Stock strategy: We have yet to see the extent of the FII sell-off in emerging markets: Manishi Raychaudhuri
We saw FII sell Rs 1.4 lakh crore of shares last year. So far in April, they are proving to be buyers. It is a market dominated by domestic institutional investors. Is there a change on the ground? Do you say the same to your customers?
It is too early to conclude that this is a change of position on the part of the FII. FIIs are selling not only in India, but also in emerging markets. From around October, it has continued to this day and it is basically triggered by two pilots; First, the Fed’s stance changed quite quickly in the last quarter of 2021 in terms of monetary policy normalization or the pace of monetary policy normalization. Second, the conflict in Europe has obviously pushed up the prices of energy and various other food and other commodity prices, which has had an impact on the current accounts of many emerging markets, including India.
This obviously led to concern about emerging market currencies. These two pilots are not yet behind us. In fact, I would point out that if the Fed rate hike is increasing, those rate hikes or finally the narrative have been digested by emerging markets. But the Fed will now enter a phase of quantitative tightening starting around May. I don’t think it’s digested adequately.
In a nutshell, I would recommend that investors remain cautious about short-term FII flows. Honestly, I don’t think we’ve seen the full extent of FII selling in emerging markets yet.
A month ago when we spoke, you said buying anything right now was like standing in front of a moving train. Has that at least changed?
Yes, I remember this sentence. As I said earlier, some of these drivers, such as the military conflict in Eastern Europe or the Fed’s rapid change in attitude regarding the pace of monetary policy normalization, are still current.
In fact, the latest FOMC meeting minutes would show that there is a clear reference to quantitative tightening (QT), possibly up to a maximum of $95 billion per month. This is likely to be much sharper than the previous QT cycle we saw. From 2017 to 2019 we have seen total FII sales in Asia take a turn around 1.7% to 1% of Asian markets market cap and relative to that occasion this time the QT is likely to be sharper.
This is also happening at a time when rates are likely to be increased simultaneously. So while the situation may not seem as dire as when I made this comment about a month ago, I would say it is still warranted.
In the FMCG space, sleeping giants like ITC are sitting at a fresh 52-week high and one can actually buy a piece of Patanjali through Ruchi Soya FPO as the shares trade. How come you are looking for opportunities within FMCG at a time when we know what has happened with inflation and input cost pressures?
In general, we are very positive about the consumer space. Right now, looking at Consumer Staples and Consumer Discretionary together, we only focus on stocks that are market leaders and retail leaders in their niches and, therefore, they are the ones who can pass on the cost of hiking inputs to their customers. Across the consumer space, in a phase of continued input cost pressures, investors should be very cautious. It’s much easier, perhaps much more advisable to play input maker, sense energy or materials for the time being.
Where do you feel that the exuberance is now overdone and that you would like to lighten your positions or avoid certain sectors, if at all?
Consumer-focused sectors can be more expensive – consumer staples, consumer discretionary – as the rising cost of capital tends to lower the valuations at which expensive stocks tend to trade.
Obviously, we’ve seen some of this happen where growth stocks have underperformed, but we believe that due to the likelihood of an even larger increase in the cost of capital, this process is likely to continue for a while yet. time. So, first, avoid expensive stocks, especially those that don’t have pricing power. I should point out that faced with the rise in these energy costs, we are not too positive on the marketing and refining space.
There are these ongoing global tensions and the lockdown in China is straining supply chains for the automotive sector as a whole. How do you see this sector?
You have to be very careful in the automotive sector, especially the companies that have made it clear that their views on the supply disruption affecting production would be just about fine for many companies.
But those that are primarily concerned with the domestic market and those that have a relatively low import content in their input mix are the ones that would be relatively resilient at this stage. So basically we’re looking for, a) the mix of inputs that we would prefer to be relatively earth-focused. b) We also look at the company’s market position in their respective niche. These two elements would allow this company to pass on cost increases to its customers. It’s not an easy game right now for the full spectrum of consumer discretionary and consumer staples.
A report indicates that telecommunications growth in the next quarter will be largely driven by ARPU growth due to the full benefit of rate increases. While subscribers will likely remain under pressure due to SIM card consolidation, how do you feel about the telecom space?
We tend to agree with that. We love the telecommunications space – both the pure players and the conglomerates participating in this space. We believe that due to consolidation, ARPUs have increased and should continue to do so for the foreseeable future. We have significant exposure to the telecommunications space in Asia and India.
What are your expectations for this season’s earnings season? Would we see earnings downgrades from this quarter?
There are a few sectors where we have already seen downward earnings revisions and they largely relate to consumption and the commodity user space. Thus, Consumer Staples, selectively some Consumer Discretionary, some of Industrials have already seen downward revisions to consensus EPS estimates over the past one to three months.
We expect this to continue in this quarter as well. Perhaps the sectors which should do better and which have already seen their earnings estimates rise are IT services. We’ve seen some of the banks face downward revisions to earnings estimates over the past three months, but there could be some recovery in banks, especially private sector banks’ earnings estimates in the future. coming. As yields increase, the net interest margin tends to improve. We’ve seen this before in the developed Asian universe and it’s likely to spill over to India as well. So it will be a mixed bag. IT services should be okay, selective finance should be okay. These are the consumers and commodity users I would be wary of.
You said markets have not fully priced in central bank normalization. While we still don’t know if inflation is structural or transitory, are you changing your whole strategy on commodity packs, especially base metals?
Well not really. The commodity exposures we have in our Asian model portfolio include the energy explorers space. We have selective exposures in other materials, but more in Southeast Asia than in India. These positions are unlikely to change within the foreseeable time horizon. We believe that commodity prices will remain buoyant for now. Much of the drivers of these commodity price spikes that we have seen, namely increased demand in developed markets, and geopolitical tensions are not expected to be resolved anytime soon. We are clearly maintaining our positions in these sectors for the time being.
What do you think of the HDFC conglomerate following the HDFC-HDFC Bank merger? What does this mean for other fintech/NBFC players who will now compete with this large entity?
I cannot comment on specific cases or specific companies, but in general consolidation and therefore a relatively lower cost of capital for the consolidated entity is likely to become the order of the day in the future. In the Indian banking space, there is a degree of consolidation and therefore increase in size by inorganic means and we believe this should continue.
Now, obviously, some consolidations, some cases of consolidation give rise to much larger entities than what we have seen previously and we have to be prepared for that. This means that not only could the cost of capital of some of these entities be reduced, but also that their pricing power, return on equity and return on capital they generate in the future could actually be boosted. .
The media business has been hot lately. What direction do you have in the media space and what sub-sectors would you be bullish on?
Longer term, we appreciate the media space for advertising revenue growth, the strong economic recovery from the Covid lows of previous years which obviously led to this buoyancy in media company revenue. In the short term, however, there is pressure on the margins of consumer companies which are the main contributors to this advertising revenue growth and this is what makes us a little cautious. Over the next one to two quarters, one would have to be a little selective about media companies. Longer term they look good although I would avoid the much loved or more expensive exhibits in the space and there are quite a few.