Volatility is a friend because it offers you the right prices to buy into. If you get perturbed by volatility, you will miss out on opportunities, said Anshul Saigal, Chief Investment Officer – Kotak Portfolio Management Services, in an interview with ETNOW.
Edited excerpts:
Being a small and midcap specialist in this kind of market may not be a very rewarding experience.
You have to have a thick skin to be in the markets. If you get perturbed by short-term moves in the markets, then this is not the place for you. And do not take my word for it, listen to the greats. Recently, at the Berkshire Hathaway conference and also in many of his previous notes, Warren Buffett reiterated that if you cannot take a 30% to 50% downside in equity markets, then just stay out because that can happen any time in equities.
But you have to look beyond near term uncertainty, near term flux in markets and focus on the long term. This market is going much higher even if it means that last year and particularly the recent past has been volatile. Volatility is a friend because it offers you the right prices to buy into. If you get perturbed by volatility, you will miss out on opportunities. We are quite thrilled by the recent volatility. We are not perturbed at all.
So let us talk about specifics. The mid and smallcap space was the most gratifying space during 2015, 2016 and 2017. Now we are using words like bombed out. Where are you picking your spots?
Within the small and midcap space, there are pockets which are completely beaten down. There is valuation comfort in certain pockets, which has never been there before. Let me give you some instances. In the infrastructure space, there are opportunities where book to bill is as much as five times. This means five years of revenues are already there in the order book of many of these companies. But these companies have halved in prices or even lower in many instances which means that valuations have corrected while in the same period, you are seeing an uptick in the order books of many of these companies.
This looks like an opportunity and if we do see acceleration in earnings over the next year, then these valuations will not be there. We also see that in the manufacturing as well as capital goods space, in the second half of this year and beyond that, there is an uptick in activity. If you look at aggregate capacity utilisation of the system, it is close to 76.5% which is near a six to seven year high. What that tells you is that at these levels you could well see a capital expenditure uptick cycle come into play over the next 6 to 12 months.
As we all know, prices factor in such upticks in activity before time. So, in the next 6 to 12 months, you could well see that space doing very well. We are already seeing the cement space showing quite a bit of strength. We were seeing cement prices go up month on month. Of course, in April, volumes have been slightly weak but that is coming off period of many months of uptick in volumes as well.
That again gives you a signal that activity in the construction and related spaces is moving up. We do find opportunity in this market. Just today, there was news that Godrej is looking to enter into the financial services space,because they find opportunity there. We also believe that after this entire flux of IL&FS and the NBFC crises, if you pick the right opportunities, then there is tremendous opportunity to make money over a period of two to three years.
There are opportunities galore but if you ask me what will make money over the next month, I have no clue. I know what will make money over the next two to three years.
There is a marked down pressure when it comes to consumption, NBFCs and HFCs. But then again, there are businesses like an AB Capital for instance which have posted a blowout set of numbers. Have any of these hits and misses which have really stood out for you from the earnings been delivered yet?
Clearly the consumption space is really not faring well and over the last particularly two quarters there has been a bit of slowdown in that space. It could be a function of many factors — the NBFC crisis, elections — leading to consumption patterns getting delayed if not stalled. We are seeing that autos also and consumer discretionary as well is also seeing a slowdown as a result of probably many of these factors.
But on the other hand, the construction and even the real estate spaces are showing green shoots and in that space if you dig deep, look between the lines and not really look at the headline numbers.
There are many opportunities which have emerged with strong results in this quarter as also the previous one. Capital goods is throwing up interesting growth opportunities that one can really look for in the current quarter results as also in the previous quarters results. As I mentioned earlier, there are pockets which are showing robustness in growth and one just has to look a little bit deeper to find those pockets.
Is it time to go and shop in autos because the cyclical slowdown is well pronounced now?
That is absolutely true, except that our experience tells us that when your instinct is telling you that probably a sector has bottomed out and buy that sector 20% lower, you might as well wait a little more because it does not look like this sector is turning around any time in the coming future. It could well be another six to eight months before the sector starts showing signs of revival. And in that period, this volatility could take the sector even lower.
We would be a little more patient before we buy into auto space at this time. Clearly, the long-term story of the space has not ended. We have a long runway for growth in this space and it is just a matter of timinRead More – Source
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