Consumer Discretionary sectors should be considered as long-term potential investments, Aashish Sommaiyaa, CEO of WhiteOak Capital Asset Management, said in an exclusive interview with Moneycontrol.
Although one needs to determine if the surge in demand for travel will continue in 2023, sectors such as hotels and innerwear will perform exceptionally well in the long run due to their association with the likely increase in per capita income and GDP growth, he said. At this stage, it’s advisable to be cautious and not make assumptions based on what occurred in 2022, he said. Edited excerpts:
There is an intense selling pressure by FIIs and overall participation remains very tepid. How differently is your view of the markets right now since the hawkish stance pretty much remains the same in the US?
When we speak to investors as well as advisors and mutual fund distributors, we do find that there is some kind of indifference or defensiveness setting in, because if you see, in the last one and a half years, barring a few sectors or barring a couple of sector rotations, one can assume that client portfolios haven't seen any returns coming through. That is something which always causes people to rethink. We know that these are the times when things become cheap. But the reality is that because of the news flow and because of the last one and a half years of going nowhere, you can sense that people are on the side-lines, and you can sense that some kind of despondency is setting in.
Do you think financials will bounce back any time soon? Do you look at the sector still as a reasonably valued sector?
Last year there was data which said that for over $22 billion of FII selling for the calendar year, I think about 19 billion was financials and IT…
Financials and IT are known for good governance, known for professional management, much higher relative free float…
If you expect that FII flow is going to turn significantly positive in the near term, then it stands to reason that these sectors will at least see a lift… and these sectors will see relatively better recovery. But if you ask me, I don't think that anything is going to change in a jiffy as far as the markets are concerned. The reason being that, for example, last year we saw huge FII selling and that was largely related to global emerging market selling. And this year also we have seen significant FII selling…
I think two things are still weighing on the minds of the markets. One clearly is interest rates, and like the cliché goes, interest rates definitely act as gravity for earnings and multiples. So until there is clarity on interest rates globally, we are going to see this kind of indifferent movement that also impacts FII flows.
And second is obviously, geopolitics, [which] is not clearly behind us. So if you really ask me, in the next three to six months, you're going to see more of what you've seen in the last year or so. I don't think anything is going to change dramatically.
If you are a contrarian thinker, if you're a different thinker, then you will keep an eye on valuations and on price-to-free cashflow kind of metrics. And you will find that the market is becoming more and more attractive. But definitely one should not put any terms and conditions that the market has to bottom out. I don't see it immediately turning the course.
Which sectors look attractive from a valuations perspective on a contrarian call?
I'm not an expert at trading or at technical, so I won't venture there. But what I was alluding to was that if anybody has been on the side-lines for the last year or two, the next three to six months will actually be the opportunity to build your portfolio with the next 18 to 24 month kind of perspective because things are getting more attractive, things are getting cheaper.
We are not a sectoral investor. But if you were to ask me about sectors, then I will say that everything to do with financials, everything to do with private sector capex, everything to do with discretionary consumption. I know right now, it's under a cloud. And of course, parts of IT and pharma. So, I would expect some bit of sector rotation in the market. And the stuff which I named, which I think is becoming cheaper is what I would focus on.
In January, you suggested a lacklustre trend in the first half of the year and momentum in the second half. Do you factor in any more negatives to this commentary?
I don't think anything has changed… I mean, you know, nobody can really forecast these things. But at any point in time, whenever we are asked a question, we are just trying to do our best to get the lay of the land and then try to hypothesise what is the most likely probability of how things would play out.
So from that perspective, what we spoke in January versus what we are speaking now, I don't think anything has changed.
I still believe that nothing is going to change in a hurry. But yes, I will be more constructive once we have more clarity on interest rates, once we see something settling as far as geopolitics… at least there should be no escalation out there. I think once these things change, maybe in the latter half of 2023, I'm more hopeful, so I will hold that stance.
What do you make of sectors like hotels and innerwear? Do you think they are still value buys?
All market participants need to take some time and segregate how much of it was the post-COVID bounce-back or the clichéd pent-up demand, you know, because travel kind of came back with a vengeance…
I think we had obviously pretty much three waves of COVID and work-from-home and disruptions as far as normal life is concerned. So I think 2022, probably we all knew was more a year of bounce-back, and in 2023, because the question is more on a shorter term basis, so in 2023 we all have to figure whether this pent-up demand or this travel with a vengeance – is it going to sustain or not?
I would say you should be cautious and you should not extrapolate what you saw in 2022. Moving on to slightly longer – like two, three years, five years – I think these sectors are going to do very, very well because they are directly correlated with the potential uptick in per capita income and potential GDP growth and whatever economic prospects we speak about India…
But if you're asking me only about 2023, then I would not extrapolate what happened in 2022 and I would watch for sustainability.
The drubbing of the auto sector seems to be gradually changing now. What do you make of this space?
I would just say that you should not extrapolate the last three to five years… the trouble started from 2018. So if you go back to 2018, I think some of these things are totally forgotten now, that even before COVID, auto was in a kind of doldrums. Why am I saying that? Because 2018 is when oil went to $88. And after that, policies related to registration costs for vehicles, insurance costs for vehicles, introduction of Bharat Stage VI, all those kinds of things were already weighing down heavily and there were floods in some parts of the country in early 2019, if I remember.
And GDP growth obviously tanked in FY20. Even before COVID came, India's GDP growth was 3.7 percent. And in 2019, we even had a credit crisis where certain banks and NBFCs were in deep trouble. So all of those things impacted auto right through 2018-2019. And I think COVID came after that. So that was kind of a backbreaking event.
If you're looking at auto, and if you're looking at auto in 2022-23, and using the base of 2018, 2019, 2020, I think it'll be very, very misleading. So I would say that you should blank out 2018, 2019, 2020 when you're talking about auto.
Coming to the other important point. Now, you know, obviously, there is some rosy picture or there is some positivity and my personal opinion is that positivity should sustain. There are reasons for this. I think that if you see in the recent past, it has done very, very badly. And people have kind of lost sense of what ways to compare or what the real market size or what type of demand is actually shaping up. That's why people are getting surprised on the positive.
The other important thing to keep in mind is that there is this sense that there is huge spending on infrastructure and roads and stuff. And I think that would always get correlated with people buying more vehicles in the medium term. Again, I'm not talking next quarter 2023. But if you were to allow the liberty of say the next couple of years, I would say that the enthusiasm would sustain as far as the auto vehicle sector is concerned.
What do you make of the commodity basket? Vedanta has been in news for fundraising plans – there have been a couple of concerns out there. How do you look at the overall commodity space and Vedanta in particular?
We're not big investors in commodities, really. I think it has nothing to do with one individual company or one individual group. The reality, we feel, is that if we claim to be bottom-up investors and if we claim to hypothesise cashflows of companies, then I think forecasting global commodities is kind of slightly beyond the remit.
Of course, we do end up owning some commodities when we feel that there is big traction in the market, purely as a matter of risk control or as a matter of controlling deviation from our underlying benchmark. Tactically, we do end up owning sometimes. But on a fundamental or long-term basis, we actually don't have exposure to any global commodity. So that has been our stance.
Also Read: India has been and will always look expensive: Aashish Sommaiyaa
For now, if one of the prime concerns for the world is that we are going to witness a significant slowdown, then I don't see why there should be consistent buoyancy in global commodities. So, a lot of times I think it’s financial speculation, bet on inflation, bet on reopening in China, all those kinds of things from time-to-time result in financial speculation. But if you ask me, bottom-up, I don't see the sustainability of commodities.
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