stock market crash | portfolio strategy: 2022 is a difficult year, protect your capital! Play it safe in your wallet: Sridhar Sivaram


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“In the third quarter, the surprises came to a large extent from the financial space where we believe provisioning numbers over the next 18 months would decline significantly and private sector banks and PSUs in particular will benefit significantly. significant and their earnings numbers will look very strong. Commodity is the other segment. Obviously the way commodity prices have moved has shown a very strong earnings trajectory and that’s been mixed,” says Sridhar Sivaram, Chief Investment Officer, Enam Holdings.

It is said that good news and good price rarely go together. Right now the news is terrible and horrible. Have the prices become good?
We’re flat for the year, so I don’t think prices are as high as we’re suggesting. At least my general view would be that 2022 is a tough year, protect your capital, be in stocks where you are sure of the benefits; concept inventory and sales price and some other random multiples can be avoided.

Ultimately, it will be the earnings that will protect the stock and even that may not help the stock, but at least the damage will be much less. My general view is that it’s tough and there’s a lot of risk – global, interest rate, inflation – the list goes on. Also, the market has actually rallied very smartly over the past two years and will need a break. We don’t know the exact reason. A part is paid at the moment. It’s better to be safe right now and that’s my point of view. I’m sure others will have different opinions. This is how we build our portfolio for 22.

What are you doing with your wallet? Where do you take chips from the table? Where will you go from high growth to value or from lower risk to a more defensive strategy?
We have done this over the past six to eight months by focusing more on value, particularly in the financial area. We have been very long on PSU banks. Look at their performance over the past year; they beat the private sector banks hands down. That’s not to say we’re bearish on private sector banks. We have a fairly large exposure to the top three or four private sector banks, but we have significantly increased our exposure to PSU banks and to the price of, for example, NBFCs or some of the riskier items in the financial basket.

So that’s one way. The other thing is that wherever there’s high growth and high expectations, we’ve already taken the profits and looked to stocks where the profits are slightly better. Metals is a name we are very bullish on in the non-ferrous metals segment in particular and the list goes on. In every sector, there is something or the other where you can mitigate the risk, but that does not mean that if the markets were to experience a sharp correction, these will hold. But they may hold up a little better than most other stocks.

What about IT, we’ve seen IT stocks come off their lifetime highs considerably.
IT is an industry where you have to be very stock specific. We cannot broaden our base as we see a divergence in performance between stocks. I would be underweight IT, but specifically overweight some stocks where earnings visibility is very strong. Keep in mind that computing in general has been a bit cyclical when looking at performance over 10 years. She’s not as secular as she used to be. You have to play this according to the cycle and the evolution of equity valuations. We are broadly underweight Information Technology, but would be long on specific stocks where we believe there is strong earnings momentum.

Could it be the blue chips on the midcap computing space? Additionally, we had seen automobiles take a step towards the end of last year. The Tata Motors big deal had a wipe-out effect. How would you also approach this space now?
In IT it’s a mix of large caps and mid caps and in automotive I should divide automobiles into two-wheelers, passenger vehicles and utility vehicles and maybe even tractors. On two-wheelers, we are significantly underweight. There is a slowdown in rural India, plus the fact that in India we believe that when EVs are actually used, it will be two-wheelers that will be the first to come off the block. It will take some time for passenger vehicles and other electric vehicles to hit the market due to charging infrastructure. For a two-wheeler, it’s very simple, you can recharge at home.

Even some of these fears manifest. People are postponing purchases because there’s a lot of buzz around electric scooters in particular and that’s the segment we’re very light on right now. The commercial vehicle part seems very interesting because we see an increase in capex by the government. We are seeing a recovery in demand. There will be a lull in between due to some of the Covid issues, but overall it’s the space that looks interesting.

There are also problems with the supply of passenger vehicles. These supply issues will take time to resolve. The utility vehicle looks the best in the automobile right now and that’s where we’d place our bets.

Given that overall PAT growth on a free-float basis has been quite robust year-over-year at 23%, how do you see the earnings trajectory we’ve seen so far? Are there specific sectors that stand out?
As for earnings, there is a general belief that January was very mild thanks to Omicron. I have been traveling a lot in the past month and most malls and other places of tourist interest were literally empty. So the feedback we’re getting from the field indicates that January was very mild and we’ll also have to keep that in mind that we had a reasonably good quarter when it comes to the December quarter. But that said, a lot of it is already built in. Also, if you fork earnings, you’ll see that many companies are facing pressure on EBITDA margin due to changing commodity prices.

The surprises also came to a large extent from the financial space where we believe provisioning figures over the next 18 months will decline significantly and private sector banks and PSUs in particular will benefit significantly and their results will appear very solid. Merchandise is the other segment. Obviously, the way commodity prices have moved has shown a very solid earnings trajectory and that has been mixed. Overall, we did well, but there were a lot of hiccups in between due to commodity prices and cost pressures that companies in particular are seeing.

When you say it’s time to protect capital, to stay on the defensive, is it time to sit on an unusually large amount of money? Would you say one should sit on 15-20% cash because it could be a bad year like 2008 or an outlier like 2013 or 2014?
As a house and as a family office, we have the freedom to sit on a higher than normal amount of money, but for most fund companies this can be a difficult proposition. I’ve been on the other side and I know it’s not easy to sit on 15% cash. Too many questions will have to be answered. So the best way for people who have a reference and a peer group is to get defensive.

But we as a house or individual can easily make a bit more money but if someone is in a SIP environment then that’s how the costs are averaged and invested over a period of time of time and thus get the highs and lows and over a period of time start making money.

But as a house with large market exposures, there are tactical changes being made to portfolios and the signs for that were there since October-November. It’s not like many of the headwinds we’re talking about were new and suddenly popping up. He’s been there a lot. The market has given people who want to take a different view a chance, enough opportunities to switch to a different portfolio strategy or to invest in silver.

One of the sectors that you have loved as a house is telecommunications and given the consolidation that is happening in telecommunications rates, this is a sector where the macros will not change. This is a sector where high oil prices will not affect consumer habits. Are you still bullish on telecoms?
Yes. So that’s one of the segments where we’re extremely optimistic and you explain exactly why we should be optimistic. But I’m just going to put some perspective on the numbers. Looking at mobility revenues, five years ago the industry was talking about Rs 2 lakh crore roughly plus a few thousand crores here and there.

If I annualize the last four quarters we are roughly at Rs 1,50,000-1,60,000 crore and if you take the last five years for the telecom company and for the customer the data volumes we consume have increased by at least 50 to 100 times. Usage minutes are up about 15-20% and generally the other fringe benefits that we’re starting to get, like using some of the OTT apps and things like that, don’t justify the fact that the industry actually lost 40,000 rupees. crore in revenue during the period as there was ultra high competition from one particular player.

As this normalizes, the Rs 40,000 crore that returns to the industry in the next two to three quarters is significantly split between perhaps the top two players. We’re down to two and a half players and it’s up to you how you want to rate some of them.

We expect to see an ARPU of Rs 200 very soon and once we see some traction in ARPU, this is a segment that is insulated from Covid or some geopolitical issues. And if I look at the segment’s valuations, it looks reasonably average right now. At no time can we say that it is at the top of the range. We therefore remain extremely bullish on the segment. This is one of the segments that we could use to protect capital and earn money.

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Don F. Davis