After great returns from January to October, are we headed for a leaner part of the market, when it’s not likely to bounce back much?
I agree with you broadly but I don’t think there is any deep improvement going forward. There is a period of extended volatility and in volatile times, the absolute return will not be as good as it was before. I would still argue that equities as an asset class would be the best asset class to invest in relative to what is in the market, but from the lens that you put in terms of the January to October time frame, would it Is going to repeat in the next eight months? I doubt it, as there will be less liquidity with tapering across the board; An increase in the interest rate cycle will coincide with better news on the US economy. 2023 rate hikes will probably come a little further and that’s what the bond markets are telling us. But the Fed is still not accepting it. But given the uncertainty surrounding it, I agree that this is not the time to expect strong double-digit returns. What we might get is in the medium to single digits over the next few months.

So, in the next few months, there will be returns. It is not that we are reaching the era of no return or negative return.
While that has been the biggest concern for the market, a bigger concern for our market is the sharper-than-expected US as that is when the picture of interest rate hikes emerges. Given that there is good news for the Indian economy to be back on a rapid growth trajectory in the US, I expect market action and economic action to balance each other out.

I don’t see a long recovery period as there is ample domestic liquidity in direct equities from new age investors, buying mutual funds and insurance companies and others. The difference between the 2007-2008 correction when the tapering happened or the 2013 one is that there is strong domestic support from both the liquidity aspect as well as the economic news footprint.

Where to look for this as we get used to single digit returns?
I think security is no longer secure. Why I say this is what liquidity has done and especially in the FMCG sector, the safety aspect of earnings prediction means that their valuations for this safety factor, liquidity has always increased and stocks have risen. These are the stocks which are at high valuations and hence if they do not deliver the kind of expected growth that is getting attention, then there can be improvement.

I would say just saying FMCG, Healthcare safe zone is dangerous. So what is safe? What is safe is where the market has still not fully discounted future recovery, where cyclic come into play. There are now domestic cyclicals such as capital goods, infrastructure, cement, construction materials and consumer discretionary stocks, where I would also include consumer durables, autos and housing. It’s a relatively safe zone despite the cyclicality as I expect earnings to rev up. Valuations are still not fully reflecting their potential which is normal in a cyclical.

Likewise global cyclicals, where metals make a play, as do commodities and oil in certain quantities, which feed industries. These are also helped by the $1 trillion infrastructure bill being passed in the US and the return of US recovery on the demand side. We will again see the global cyclical game. So I would say that the global and domestic cyclicals represent a safe element, but one has to give it time to play. I would say this is a very dangerous time to invest from 6 or 12 months point of view. If one has such an approach, one should stick to the hybrid category of mutual funds like dynamic asset allocation, equity hybrids where they mix to soften the blow of volatility and at the same time get equity taxation . One can go back to equities when the time feels right. They are ideal as the capital gains tax is only 15% even in the short term.

So in short, I think the growth of the Indian economy is where the security lies because there is demographic dividend, the PLI scheme that the government is putting in place, pushing the infrastructure related to the government, which will be boosted with the coming budget. Because the government will make a lot of announcements around that place. I see it as a safety element, provided we have a medium term view on the market.

If you talk about cycles, where will the banks operate?
To me, financials represent three different facts. Corporate Oriented Banks and Retail Oriented Banks and NBFCs. Within NBFCs, I would segregate housing finance companies as a separate pack as opposed to normal consumer based lending.

In these three packs, banks are taking advantage of softer interest rates as they have a direct window to the RBI. The second aspect is accessibility. Whether it is a private sector bank or a public sector bank, no NBFC can match the reach of banks. I expect banks to be ahead of the curve compared to financials.

Financials are smart, quick turnaround on loans, quick decision making and this is where their USP comes in and in the non-bank financial sector, it is capital adequacy and brand and how easily they can raise cheap capital and stick to it There is outside who comes in.

The third are housing finance companies. Demand for housing loans will increase to maintain the top line, but there is a competition among housing finance companies to cut rates. Banks are now bidding at 6.5%, I don’t think NBFCs and housing finance can match that kind of rate, so they have earmarked places where their margins can be protected. Housing finance is an interesting place where the total volume will grow, the top line will have tremendous growth but if you come at the cost of margin, then in case of long term loans, one cannot raise money cheap 12 to 15 years today Is. So they are going to borrow at cheaper rates and expect it to roll over, but over time, the market will also know that their margins are going to go down as interest rates are going to go up. That’s the key.

Financials are not a blind call. This is a company specific call that I need to take based on all of these factors.