What is the ideal market strategy in the run-up to general elections? Dinshaw Irani answers
Synopsis
“A market rally would have happened if there was some excitement going forward. I do not think that is happening. Our belief is that it will be more of a flat line. The market probably can be divided into two parts. One will be prior to elections, and one will be post-elections because the state elections will basically be an eye-opener.”
We are very different from the rest of the players I guess because as we were getting the money, we were investing. In fact, when we opened NAV on November 15, we were almost fully invested – 98% invested or so and we were very clear on the markets. The biggest concern in the market was obviously the US treasury yields, the 10-year bond yields, which were shooting up.
In fact, there was a term for that called bear steepening of the curve when the 10-year yields difference between 2 and 10 shot up to almost around 120-130 bps in June but then narrowed down to almost 10 bps before we launched our fund but fortunately that gap has again opened up, in fact, the US 10-year yields have come down to 4.4% from 5% that they had hit so that gave us a lot of comfort that one big competitor in the market for money was obviously becoming a very unattractive player for Indian equities and such. That is driving us to increase our weightages and in fact, we get fully invested as such so that is where we are.
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The fact that you have invested 98% for total corpus means that you see value in the market. The general argument is that there is no value in the market, sliver of the market is looking okay in terms of value. So, what has prompted you to invest 98% and where have you invested?
As I said, we are stock pickers, we always look for pockets within the market. In fact, whenever the markets are flatlining, that is the best time you can really take your bets on, I mean you have the time to evaluate your stock, you have enough time to gather your stock whenever you want, whichever form that you like and that is what we like and I think this was a perfect opportunity. The market corrected by the time we came up with our NFO and probably invested at the right time as such,I guess, keeping my fingers crossed here.
But yes, that is how it is. Probably two-third of our portfolio is in largecaps and one-third today is in mid and smallcaps. Our sector preferences are quite clear. We have been saying this all along that it is mainly financials and consumption. Again, consumption is mainly discretionary and when we say consumption, it is a very broad brush kind of explanation because we also include hotels and real estate and stuff like that and those are the kind of plays we are working with as such. Yes, so that is where we are today.
Rural has not picked up for a very long time. In fact, there were green shoots which totally vanished. Our feeling is it is a structural play working out in the rural markets because the non-farm labour is not picking up there. Now, that is where the real discretionary spends come in when the non-farm labour picks up. Till then, it is all staples because farm labour has been pretty okay within the rural markets and non-farm is a play on the unorganised sector which I do not think is going to pick up in a while from now as such because of formalisation of the economy.
Stocks Recommendations
Defence is a longer-term play. We have to avoid the cyclicality within defence and when I say cyclicality, I mainly mean the kind of capacity constraint that most of the players have. One needs to be in plays which are more across various services in defence, basically electronics is what I am talking about and obviously we are looking at outsourcing plays within defence as such because at some point in time, India can be an outsourcing play for defence.
Frankly, after all these problems that have come up with Ukraine and Russia and Israel and Gaza, the world has started spending more on defence. In fact, the EU, which was earlier very dormant in terms of defence spends and Germany had the lowest defence spend, have also upped their defence budgets. I think they need to outsource to various countries and India would be one of the fair beneficiaries of this. So, we need to work out those plays as such. So, it is a structural long-term play and there again one has to avoid the cyclicality and that is why one has to be very selective while picking defence stocks.
The rally would have happened if there was some excitement going forward as such. I do not think that is happening. Our belief is that it will be more of a flat line. I mean, if you split the market, probably it will be divided into two parts. One will be prior to elections, and one will be post-elections because a lot of talk is being said during the, I think the state elections will basically be an eye-opener.
Whatever results come out will be interpreted to a larger extent because this time around, the five states which are going to elections, are a microcosm of what our general elections are going to be. In three states, two central parties are fighting each other. One state, there is a central and a local party fighting each other. And in the third state, there are two local parties fighting each other. So, it is like a perfect play to understand what is going to happen in the central elections when they come about.
Frankly, today morning, there was one big overhang. FIIs have been sellers all along. But if you look at the November figures thus far and add the primary markets flow from FIIs, they are more or less even-steven. They are sold in the cash market, but they have been buying in the IPO market as such. Today morning, when I opened the paper, I had to go through five pages of IPO ads. So, IPOs are sucking the money out from the markets.