Wanted to start off by just getting your take on the market because it seems that there has been one direction only for us for quite some time and despite the fact that earnings momentum is slowing down, the FII selling has been relentless, it is pretty much a 1% to 2% fall day after day at max. Are we in store for a bigger correction and when is that due?
Ashwini Agarwal: This is something that all of us old timers have been struggling with because valuations have been stretched for quite a bit. And when I have spoken to your channel before, I have said that things look a little bit stretched and the market continued to kind of move up. Even the correction, as you say, over the last couple of weeks has been kind of tepid. It is not anything significant. Though I think the supply of paper and the relentless FII selling is taking its toll at the margin. So, how do we look at things from here? If I zoom out, the earning season is turning out to be a little bit soft. The economy has slowed down. Now let us see how the festival sales do and if there is a sort of sharp uptick in the economy once again, which as per the RBI had slowed down because of unseasonal rains and excessive rains, but I do not know if that will happen or not. And the valuations are continuing to be challenging in many pockets.
So, I do not think that there is a lot of room for the market to move up. Now, how much will it fall is something that I am not very clear about because every fall has been rewarded for buyers and I think that lesson has gone down very well. So, any dip, you see a massive amount of buying coming in. Obviously, this time around, things are a little different because there is also a lot of supply of paper, both primary as well as secondary, which is happening, so that might actually kind of neutralise the inflows that we are seeing. But I do not want to underestimate the power of the local investor. So, it is difficult to say how much it will go down, but I do not feel very good at this point.This slowdown, which has hit the market, is it something which is already factored in or it will keep on disappointing us because the stock reaction by companies where disappointment is there, whether it is Bajaj Auto or Reliance, I mean, any company which has disappointed has been taken to cleaners. So can I say that a lot of this bad news is already getting factored in?
Ashwini Agarwal: Probably individual stock wise, but I do not know whether the broader slowdown, let us say GDP growth, for example, RBI’s forecast is 7% if I am not mistaken. If we read what is being written by other economists who are tracking this number, they are closer to 6.5%. Now, the trend is what matters. The trend is negative right now. The nominal growth of revenue if you just look at whatever quarterly numbers have come out is nothing exciting. Even the GST collections are a little bit soft, just in line with nominal GDP growth. So, all of this is telling us that there is that push to growth is missing. Now, whether it is because elections caused a temporary slowdown in government spending and private capex has not really picked up even today, whether it is the external sector which continues to be kind of soft from a demand conditions point of view in most parts of the world barring the US, it is very difficult to say, but a lot of things are coming together. So, I would say that there is a high likelihood of disappointments gathering steam from here. So, the momentum of negative news kind of builds up is how I think about it.
What could be the out of jail card for us? Could it be reversal in China? Could it be FIIs coming back? Could it be pure demand from festival season? What could be the out of jail card? I am using this out of jail card often, I mean, just started playing Monopoly with my son, so you remember that out of jail card?
Ashwini Agarwal: Yes.
So, what is out of jail card for the bulls?
Ashwini Agarwal: Let us say the rest of the earning season is blockbuster and all the largecaps are probably sort of out of line with what is happening to the underlying economy. I mean, if the rest of the result season is very-very strong and everybody kind of shows up with numbers that are rock solid, then of course, we will be wrong, then I do not think the current support levels will break.
The other one on a more serious note, if I think about the global perspective, there has been a very confused outlook on interest rates. If you just look at the US 10-year bond yield, it went down to 3.9. Now, yesterday, it was 4.15.
There is a note from one of the leading portfolio managers in the United States on the fixed income side saying that they expect the 10-year bond yields to touch 5%.
I do not know whether it will happen or not. But I mean, that is a pretty scary phenomena. A get out of jail card could be a softening of interest rates globally and RBI following suit and if that comes through, that might actually allow us to muddle through this soft patch of earnings.
And the softer interest rate environment in the US will also allow the Chinese policymakers to continue to pump prime the economy, so I think that is the real out of jail card if it comes to pass.
What should be the best portfolio strategy, like sit on 15-20% cash or more or do not try to be cheeky in this kind of market because if the three-year picture is better, then there is no point in trying to time the market, get into this emotional trap and pay extra brokerage and extra tax?
Ashwini Agarwal: I have been sitting on 15-20% cash for a while and it has been really painful. And what you say is right. The way to invest in the market for people who are individual stock pickers among your viewers is to build solid conviction about what you own on a three-year basis and be prepared to say, okay, if I see a 30% drawdown in the stock price, I am not going to panic and I am not going to get phased and I will continue to hold if the three-year outlook is something that I believe in and that conviction is the only thing that can see you through.
For mutual fund investors and people who do SIPs, I think it is a foregone conclusion. The last 20 years have taught that timing the market is fruitless. So, you might as well continue doing what you are doing, you might see a 15% or 18%, in very worst case drawdown more likely it will be single digits single digits or early teens, but three years from now, you will be much higher from here, so why bother, just continue to stay the course.
And like you say, timing the market does not pay and then it involves costs including brokerage and taxes so why do it. So, it is a combination of both. I also think that there are pockets of exuberance. So, let us go back to September 2021. September 21 to March 23, we saw a 15-17% correction in Nifty, somewhere of that order. But there were stocks that were down 80%. And the stocks that were down 80% were the ones that were the most celebrated IPOs of that year where valuations are completely nuts. Similar to that, we have seen a big correction in defence names in the last whatever three-four months. We are seeing corrections elsewhere.
So, individual valuations is something which does merit a deeper look. If you own something which has completely bizarre valuations and earnings are not reflecting what your expectations are, then you are better off without them. Because the correction if it happens is going to be very painful for the stocks that are expensive.
So, I am quite curious. Yes, you cannot time the market. No one can other than God perhaps. But tell me, what is it that is going to make you deploy that cash that you are sitting on and more importantly what is the shopping list looking like? I am sure you have already done your homework.
Ashwini Agarwal: So, there are a bunch of things. So, financials they have been complete underperformers in the last two years, three years, so some of them are looking quite interesting at this point in time, so that could be a place where you could deploy some money to. The only caveat I would add is that a lot of the financial space disruption risks and regulatory risks.
So, when you do your bottom-up stock picking, please bear in mind these two risks. And I think the larger, well funded, compliant players are probably where you want to be, so that is number one.
Number two, export led, especially chemicals, certain other commodities, textiles, garments, I mean that is the other broad brush area where I would say that I am quite constructive because I think a lot of the demand has moved to India and some of this will continue to drive earnings for the next two, three, four years.
So, those are the two places where I can say at least sectorally I feel favourably disposed and pharmaceuticals would probably be the third one. Otherwise, across the board when you look at it from a sectoral perspective, there is not really much that you can pick and choose, everything is pretty expensive if you broadly speak about sectoral biases, but on a bottom-up basis there are ideas and like I said in the initial phase either sit on cash or stay with the largecaps and as the correction deepens, if it deepens, deploy the cash in medium-term growth stories, I mean that is how I would go.