how it plays out.
Is it time to get back on the defensive like IT?
Yes absolutely. There needs to be a more defensive strategy and additional flows if you have to invest and these should be in companies that will not be affected by rising commodity prices or to some extent foreign demand or even domestic demand.
We must take into account a weaker demand on the internal market for many goods and services. You can’t take for granted the way it was maybe two, three months ago when the corporate results came in for the September quarter and we were all excited about the December quarter because the worst was past the third wave of Covid and the consumer was coming back strong. A big unlock trade was also in place and many industries and managers believed that the best times were ahead of us and that we could grow at the fastest rate ever.
All of these arguments need to be reviewed. They may still turn out to be true, but one needs to better understand how the request will play out. So I think it’s time to make portfolios a bit more defensive. One can certainly look at IT, maybe even the staples that I avoid but where there might be some value.
Need to look more closely at capital preservation and so maybe avoid growth stocks, banks, some of the other consumer-focused companies and look for companies that may not be affected as much and have passbooks orders in place and profit visibility. Yes, this can be a wise strategy at this point.
What is your vision of the UP elections? How much of a roll do you think he’ll have?
I think it will have maximum one day impact regardless of the outcome because we know people elect differently at the state level and differently at the central level and 2024 is even further away. Much of the work has already been completed by the government. Various reforms have been undertaken and they have done a good job. It is a matter of waiting and seeing how these reforms actually unfold.
On many fronts, the government is in the implementation phase and many reforms, laws and programs have been implemented and all that remains is to implement the plans. I don’t think the UP election will have a major impact on government policy or the stock market from that perspective.
Of course, if the BJP loses, there will be an impact on sentiment for a day or two, but in the medium to long term, I don’t think that’s a major event that the markets follow.