Hiren Ved on how to deal with selloff & where to find value
- Sit tight, recast portfolio, quit or add -- there are 4 options.
- Consumption is still something that you can bet in this country.
- You will get a lot of opportunity to buy in next 3-6 months.
You have used the term “fallen angels” in the past. During 2013-14 selloff, you bought into United Spirits, Glenmark, Bata. What is there on your shopping list where you think that it could be a 10% downside, a 15% volatility but the earnings growth will ensure that in two to three years 40-50% return could happen?
I see opportunities in three or four buckets. One is that even the best of the best have corrected.
Give me an example.
Bajaj Finance has corrected. HDFC Bank has corrected. Even Axis Bank has corrected from the top reasonably. What typically happens is that in a cycle the best falls last. You will get some opportunity there at a certain price because you will get to add to what I call the leaders which have corrected. You got to figure out which ones.
Second, there are sectors which have gone through a very long consolidation phase over the last eight-ten years and real estate is one of them. You now have regulation in that sector. You now have far more high quality institutional organised capital which is backing that sector with the Blackstones of the world and with REITs coming in.
There will be a few players who have remained solvent and who have been able to deleverage and with the kind of consolidation that we are in seeing in the sector, I am not saying that things will improve immediately tomorrow but stock prices are near about 8-10-year low and I have seen that if a sector has gone through a massive consolidation for such a long period of time, then there are opportunities that you will get.
Consumption will continue to be the bulwark of this. I know a lot of people do not agree they believe that valuations in consumption are high but I do not see a significant uptick in capital investment cycle as yet. Yes there is some spending which will happen by the government but unless we see large scale long-term money which they are trying through the NIIF and attracting foreign direct investments and unless we unclog some of the inconsistencies in the infrastructure sector, you tell me which infra company… everybody who tried investing in the infra sector have lost market cap. So consumption is still something that you can bet in this country. What has happened is that rural consumption has taken a big knock because there has been a deflation in agricultural prices.
My sense is that if agri product prices start to move up, as obviously monsoons have recovered, then some of the rural demand will come back and we have seen some bright spots in the consumption sector in this quarter for example. Paints has done well. Few of the FMCG guys have done well. I think by and large the liquor guys have done reasonably well. That is where the opportunity lies. One area where they genuinely did something in this budget was in low-cost housing. They have given a big tax break on affordable housing. I believe good housing finance companies which are focussing on affordable housing segment could see an opportunity.
That is where we see opportunities in the market place. You will get your chances to buy over the next three to six months. Right now, we were getting to the point of a lot of gloom and doom but there is always a silver lining in the gloom and doom.
Midcap investing in India has not been a very happy experience. In the last five-seven years, if you just bought one mediocre stock, returns have been negative. There is a lot of liquidity in the world. Liquidity will chase the fewer pockets of visible growth. Liquidity will come back eventually to India because of the global negative interest rate environment. What kind of market positioning could we be staring at? The same 10-15-20 stocks keep on going higher or risk will start moving away from them?
We are in a unique situation. If liquidity comes in, then it typically tends to go where there have been returns and in the last two-three years, returns in midcaps have not been that great…
Last five years, why two-three years?
Now five years because the base is low.
FIIs typically do not tend to go down the cap curve. They typically tend to buy the top 30-40 companies where there is liquidity, scale, size visibility. This time, if we genuinely see the economy turning around, then my sense is that the foreigners will continue to buy largecaps except for the India dedicated funds because there, managers know how to pick midcaps.
As far as domestic money is concerned, some of it may come back into the small and midcaps but this time around we are not going to see a secular bull run in small and midcaps like we saw between 2014 and 2017. It is going to be very selective. We actually did a study taking a 10-year period between 2008 and 2018 and we studied 1,350 companies which were called small and midcaps at that time. How many of them have been able to transition to large caps in one decade? 10 years is not a small period of time. Only 80 companies could make it, 5% of the universe.
And your definition for large cap is 5 million, 10 million?
The definition is that the hundredth company in the market cap. So, if you take the BSE 500, you take the hundredth company which is 3 billion odd, about Rs 21,000 to 25,000 crore.
So only 80 companies have migrated higher?
Only 80 companies had migrated from small and midcap to largecap…
And now how many are left, I do not know.
Yes so I am saying that to make money in small and midcaps, you really need a great economic cycle which will lift some of these companies into becoming larger companies and the success rate is very low. Either you have to be so skilful that you are able to pick amongst those 80 or you are just doing such a broad diversified call on 100 companies and you know the entire asset class does well.
One big lesson is that yes mid and smallcaps are very exciting but the success rate is very low and you have to be both skilful and lucky to get hold of a couple of them who become true multibaggers.
So, stick to large caps for next couple of months?
Stick to large caps and larger midcaps. As I said, in every sector there are one or two or three players who are standing. They have a brilliant opportunity to take market share away from other people, so those are the guys who will continue to grow.
We are meeting at a time when news is bad. Let us hope prices are better. Good news and good prices they do not come together. How should one really deal with selloff in 2019?
There are four options: one is that you do nothing, you sit tight. Second is that this is a great time to look very hard at your portfolio and restructure it because today everything is available, everything has gone down and so you have a great opportunity to take a hard look and switch your investments. Third which I would not recommend is quit at this stage after having taken so much pain; and fourth is if you have the conviction and a long-term view, then this is the time to actually add money.
I would say depending on your risk reward and your risk appetite you should choose one of the four options and decide how to deal with the selloff.