In past few days we have tried to highlight that the above
potential growth in India during 2004-08 on the back of easy credit
availability & loose monetary policies has led to serious misallocation of
capital and other resources in the country. The recent abandoning of some large
projects is certainly a hint of growing realization to this effect.
Besides, the politics of “competitive majoritism” has also led
to irrevocable government commitments towards flagrant welfare spending.
Though, this has certainly provided some sustainable spending capability to the
humongous bottom of Indian pyramid.
This clearly suggests that government and corporate finances are
likely to remain under pressure for protracted period. Therefore, in our view,
capex, PSUs, credit themes may not work in Indian markets till the time
necessary corrections are carried out.
In this context, in our view, the only secular theme in India is
that 1.25billion stomachs are to be fed and 1.25billion bodies are to be
covered. Even with 50% filled stomach and covered bodies, we will have enough
scope for so called consumer oriented companies to continue growing, albeit not
at a pace many would like to see. But this is the only valid argument for
investing in Indian equities. All other arguments, in our view, suffer from
limited view, as we highlighted yesterday.
Now, insofar as the argument against valuation of consumer stock
is concerned – it is a valid argument from limited view point, i.e., when we
evaluate these companies in isolation from the macro context. Otherwise, if x%
of funds have stay invested in Indian equities these have to find way in this
secular theme only (besides of course ITeS which is largely a proxy for US
recovery) till some other theme emerges; which in our view is at least
12-15months away.
To derive some support from historical perspective, please
consider the following:
In early 1990s’ commodities were over 40% (Present 9%). Remember
ACC, TISCO and SAIL fascination of Harshad Mehta. In late 1990s’ ITeS weight
was over 40% (present 11%). In 2007 infra/capex/real estate was over 35%
(present 7.25%). ABB, Siemens, Suzlon etc. exited and rest is down by 60-90%.
Presently, financials are 29% and these have to go a long way
down (below 15% at the least) for the cycle to get completed. This may happen
by some exits and a lot of price correction.
The consumers (autos, telecom, textile, FMCG and pharma) were at
the core of the Indian markets for over 100 years. These presently account for
27% of Nifty (including Asian paints). We expect these and ITeS together to go
up to over 50% in next 12-15months by way some new inclusions, e.g., Dabur,
Idea, Tech Mahindra, Havells, Tata Global, Zee entertainment, etc. and some by
way of irrational price exuberance in HUL, ITC, M&M, Asian Paints, etc.
We suggest using the expected market correction to buy some of
these tier two names.
Thought for the day
“Poisons and medicine are oftentimes the same substance given with different intents.”
-Peter Latham (1984-)
Word of the day
Quillet (n):
A subtlety or quibble
(Source: Dictionary.com)
Shri Nārada Uvāca
Is Shakeel Ahmed’s tweet an act of sedition?
Police, which arrested couple of young girls and a cartoonist a few months back, may want to answer!
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