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Avoid value trap, staying in cash does not hurt in India: Gurmeet Chadha

ET Now|
Aug 27, 2019, 05.31 PM IST
Gurmeet Chadha-1200


  • Investors should load up on a combination of financials and consumption stocks.
  • Traditional asset allocation theories are being challenged.
  • Cash has been the best allocation in last one year.
There should be an expectation that the fundamentals are changing slowly but surely. One should not get too carried away with the pullback, says Gurmeet Chadha, Co-founder, Complete Circle Consultants. Excerpts from an interview with ETNOW.

What exactly are you making of the kind of pullback or rebound that we are witnessing in the markets? Do you believe that this sort of momentum is here to stay?
There could be a short-term positive momentum in the markets which is clearly evident in the pullback that we have seen. But we must remember that sentiment changes quickly. Fundamentals obviously change with a lag and sentiments for sustainably to turn positive. There should be an expectation that the fundamentals are changing slowly but surely. One should not get too carried away with the pullback.

The economy will take maybe two quarters, three quarters to really come back. What one can track on a near term basis is how quickly the balance sheets of global central banks as well as RBI will expand.

Talking globally, we have probably seen rate cuts by almost all major central banks. I expect more asset purchase programmes and more stimulus to come as global growth slows. So that should be favourable. Also what we have seen is that in this particular selloff it was the Yen and gold which actually went up and not the dollar. In terms of rupee weakness which has a short-term impact, there could be something positive for us.

On the domestic front, the M3 supply (broad money supply) which includes cash in circulation, short term deposits, long term deposits and securities, is not catching up at the same pace as the nominal growth of GDP. In fact, post 2015, it has not even reverted to the mean.

But following yesterday’s move and the RBI commentary, we expect the M3 supply to pick up. There is a clear focus there so that the RBI balance sheet would be more expansionary and that would also mean that there will be more asset purchase in the domestic bonds as well. In light of that, the market could regain a bit of it but one has to be cautious in terms of not advising going all in and being careful about what you buy.

Going forward, how are you anticipating things to play out? We actually got most of the cues behind us now. Are you focussing on select financials, HFCs in the event of any further stimulus that we may see from the government?
You are right. A combination of financials and consumption is what investors should load up in this correction. There are already signs of some marginal pick up in a few pockets. Starting last week of July and August, the FMCG sector has seen a good uptick -- both in primary and secondary sales. So, Dabur which has about 15 brands and more than Rs 100 crores turnover can be looked at.

Biscuits could be avoided for now because the category itself is growing at around 1% instead of 8-9% which we saw last year. FMCG looks good. Tata Global Beverages is another name which is relatively less expensive vis-à-vis some of the high expensive names we have.

The tea business continues to see premiumisation. There has been a lot of new market launches; Starbucks has turned, SSG is very impressive. There are now about 151 outlets and globally we have seen that Starbucks is quite a force to reckon with once you have the positive operating leverage coming in. So, that is something on the FMCG front.

Financials clearly should do well. Also, one of the select construction names one can look at is something like KNR Constructions. L&T also looks good from a price correction point of view and one should keep some cash in the portfolio.

We are seeing a lot of oddity right now in the way traditional asset allocation theories have been challenged. This year, S&P is up, gold prices are up, the bond index is up. So there is no negative correlation and I have not seen a very higher correlation between bonds and gold prices in a recession than ever before.

So your traditional asset allocation theories are being challenged. It is good to stay in cash, avoid too much exotic products, avoid too much value buying simply just because something has fallen off. We have seen that with DHFL, Yes Bank, Tata Motors. There is not a floor if there are issues once you start dealing with governance issues. So avoid that value trap and staying cash in India does not hurt. You still make 5-6% by staying on cash and on a lighter note staying on cash has been the best allocation in last one year.

Do you find any value in any of the telcos?
There is a contrarian play as far as telcos are concerned, obviously the Kenya news has been a bit of a dampener for Bharti Airtel. But if you see the last two quarters’ trend in Bharti, their focus is clearly to move up the pyramid and not really focus and compete on the bottom of the pyramid.

My hypothesis is that this will eventually be a two player industry with Vodafone-Idea losing out. We have already seen a huge market share loss for them and this play will gradually transform into more content, commerce and communication and not just the telco and the data and the value added services

A better play is obviously Reliance because it is a far more diversified play. You now have consumer facing businesses with retail and Jio being almost 32-33% of EBITDA. So that transition from the brick and mortar, petchem and refining business to the new age businesses is shaping up.

The Aramco deal could be a very big trigger because they need to deleverage and probably put in more money. They are very serious about the ecommerce play. Reliance looks to be a little better but Airtel does not look bad at these price levels. But one has to be a little more tactical here in terms of playing out this theme. So only a small allocation to the portfolio can be considered as far as Bharti is concerned.

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