ETMarkets.comThe market at this point of time is running ahead but I do not think it is running so way ahead that we can have a big crash, says Ravi Dharamshi, CIO, ValueQuest Investment Advisors
What is the right way of looking at markets because for 2020 the Nifty return for the entire was about 10% but if I count what markets did from the March’s low of 7,500 to 15,000, it has been a return of almost 100%!
What a year it has been. It has been packed with lessons that are not easy to forget. We are lucky to be still living and thriving in these unfortunate times. So touch wood! But God willing, things will turn out better. Coming back to your question, around March, I had tweeted that this is the point of maximum pessimism. Not many people understand the importance of that. Essentially what it means is that from that point on, a new bull market is going to be born.
In March, we had crazy volatility and our VIX levels had touched the highs it had reached in the Global Financial Crisis of 2008. What transpired in March was a fast forward accelerated version of the global financial crisis in a month’s time. There was a 40% drop in that on back of an already going on bear market in small and midcaps since 2018. We were anyway losing hope -- whether it was about the government, or about businesses.
There were too many issues to have a positive outlook and on top of that then you will get hit by Covid which literally brings everything to a screeching halt. That really broke the camel’s back and everybody just gave up hope. If you had lived through 2008, you would think you have the experience to sustain this but again the market surprises you and tests you time and again. 2020 March was one such testing period but it was clearly the point of maximum pessimism.
Now if that was the point of maximum pessimism, then a new bull market was about to be born. A lot of people failed to see that. Whether it has been a terrorist attack or a global financial crisis or health pandemic, the response of the central banks around the world has been to provide a stimulus to the market, cut interest rates and provide liquidity to the market.
If that is going to be your standard response, then whether or not we overcome the pandemic, we will sure overcome the asset price deflation and that is exactly what has happened. Today, when we are up almost double from the bottom, it does not take a genius to tell you that there will be volatility up ahead. There is likely to be a correction. But we have to look beyond the near term volatility or the near term downtick or correction, consolidation whatever could happen and you have to start looking whether this liquidity that has been provided or the steps that have been taken will that lead to a more sustainable bull market or not and that is the question that one should be looking to answer all the time.
There is no scientific metric which will tell you that what will happen to liquidity but if liquidity is one of the factors why markets are going higher, can one safely assume that markets will continue to go higher because there is abundant liquidity?
I will provide you with a couple of data points and you can have your own conclusion. In September 2001, we had a terrorist attack and the Fed opened the floodgates and the money supply growth went from 6.2% to 10.3%. But the Fed’s balance sheet size did not change much and the fiscal deficit ballooned to 3.8%. Essentially, a monetary policy and fiscal policy support was given to the markets. Now that led to seven years of bull market and the global market cap went from $23 trillion to $60 trillion in a span of seven years. That was in 2001.
In 2009, when post 2008 crisis, the Fed’s balance sheet ballooned by 2.5X, the money supply growth increased from 6.2% to 9.4% and the fiscal deficit ballooned to 7.9%. The market cap went from $32 trillion to $90 trillion. This was a pre-Covid peak. Basically in 10 years the market cap almost tripled.
In March 2020, the Fed had expanded its balance sheet by 2X, money supply has been increased by 3X and the fiscal deficit has been allowed to balloon. Absolute money pumped in was over $9 trillion worldwide by various major developed countries. Now the market cap of the world was at $65 trillion and in nine months, we are at about $103 trillion. If 2001 and 2009 are a guide book in a way, if there is any direct correlation of the markets with any one particular variable, it is liquidity. GDP growth and everything else is a much lesser predictor of where the market is headed. Now, if I tell you that what has happened in 2020 is way more than 2001 and 2009, what would you expect the market to do?
Currently interest rates have bottomed out. They are negative in some countries. They can only go higher. Is that not a big risk?
Usually markets do not start rallying when the rate cuts are being made. In fact, the rate cuts imply that central bankers are worried and things are going to get worse. Usually they end up overextending themselves on the downside which leads to the rebound in the market. Usually when the interest rates bottom out, the equity markets start performing. In our case, when the steps were being taken by the government and when the liquidity was being provided and interest rates were being cut, the markets kept falling relentlessly.
But once all the leveraged players are out of the system and the patient capital comes back, they evaluate that every crisis has been an accelerant. Even Covid is no different. The response of the government is to provide liquidity and fiscal push and that is going to lead to a revival in the market and hopefully in the economy as well. It is heartening that this rally is not without accompanying improvement in GDP or earnings cycle. The market at this point of time is running ahead but I do not think it is running so way ahead that we can have a big crash.
How is the big picture for pharma looking after the recent run up?
2020 was the year when the world recognised the importance of Indian pharma and Indian generic players. Just a couple of years ago, there was all kinds of negativity with the USFDA issuing warning letters and books were being written about how our companies are manipulating everything. But you cannot overlook the fact that now every fourth pill consumed in the US is made in India. That kind of a thing cannot happen without necessary quality standards.
Covid has definitely accelerated the opportunity for pharma. It has opened up new doors. Vaccines was not something that was looked upon as an opportunity when evaluating pharma companies but now there are lots of vaccine plays available. There are lots of API plays available as well thanks to the PLI scheme of government and of course there are the US generic players and that story is panning out because the generic market has reached a better equilibrium in terms of pricing. I remain very bullish on the pharma space for the next three-four years.
Where are you focussing on within the pharma space -- biosimilars, specialty, API?
We continue to like stories that are focussed on the US market. US is the largest market, the Indian players need to upgrade themselves from being a pure play commoditised generics focussing on oral solids to a more specialised role which means it would be either biosimilars or inhalers or other small niche specialty molecules, complex molecules. So those are the opportunities to focus on. One has to evaluate every player in the pipeline and see how they are positioned.
I would say that opportunity is still very large and there is still a large runaway available for Indian players to upgrade themselves since last five years as they have been investing for the future and all those investments are going to bear fruits in the next three years. The future looks very bright for companies focussed on US markets.
Indian domestic market plays are also decent but at some point last year those opportunities have been fully priced in. At some point, they will also become attractive again but the relative delta is definitely more in the US focussed players. Now we also have some presence on the API side of the market and I believe this focus of Indian government to reduce dependence on China and to encourage champion players out of every sector is going to lead to a big boom on the API side. It is already happening. Clients on their own are coming and wanting China plus one strategy and they are moving a little bit away from China. All that will reflect in the numbers.
Indian pharma sector’s prominence in the world is only going to increase.
Nifty does not have a big representation in pharma but you were running a significant overweight. Are you planning to stick to that?
Yes, we will continue to stick with pharma. There is no reason for us to anticipate or pre-empt what lies ahead. At this point of time, things are panning out way better than what we had envisaged so we are going to let it run. One of the portfolio companies that we have had has ended up achieving our internal target of FY23 in FY21 itself. I do not know where to go! It just puts things in a perspective that we have no ability to predict what is going to happen. The cycles still look favourable and the probability still looks good and we are going to stick with it.
ET Now: In the last three-four months, we have seen the other side of the market -- steel, cement, PSU banks -- coming back. Is this rotation at play or is the comeback in some of the industrials and cyclical can just go beyond this deep swell what we currently are witnessing?
Ravi Dharamshi: No, I was earlier of the opinion that it would be a mean reversion but I have changed my view. The economic revival has been sooner and also much better than expected. I think it is almost a V-shaped recovery and that is what everybody is leaning towards.
The kind of surprise that we are seeing whether it is on the NPA cycle or the GDP growth or the various demand factors that we see is obviously a big surprise. We will wax and wane between which theme does better -- whether the Covid theme or the recovery theme is doing better. Both the themes have credibility at this point of time.
Your new idea is to invest into home improvement companies tiles, paints, pipes what is fuelling your optimism because real estate is still in a downtrend?
The basic thesis is that multiple things are driving us towards home improvement but the big thing is whether there is a revival in real estate. We have been a huge consolidation in the real estate sector. The supply overhang has been reducing, the absorption has increased in the last six months, the kind of registrations numbers that are popping out thanks to the various incentives provided by central as well as state government is definitely credit worthy. There are many ways to play this thing you can go ahead and buy a developer or you can go ahead and buy a home story improvement coming back. or building materials. The industry structures are better on the home improvement side, the valuations are also available, there is also a tailwind of consolidation. For example, pipes is one theme. There is a consolidation where some of the players have been rooted out thanks to the crisis and there is a higher market share and growth amongst the top two-three players.
Are we in for a bull market for mid and small cap stocks like we saw between 2013 and 2017 or is it too late to assume that we could be in for that kind of a market?
I feel it is better than the 2013-2017 period. It is more like 2003 to 2007. The point from where the rally has started was a point of maximum pessimism and the kind of policies and reforms the government has put in place are going to provide a better credit path over the next few years for the growth overall. Already people are talking about a 10% kind of a growth in FY22 in GDP. Today you have to take a call if that kind of growth can come off a lower base. But still it will be a 10% GDP growth or a double digit growth print. If that is the case, then you really need to think how you are going to be positioning yourself.
I would say the bigger risk is not being invested in the equities than it is for whatever correction consolidation is in store in the next few months. The economic cycle bottoming out is more akin to the 2003-2007 cycle than the 2013-2017 cycle.
How much of the market has reached a level beyond which PE expansion is unlikely to happen even if earnings come? Also how much of the market will see both earning and PE expansion?
If you provide an unabashed bullish view then you are looked upon as somebody who is marketing themselves. But statistics can be very misleading. Tail events are usually what define the investing career and I would recommend this book called Psychology of money by Morgan Housel. More likely than not, it is these tail events that define your investing career but most of the time people leave these tail events out of their investing journey. An unprecedented amount of liquidity is being pumped in and every time such a thing has happened, we have had a seven-eight year bull market and 3-4x market cap. I would expect the similar kind of a result this time around also though I will always keep monitoring whether that is happening or not. If the global market cap is already at $103 trillion, who is to say that it cannot reach $150 trillion or $200 trillion. I am not suggesting that it is going to happen but if that is to happen then I mean it is better off if you are focussed on investing and finding opportunities rather than trying to be oversmart and trying to time the next correction.
What is the right way of looking at markets because for 2020 the Nifty return for the entire was about 10% but if I count what markets did from the March’s low of 7,500 to 15,000, it has been a return of almost 100%!
What a year it has been. It has been packed with lessons that are not easy to forget. We are lucky to be still living and thriving in these unfortunate times. So touch wood! But God willing, things will turn out better. Coming back to your question, around March, I had tweeted that this is the point of maximum pessimism. Not many people understand the importance of that. Essentially what it means is that from that point on, a new bull market is going to be born.
In March, we had crazy volatility and our VIX levels had touched the highs it had reached in the Global Financial Crisis of 2008. What transpired in March was a fast forward accelerated version of the global financial crisis in a month’s time. There was a 40% drop in that on back of an already going on bear market in small and midcaps since 2018. We were anyway losing hope -- whether it was about the government, or about businesses.
There were too many issues to have a positive outlook and on top of that then you will get hit by Covid which literally brings everything to a screeching halt. That really broke the camel’s back and everybody just gave up hope. If you had lived through 2008, you would think you have the experience to sustain this but again the market surprises you and tests you time and again. 2020 March was one such testing period but it was clearly the point of maximum pessimism.
Now if that was the point of maximum pessimism, then a new bull market was about to be born. A lot of people failed to see that. Whether it has been a terrorist attack or a global financial crisis or health pandemic, the response of the central banks around the world has been to provide a stimulus to the market, cut interest rates and provide liquidity to the market.
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There is no scientific metric which will tell you that what will happen to liquidity but if liquidity is one of the factors why markets are going higher, can one safely assume that markets will continue to go higher because there is abundant liquidity?
I will provide you with a couple of data points and you can have your own conclusion. In September 2001, we had a terrorist attack and the Fed opened the floodgates and the money supply growth went from 6.2% to 10.3%. But the Fed’s balance sheet size did not change much and the fiscal deficit ballooned to 3.8%. Essentially, a monetary policy and fiscal policy support was given to the markets. Now that led to seven years of bull market and the global market cap went from $23 trillion to $60 trillion in a span of seven years. That was in 2001.
"What transpired in March was a fast forward accelerated version of the global financial crisis in a month’s time."
In March 2020, the Fed had expanded its balance sheet by 2X, money supply has been increased by 3X and the fiscal deficit has been allowed to balloon. Absolute money pumped in was over $9 trillion worldwide by various major developed countries. Now the market cap of the world was at $65 trillion and in nine months, we are at about $103 trillion. If 2001 and 2009 are a guide book in a way, if there is any direct correlation of the markets with any one particular variable, it is liquidity. GDP growth and everything else is a much lesser predictor of where the market is headed. Now, if I tell you that what has happened in 2020 is way more than 2001 and 2009, what would you expect the market to do?
Currently interest rates have bottomed out. They are negative in some countries. They can only go higher. Is that not a big risk?
Usually markets do not start rallying when the rate cuts are being made. In fact, the rate cuts imply that central bankers are worried and things are going to get worse. Usually they end up overextending themselves on the downside which leads to the rebound in the market. Usually when the interest rates bottom out, the equity markets start performing. In our case, when the steps were being taken by the government and when the liquidity was being provided and interest rates were being cut, the markets kept falling relentlessly.
But once all the leveraged players are out of the system and the patient capital comes back, they evaluate that every crisis has been an accelerant. Even Covid is no different. The response of the government is to provide liquidity and fiscal push and that is going to lead to a revival in the market and hopefully in the economy as well. It is heartening that this rally is not without accompanying improvement in GDP or earnings cycle. The market at this point of time is running ahead but I do not think it is running so way ahead that we can have a big crash.
How is the big picture for pharma looking after the recent run up?
2020 was the year when the world recognised the importance of Indian pharma and Indian generic players. Just a couple of years ago, there was all kinds of negativity with the USFDA issuing warning letters and books were being written about how our companies are manipulating everything. But you cannot overlook the fact that now every fourth pill consumed in the US is made in India. That kind of a thing cannot happen without necessary quality standards.
Covid has definitely accelerated the opportunity for pharma. It has opened up new doors. Vaccines was not something that was looked upon as an opportunity when evaluating pharma companies but now there are lots of vaccine plays available. There are lots of API plays available as well thanks to the PLI scheme of government and of course there are the US generic players and that story is panning out because the generic market has reached a better equilibrium in terms of pricing. I remain very bullish on the pharma space for the next three-four years.
Where are you focussing on within the pharma space -- biosimilars, specialty, API?
We continue to like stories that are focussed on the US market. US is the largest market, the Indian players need to upgrade themselves from being a pure play commoditised generics focussing on oral solids to a more specialised role which means it would be either biosimilars or inhalers or other small niche specialty molecules, complex molecules. So those are the opportunities to focus on. One has to evaluate every player in the pipeline and see how they are positioned.
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I would say that opportunity is still very large and there is still a large runaway available for Indian players to upgrade themselves since last five years as they have been investing for the future and all those investments are going to bear fruits in the next three years. The future looks very bright for companies focussed on US markets.
Indian domestic market plays are also decent but at some point last year those opportunities have been fully priced in. At some point, they will also become attractive again but the relative delta is definitely more in the US focussed players. Now we also have some presence on the API side of the market and I believe this focus of Indian government to reduce dependence on China and to encourage champion players out of every sector is going to lead to a big boom on the API side. It is already happening. Clients on their own are coming and wanting China plus one strategy and they are moving a little bit away from China. All that will reflect in the numbers.
Indian pharma sector’s prominence in the world is only going to increase.
Nifty does not have a big representation in pharma but you were running a significant overweight. Are you planning to stick to that?
Yes, we will continue to stick with pharma. There is no reason for us to anticipate or pre-empt what lies ahead. At this point of time, things are panning out way better than what we had envisaged so we are going to let it run. One of the portfolio companies that we have had has ended up achieving our internal target of FY23 in FY21 itself. I do not know where to go! It just puts things in a perspective that we have no ability to predict what is going to happen. The cycles still look favourable and the probability still looks good and we are going to stick with it.
ET Now: In the last three-four months, we have seen the other side of the market -- steel, cement, PSU banks -- coming back. Is this rotation at play or is the comeback in some of the industrials and cyclical can just go beyond this deep swell what we currently are witnessing?
Ravi Dharamshi: No, I was earlier of the opinion that it would be a mean reversion but I have changed my view. The economic revival has been sooner and also much better than expected. I think it is almost a V-shaped recovery and that is what everybody is leaning towards.
The kind of surprise that we are seeing whether it is on the NPA cycle or the GDP growth or the various demand factors that we see is obviously a big surprise. We will wax and wane between which theme does better -- whether the Covid theme or the recovery theme is doing better. Both the themes have credibility at this point of time.
Your new idea is to invest into home improvement companies tiles, paints, pipes what is fuelling your optimism because real estate is still in a downtrend?
The basic thesis is that multiple things are driving us towards home improvement but the big thing is whether there is a revival in real estate. We have been a huge consolidation in the real estate sector. The supply overhang has been reducing, the absorption has increased in the last six months, the kind of registrations numbers that are popping out thanks to the various incentives provided by central as well as state government is definitely credit worthy. There are many ways to play this thing you can go ahead and buy a developer or you can go ahead and buy a home story improvement coming back. or building materials. The industry structures are better on the home improvement side, the valuations are also available, there is also a tailwind of consolidation. For example, pipes is one theme. There is a consolidation where some of the players have been rooted out thanks to the crisis and there is a higher market share and growth amongst the top two-three players.
Are we in for a bull market for mid and small cap stocks like we saw between 2013 and 2017 or is it too late to assume that we could be in for that kind of a market?
I feel it is better than the 2013-2017 period. It is more like 2003 to 2007. The point from where the rally has started was a point of maximum pessimism and the kind of policies and reforms the government has put in place are going to provide a better credit path over the next few years for the growth overall. Already people are talking about a 10% kind of a growth in FY22 in GDP. Today you have to take a call if that kind of growth can come off a lower base. But still it will be a 10% GDP growth or a double digit growth print. If that is the case, then you really need to think how you are going to be positioning yourself.
I would say the bigger risk is not being invested in the equities than it is for whatever correction consolidation is in store in the next few months. The economic cycle bottoming out is more akin to the 2003-2007 cycle than the 2013-2017 cycle.
How much of the market has reached a level beyond which PE expansion is unlikely to happen even if earnings come? Also how much of the market will see both earning and PE expansion?
If you provide an unabashed bullish view then you are looked upon as somebody who is marketing themselves. But statistics can be very misleading. Tail events are usually what define the investing career and I would recommend this book called Psychology of money by Morgan Housel. More likely than not, it is these tail events that define your investing career but most of the time people leave these tail events out of their investing journey. An unprecedented amount of liquidity is being pumped in and every time such a thing has happened, we have had a seven-eight year bull market and 3-4x market cap. I would expect the similar kind of a result this time around also though I will always keep monitoring whether that is happening or not. If the global market cap is already at $103 trillion, who is to say that it cannot reach $150 trillion or $200 trillion. I am not suggesting that it is going to happen but if that is to happen then I mean it is better off if you are focussed on investing and finding opportunities rather than trying to be oversmart and trying to time the next correction.
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Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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