As we play for a massive recovery in line with global signals, are national elections factored in? Will the market even react if it plays as the exit polls indicated?
Historically, state election results had little impact on markets beyond a day or two. I think the impact of these results will not be much. So even if it had gone the other way, the impact would not have been very significant. There are much bigger global factors at play today and macroeconomic factors related to inflation, interest rates, etc., and it is these elements that will determine valuations.
The national election results will create very short-term volatility and this is unlikely to happen as expectations seem largely well set.
What happens now? Do we forget what happened in the past 15 days? Did we make a sustainable background? Can we start buying in this short pressure?
This is clearly a short squeeze and what happened is that previously there was a short squeeze that played out in the commodity markets. Now that commodities have moved to the other side, in the short term, very bearish positions could be liquidated. But the challenge is to assess whether, from a macroeconomic point of view and in terms of revenue growth, we are on the way to a return to normal like a few months ago. It seems unlikely.
Brokerages have already started to scale back earnings expectations in many sectors. I just read reports on consumer goods, automotive, etc. Crude rose to $130. Nobody really bought rough at $130. Today it’s $110-112. So that volatility will play out, but over $100 is still high and most commodities are still high.
Look at coal, metals, steel, etc. These challenges will not disappear very quickly. So it will be good if the markets stabilize, settle for a while and absorb this news. Otherwise, these volatile up and down swings will be difficult for many investors.
What would you recommend doing with HDFC Bank at current levels?
I believe that HDFC Bank’s premium over all other private sector banks as well as major PSU banks like SBI has fallen to almost unheard of levels. I think there is value at this price. As the stock has fallen to the Rs 1300 or Rs 1350-1360 level, I don’t think long-term investors will risk much by hoarding it at current prices. I would say they are hoarding so they can buy maybe half now and wait to see if the markets give another leg down which based on macro factors is a possibility over the next few weeks. The downside of HDFC Bank in my opinion is quite limited because usually even if the cycle of interest rate hikes starts etc. HDFC Bank holds up against it very well compared to most other banks especially PSU banks .
Should we buy Indian Hotels, PVR, Trent after the recent fall they suffered?
I would agree with that. The unlock theme is going to be very strong. There were two waves during this exercise; First it started with Delta, then came Omicron. Despite this, many of these companies have been very successful. These businesses can actually withstand increases in input prices better than most other businesses that were operating normally. Unlock themes will continue to work just fine. There are choices ranging from multiplexes to hotels to catering businesses. All these themes should do very well in the next two or three years.
Is the best of metallic gains behind us? For those who own metals stocks, there was a 5-7% rise and a 20% drop. Is the risk-reward ratio stacked that way?
Yes, the risk-reward is high for metal stock companies as it is now believed that due to the type of commodity price spikes inflationary pressures are possible leading to higher interest rates etc. . Eventually, central bank actions that follow once the Ukraine question ends could lead to a recession two or three quarters later.
So in this scenario playing metals might not make sense. Now, from the perspective of the user industries as well, the challenge now is that everyone is trying to say it’s worse in terms of input costs and now things will get better.
Let’s play on this theme but the pricing pressures for these companies have not abated per se. And now many companies, from everything I’ve interacted with, are saying that we’re not going to accept any more immediate price increases, even if we have to cut our margins because consumers just can’t absorb this type of price increases. So that’s the challenge. There may be some moderation in input prices, but this will not be fully passed on to consumers. Margin compression is unlikely to disappear for at least the next two or three quarters.