Continuing from yesterday (see
here), I would like to share with readers what changes I have made or shall
be making in due course, in preparation for the new market cycle. In my view—
1. This new market cycle
shall see a correction in the consumer behavior. The growth in the household
credit (personal loans or non-corporate finance) since the demonetization
(November 2016) has been relatively very high. This has mostly supported
discretionary consumption and financial investment, as we have not seen
significant growth in real asset building (Real Estate, MSME Capacity Building
etc.).
The wealth destruction caused by sever correction in financial
asset prices (both equity and debt), persistent illiquidity in the housing
market, and stagnant to lower wages may diminish the borrowing capacities of
households in short to midterm.
The relative high valuations of most consumer discretionary and
consumer financing stocks with relatively lower growth visibility may result in
a prolonged underperformance. I shall reduce the weight of such stocks
materially in my portfolio.
2. The paradigm shift in
RBI credit policy strategy, and dramatic addition to the global liquidity means
that the debt yields shall decline structurally in midterm. This combined with
the incentive of low tax rates, means that we shall see (a) resumption of
capacity building in manufacturing sectors, and (b) rise in activity in real
estate sector. I shall be there adding the following in my portfolio:
(i) Corporate
Lenders
(ii) Real Estate
developers and owners.
(iii) Capital goods
manufacturers.
3. In past few years lot
of companies have build significant capacities for import substitution. Given
that INR has depreciated and is likely to remain weaker for some time (my view
is USDINR average to remain between 72.50-74 in the midterm), the attractiveness
of these capacities has further increased. I shall be looking at such
companies, preferably with low debt. These companies are mostly in sectors like
Specialty Chemicals, Agro Chemicals, API manufacturing, and consumer
electronics.
4. The valuations in utility
space have become extremely attractive, especially if when we compare the
dividend yields with debt returns. However, I shall resist my temptation and
continue to avoid the public sector companies. I shall chose only from a
handful of private players in utility space.
5. Technology is an
interesting area. I have been avoiding the largely wage arbitrage businesses in
this space and focusing on the digital and AI focused companies. I see no
reason to change that strategy, despite sharp correction in valuations. I shall
actively look for opportunities in FinTech, ITeS, E-Commerce areas. I would not
mind investing in non listed space if some good opportunity presents itself.
6. I shall add significant
weight too healthcare segment (API, Formulation, Branded, Local, MNC, Hospital,
Pathlogical Labs, Insurance etc) in my portfolio.
7. I will avoid
commodities for now. However, later in the year, I shall look at both Cement
and Steel favorably.
8. Amongst financials,
besides corporate banks, I shall look at NBFCs not focused on consumer
financing.
