Where do you see the margin of safety offer this year? How does the complexion of your model portfolio look? Have you factored in all this cautiousness which you are talking about? Are you cautious about your portfolio structure as well?
Not yet. For the last two and a half years, our recommended stance to investors has been cyclical-biased. It has been overweights on autos, banks, industrials and discretionary consumption. We have been recommending a cautious stance on export dependent sectors like IT or even chemicals and commodities and other sectors. But we have not recommended any change.
We are closely watching for another month or two, but we still believe that vis-à-vis previous cycles, in this cycle, banks look a lot more resilient. The character of banking sector loan books appears to be a lot more whether there is not much overleverage in the borrowing segments. Margins this cycle look very different to previous increasing rate environments because about 40% of the loan books are external benchmark linked loans.
So repricing of loans is a lot faster in this cycle than earlier. We still need to see how much the deposit rates go up if they spike up. Yes, there will be some margin pressure in the second half of the year but we still think banks are a lot better in this cycle. I will not want to call banks as defensive, they are not because they are ultimately eight times leveraged sectors but banks will be possibly the better segment within the cyclicals.
« Back to recommendation stories
Sectors which have otherwise leveraged demand like autos or property or capex cycle dependent could be where they have been recommending for two and a half years. We need to figure out if those would see some earnings downgrades as the year goes. It will start off with valuations getting impacted. Eventually earnings will shore up as an impact may be two-three quarters later but markets will be ahead of it.
What about the part of the economy which was coming under pressure – rural India, the tier II, tier III cities? There was a K-shaped recovery at play here in India where the bottom part of the economy was not in very good shape. Do you see that change going forward? What would be your positioning on the rural end of the market, in two-wheeler and consumer stocks?
Those could be a surprise. Typically, we have seen the year before that during central elections, rural India tends to start improving as the policy making tends to be more favourable towards putting money into rural pockets.
We can expect the demand in staples and cement and even consumer durables can be rural-led demand. So rural could see a surprising positive improvement. We need to keep an eye out, maybe preempted by at least a couple of quarters so that we can capture it fully. But both the farm and the non-farm economy in the rural side can be positive this year.
What are your thoughts on the mid and smallcap end of the market? They have already hugely underperformed the benchmark, the larger universe indices. What is your sense? Are there interesting stories in midcap and smallcaps. How are you gauging froth over there? Are valuations relatively better in that pocket?
We do not classify the midcap as being attractive. Midcaps is more a call on management’s capability. It is more bottom up than taking the broad brush view on midcaps versus largecaps. There are some largecaps which are vulnerable and some midcaps which will be a lot more resilient but what we will watch out this year is whether the demand restrictive companies volume growth will be resilient and weather potential macro challenges.
So it is going to be testing the management’s capability and which managements can create newer avenues for growth that can show the required capability to adjust the sales when the winds are not in their favour and ensure that growth engines sustain. So midcaps will remain more bottom up management quality focussed while largecaps will be more about valuations. It will be more about how the sector view evolves.