The valuation smash continues
Doesn’t really need an explanation, does it? You’ve seen this in the Q3 earnings, any business that was trading at premium valuation and disappointed on earnings saw a steep sell off. The market today would rather pay 20 PE for a cyclical business that is in a good cycle rather than pay 60 PE for a high quality business that is in a not so good cycle. Looks silly over the long run? Maybe, but we’ve just gotten started with this narrative.
This can run much longer than people expect it to; especially when narratives come back into vogue after a long hiatus (5+ years). Those who did not pivot into domestic consumption pockets after 2010 suffered for the next 5 years. They didn’t need to be very early, they just needed to participate once the trend revealed itself. Will the coin be flipped this time around?
Economy facing sectors like Infra, Capital Goods, Engineering and Govt capex driven pockets have cried wolf many times in the past decade. Every time investors thought the capex theme was coming back into vogue, it turned out to be a false start. Will this time be different? One should stay open to all possibilities.
YTD has been good for the portfolio on a relative basis, the FY23 YTD outperformance over the BSE 500 is > 5% right now. This follows up an year (FY22) of underperformance, on a 2 year basis we are back to being slightly ahead of the BSE 500. Since inception it is still a no contest (in a good way) with respect to both the BSE 500 and NIFTY 50, we are also beating the midcap index while trailing the
small cap index by a small margin. We hit the first 10 bagger in the portfolio recently. Flat markets have typically been my most fruitful periods in previous cycles too, this is when we get to take a step back and calmly observe how the market is pivoting. If the portfolio positioning is on track, the alpha only increases as the next up cycle picks up pace, whenever it does
Our analysis of Q3 earnings indicates that inflation is starting to seriously impact urban discretionary consumption. What started with the rural market is now making its way into the urban markets too. Barring the luxury and affluent segments, concerns are being voiced across categories like durables, footwear, garments & QSR.
The 1 year FD rate has already breached the 6.5% mark, with deposit growth lagging credit growth for many banks the race to garner deposits is firmly underway. Global markets and central banks will not be able to provide too much clarity on interest rates until the inflation trajectory becomes predictable, which may not happen soon. Don’t be in a hurry to call a peak and front run interest rate cuts.
Tech pockets are pruning the excesses built into the system since 2015. When a sector bull run sees a climax move, the sector often takes many years to come back into vogue as a stock market leader or as a hiring leader.
Investment bankers were the hottest commodity in the 2003-08 period, they still haven’t gotten that kind of air time even after 15 years.
L N Mittal was the most famous person of Indian origin during the same period, no newspaper has written much about him for more than 10 years now.
Dilip Shanghvi was the most followed Indian businessman in 2015, he is yet to receive that kind of attention even after 8 years.
The markets and media will build you up and move onto the next shiny toy overnight once the trajectory slows down. There are some 30 something folks at Bangalore with the kind of swagger that Ambani himself would be astounded by, all because they haven’t seen a mini career crisis yet. On a long enough timeline, everyone will go through a challenging period. If you’ve been a beneficiary of the tech boom in the past 6-7 years, don’t take it personally if the next few years aren’t that lucrative. In markets and in employment you don’t want to desperately chase a late cycle trend. It is a LIFO queue that gives you minimal time to course correct once the music stops.