There are no positive triggers in the market, and only on the back of the income do we see some pockets moving. So in that sense we also show a little resilience. But when can markets really pick up a direction from now on?
Devang Mehta: There has been a fast and furious rally in the last three months since mid -April. In April, May and June it was roaring and in the past three four weeks we saw a little consolidation, a mild correction also happened in this market. Are there triggers for the market to go up? One is of course the American tariff situation. The second is, as we always say that the market is a slave of income and we go through that profit cycle, the last 20-25 days have been a result-tough period. Individual companies respond to individual figures.
Also in sectors there is a lot of polarization in terms of the number that one company is good, and another company that is not so good. People look at the management commentary and body language. This is good for the health of the markets. This consolidation happens. The macros are still good for India. High frequency indicators indicate a little delay. But on the positive side the rural consumption seems to have reflected back, the monsoon is good, inflation is coming down and the RBI has a speed reduction.
Macro Plus microcominatie would therefore play very well in the longer term. There may probably be a little consolidation in the next or two months that is now taking place on the market.
The FOMC corresponds to the outcome and more than that, the comment that comes in from the FED chairman Jerome Powell about the interest rate scenarios can be very important triggers. Then we have the credit policy in India, where we should pay attention to the interest rate scenario/ what is your opinion and how do you see the markets turning out?
Devang Mehta: It is clear that there is not much expectation at the moment on the speed reduction, because most of the markets and in particular seemed to have on the global side. There is still much monitor for the FED chairman, because the US decides the process on the tariff front for different nations and there is some uncertainty about the global front – whether it has been the US, Europe, and on the Chinese front, a little worldwide uncertainty in the procedure.
Markets in most of these regions, however, are doing well, especially in the US, new highlights are probably affected every day and that is a different part. But returning to India, the RBI governor has done something smart by loading the speed reductions, the 50 BPS that lowered the last time was a surprise for many people, just like the CRR-Cut that improves the measures on the liquidity side, whether it is also done by Omos in the last four months.
The situation in India at the moment on the overall liquidity front is good. Even on the front of the market it is not as bad as it is depicted. Probably with people who come from the countryside, as the RBI reported, will improve things when urban consumption bounces back and the festive question returns.
We arrive in the festive season: August, September, October are tough in terms of all the festivals that India has. My feeling is that the question will come back, even on the urban side. RBI has loaded the rate reduction in the front and therefore there are not such expectations, but it will be a pleasant surprise for the market if another 25 bp is cut in the next three months.
With Trump announcing a rate of 25% on India, where should be placed?
Devang Mehta: We have been very vocal and clear in the past quarters and even a few years that domestic targeted themes show many promises. India is always supposedly categorized as a back office for the world and I make this point quite often, we will probably be a springboard to become a small factory for the world. I am not saying that we are going to become a production or an engineering giant, but whatever we see in terms of production growth and engineering growth, in terms of the Government Capex, in terms of approaching private Capex, is positive. I don’t recommend anything, but L&T figures were fantastic with 33% order book growth, about RS about 95,000 crore of orders fleet in the past quarter. If you store that for which these orders are, look at each sector, look at electricity, look at renewable energy sources, look at energy, most of these sectors will continue to do well.
Many micro sectors or themes that are now outside the index and are not part of your regular indices, where there is a lot of value, also in the financial data. These are domestic centric themes, whether they are NBFCs, whether it is wealth management, whether they are depositories or intermediaries in the financial room. Another theme includes a large number of Capex -related sectors and a little discretionary consumption. In my opinion, financial data are part of discretionary consumption and Capex-oriented themes must be the central part of the portfolio where exports are a very small part or even ignored until the worldwide situation improves.
What is your core investment philosophy? What should be the strategy at the moment to create a portfolio?
Devang Mehta: The core of our investment philosophy is something that has stayed with me for quite a long time. There are things that I usually look at. Firstly, everyone talks about Bottom-up investing, which is fantastic, but one must also look top-down thematically and which are the sectors where opportunities or industrial size grows. Or his ideas that you think an industry will grow 3x, 4x, 5x. So the opportunity size becomes huge. A part you have to look at is where there will be phenomenal growth as an industry. You cannot buy companies in the industry that are aged or where there will be no future traction. So a part is that it must be a huge 2x, 3x, 5x, 8x, 10x types of opportunities.
The second is when you find that the size of the chance is huge, you also have to unsubscribe where there is perfect competition. What does that mean? It means that you have to be in companies with a dominant market share. Believe me, you don’t just need larga caps for this. Yes, there are certain larga caps, but there are also good middle and small caps where the opportunity size is huge, where your market share is also high. There is a kind of oligopoly, duopoly, monopoly type situation here that leads to high price force, a canal. These companies have inherently high intoxes and roces.
Third is something that I am loan from Warren Buffett’s dictionary that speaks about safety margin. In simple words, it is stress-corrected return with a very good night’s sleep for everyone. You will probably sleep peacefully at night if you buy good quality companies, if you buy companies with a good corporate governance, with good root, roces, no guilt or low debts, and companies that grow with a certain percentage. In this way you know that the business model would survive for the next three to five years that will be very disruptive.
So these are the three investment philosophies. I can continue, but most of the time these are three stepping stones that one should look at.
What are these companies that give you a good night’s sleep?
Devang Mehta: I would not talk directly about companies, but certain sectors or microthemas that I have discussed are clearly ahead. These are companies in power automation, engineering-based companies that have a production theme and are of air solutions. There is a sector called liquid insulation. There is cryogenic equipment as a sector. Port seems like a good company, especially port infrastructure companies. These are companies that are more about Capex, Production, Engineering, Plus certain companies in financial data that are depositions, which are financial intermediaries and are asset management, AMC type companies. These also include companies involved in discretionary consumption, usually related to travel and tourism, perhaps hotels, perhaps luxury from the top of the type of consumption. Not all jewelry companies, but certain companies that are fantastic in terms of growth in jewelry and that in lifestyle extension of ambitious Indians who want to get up the curve.
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