Somaiyaa says typically, a change of macros is accompanied by a change of style, sector and market cap and that is what we are witnessing right now.
What exactly is happening in the auto space? There was a time when everyone was only singing one tune that auto is a one-way street and that upward momentum is coming in. There was a lot of demand on the ground. But right now, it is the opposite. We are seeing high inventory levels for most of these auto players at the dealership levels. The sales are also not picking up. What is the take coming in the auto sector? How should one read through all of this data while investing in the sector, which is very crucial for the economy?
Aashish Somaiyaa: We have to see the entire five-year period. From 2018 to 2020, it was quite a disaster. 2018 onwards, for example, there was an escalation in insurance costs. Bharat Stage-VI, there were floods and certain calamities in 2019, a credit crisis after IL&FS default. And then, of course, there was the entire Covid period shutout.
By March 2020, people were supposed to clear inventories and move towards Bharat Stage VI. The point is that the period between mid-2018 and mid-2020, was a complete disaster and it culminated with COVID. And then, reopening, easing of the credit cycle, inventory clearance, back-to-back launches of new models happened. So many things eased up after COVID.
So, maybe what we have seen from 2021 till about 2023 or early 2024, in two-and-a-half to three years, we will see an action equivalent of about five years and I do not think one should be very surprised. So, one part is this normalisation because 2018 to 2020 was a washout. I would say it is a normalisation. We cannot keep on just extrapolating. At a point in time, we must have gone from below 2 million vehicles to now about 4 to 5 million vehicles if I speak about four-wheelers. That is the kind of change that has played out in last three-four years. So, it is more a normalisation process compared to what was happening in the past.
Which sector is in favour now because we have seen a lot of sector rotation? The fact that we are seeing FMCG outperforming, IT making a comeback, and a lot of brokerage notes favoring the IT sector. People are trying to look at value in some sectors that they would have avoided a few months ago. So, where do you see that pocket of safety right now?
Aashish Somaiyaa: Financial services. Some of the capital market plays have gone up a lot in the last three to six months if I talk about financial services as a sector. Secondly, we have been overweight on financial services, capital market plays.
Similarly, we spoke about IT, but in IT more small and midcap IT, say for example. IT companies working with BFSI customers. Then, if you look at selectively consumer stocks, because we invest across sectors, we do not have any style or sector bias. But if I look at the current portfolios and describe the overweights to you, the sectors that have gone up a lot and we still continue to be overweight is industrials and manufacturing. But apart from that, we are benefiting from the sector rotation at play. This typically happens when there is a change of macros. In 2022, there was a change of macros, because in early 2022, instead of going down, interest rates started to go up, the dollar started to appreciate massively, and commodity prices started playing up. There was geopolitics and oil and metal caused havoc in the markets. Now, from that point till now, the macros are going in reverse. The dollar has stopped appreciating, the interest rate expectations are on the softening bias. I am sure the rupee has not only stabilised, but it will show probably an appreciating bias. So, typically, a change of macros is accompanied by a change of style, sector and market cap works in the markets. That is what we are witnessing right now.
In the BFSI space, are you seeing more value in the banking names given the fact that they have underperformed the benchmark and the markets overall on a year-to-date basis? The valuations are nearly 15% to 45% lower compared to historical averages currently.
Aashish Somaiyaa: Yes, there is a change in monetary policy out here. For example, in the last couple of days, we have been following news that the first quarter of this financial year was the election season. After that, the government has kind of started spending and loosening the purse strings.
Typically, if government balances with RBI were very high, then that part of monetary policy was a headwind. Whereas now spending is coming back and all of that liquidity is not being sucked up. Plus, eventually we will see the rate cycle also turn. So, my view is that there is a lot of debate about the ability to raise deposits, etcIf there is some turn in the monetary policy and some turn in the monetary cycle, those pressures would ease.
Clearly, valuation comfort adds to it. If we see a significant turn, like in the last one month we have seen FIIs buying consistently. This month to date, it is significantly net positive. The colour of money also might influence some of these things. And yes, there is comfort in large private sector banks.