In a chat with ET Now, Rajeev Thakkar, CIO, PPFAS MF, says there are sector specific issues with IT, pharma, auto, telecom and with introduction of GST, it will not be an easy situation.
What is it going to take for the markets to push further from here because of late we seem to be getting in a bit of a consolidation mode as is the rest of the world too?
So markets can push forward on two factors, either earnings growth or people may put a higher multiple on the earnings that are there or expected to come in. There is not much room left to go up further and some would argue for a multiple contraction. The only thing that can take markets forward is growth in earnings.
Which is not there?
Which is difficult. If you break down and look sector by sector, there are sector specific issues. IT has its own challenges. Pharma had its challenges. Auto industry at macro level has challenges. GST is coming in with its own bit of turbulence. Telecom with its hyper competitiveness. Banking is still not able to shake off the bad loan issues. So there are sector specific issues. It will not be very easy as some people are hoping it to be.
Next month again, we will have to deal with the hard reality of earnings. Where do you see an earning surprise coming in and where do you think the pressure on earnings is going to remain?
I am not very hopeful in terms of April-May numbers which will be there for March ending being significantly better than what people are expecting.
We have seen a 15% rally in benchmark indices this year, plus-minus 1% or 2%. Smallcap indices are up by more than 17-18% this year. This is on back of a great 2015 and 2016. I safely assume that with the assumption of 14-15% earnings growth for FY18, a large part of gains for this calendar year are already there and for next nine months, it could be a flattish year with a downward bias rather than upward bias?
That is a very difficult call to make because many a time when momentum is there, it creates its own reflexivity. People then do not look at what has been the earnings growth number, what has been the price growth. Today if you randomly name let us say three stocks - Asian Paints or a Gruh Finance would have doubled profits over four-five years and there stock prices would have gone in excess of four or five times and Nestle which has not grown profits has also seen stock price go up.So prices are moving faster than earnings. It is a fact as on date, optimism and liquidity
Do you think that with Q4 earnings, there could be a sort of balance coming in? Could expectations come lower and prices try and match up with that or do you think the market will continue to be at these elevated levels in hope of a revival in earnings?
The buzz word these days has been long runways. People are not looking at this quarter's numbers or people are saying oh! India is the next developed country on the horizon and so much of GDP growth will come in and so much of wealth will be created, hang on to your seats, do not worry about quarterly earnings, do not worry about small ups and downs or temporary over valuations. That is what people have bought into. How long it continues remains to be seen.
Haven't you bought anything recently?
No new additions, no new dilutions? How are you deploying the fresh inflows?
The margin there have been small sales. As on date, we are north of I would say based on last fact sheet for the February month, we were more than 10% in cash and arbitrage positions. So we have this flexibility where if inflow comes in, we do not necessarily deploy it on day one, we put it in cash to futures arbitrage waiting for something to come our way.
Do you think given the way how things are evolving at a global level, where IT, pharma is contracting, there is a new capex cycle which hopefully would start in US. Back home also, we can talk about a new capex cycle which could eventually take up. Do you think the heart of your portfolio or the construct of your portfolio could change because you own a lot of consumer names, you own a lot of banks.There is Persistent System in your portfolio. I also notice that there is a lot of Ipca in your portfolio. How will you portfolio change given that the dynamics for some of the sectors are changing?
We keep evaluating those and whether the sector dynamic has changed to such an extent that the portfolio needs are relook. In fact, some of these names that you refer -- Dr Reddy's and Ipca -- are small positions which have been built looking at the problems they are facing. These have been built after they had USFDA troubles...
Would you increase them because investors would say let us buy bad news and a lot of bad news is in pharma. There is no bad news for rest of the sectors but for IT and pharma where there is only bad news?
We have been looking to buy bad news in pharma. Only thing is we have not looking to build very big positions in individual names because resolution time lines are uncertain in these companies. If you think resolution will come in two years, some time it gets extended to three and four years. We try and build a basket of a few stocks rather than have a lot of waitage in one stock itself.
So which sector within your portfolio or fund has the maximum weightage right now?
It would be IT related meaning...
More global in nature I am guessing.
Are you looking at adding more positions here as names like Apple continue to make fresh highs? Are you looking at increasing your exposure?
This is the place where most of the wealth creation is happening not just in terms of stock prices but in terms of innovation and them being able to disrupt traditional industries. So whether it is Amazon or Uber, despite it disturbing the transportation industry, it is a place where we have a lot of analyst coverage in where we are looking at thing closely.
Broadly one-third of your portfolio is global in nature?
The way the rupee has moved, what happens to that global part because 4% is what we have seen a rupee uptick which means your global portfolio, suddenly on a mark to mark basis, would have bled by 4%?
No. Above 90% of our underlying exposure is hedged. Whether rupee appreciate or depreciates, the NAV does not get impacted. Only the balance 10%.
You do it so efficiently?
Yes. So 3% so on 30% portfolio if 90% is hedged. On overall portfolio basis, about 3% exposure is there to currency, not much.
So Google, Apple, UBS, IBM, these stocks are at an all-time high. IBM is making an all-time high. Apple is there. Google sitting at an all-time high. Nasdaq is also all-time high. These are great companies but somewhere are you tempted to again from price perspective that it is time to cash out?
We keep watching the valuations but more frenzy is in domestics rather than in overseas stocks. Also, there is more frenzy in our small and midcap space. Apple despite stock price moving, is nowhere near sell levels.
You have never got Amazon?
We have been temped many times but never been able to value it. The biggest fear that I have is if I were to buy Amazon and you and Ayesha were to ask me how did you value it, you call yourselves
Cash flows. The nteresting part is that whatever cash flows they make from their slightly older businesses...
The cloud business is the main cash flow throughout...
They pump out those cash flows into new loss-making ventures. I am sure they started with selling books, books is a very profitable segment for them. But today they are creating video content for Amazon Prime Video, now that is obviously losing money. They have no revenue model for that. On a net basis, they do not report much profits. So it is tricky placing a value on it and sticking your neck out. It is something which tempts us but very difficult to say what is the right price.
I can just share a very interesting thing about Buffett and base source which is common even though it is old economy and new technology, Buffett has bought into consumer monopoly, he has bought into consumer companies or he is betting on consumer habits because consumer habits do not change... Wal-Mart, Coke or whether it is Kraft or some other businesses. Bezos once said on a public forum that even though I represent a new technology business, what I am betting on is a fact that the consumer never changes. The consumer always wants something which is cheap and he always want something which is easily available.
He said three things 15-20 years from now consumer will never tell me why do not you sell your goods at higher price? So they want the lower price. He said faster delivery. No one will say you deliver it too quickly and third is he said the whole experience, a wide choice and things like that.
All I am saying is that Buffett also bet on the same thing that the consumer rarely changes. Bezos is also betting on the same thing that the consumer habit or consumption patterns rarely change.
Incidentally Buffett has sold out Wal-Mart looking at what Amazon is doing.
The original article could be seen here.