New highs are always exciting and scary: Manish Chokhani

“In every market cycle, at some level the market goes ahead anticipating earnings. If it doesn’t come, you will get a correction. I am not implying that this market doesn’t have a correction possibility already built in over there,” said Chokhani.

He sees a lot of disruption in IT and pharma, surely there will be big winners and big losers and it is not something that you can ignore. That is a space to keep an eye on but it is not currently going to be big money-makers, he mentioned.

Speaking about consumption basket, he said, consumer staples are a place to hide out but in the consumer discretionary space, there is money to be made there.

Some of the non-banking financial companies look scary in terms of how the markets are valuing them and given what is happening now with goods and services tax (GST) and demonetisation, there could be an air pocket there, he further mentioned.

Below is the verbatim transcript of the interview.

Q: What is next for the Indian markets since they are scaling these all-time highs?

A: New highs always are exciting and they are always scaring because you are now in uncharted territory, you don’t know where you are heading and because we haven’t had earnings coming through, you always have that annoying feeling in the pit of your stomach that is this real, will the earnings come through, if it does not come what happens. However, when you look at underlying trend lines, I don’t think for example the macro conditions for India have been better.

For 25 years I remember looking at India, you always made a bull case on micro that the businesses are doing well and the bear case always was we have a twin balance sheet problem, the current account is screwed, the fiscal deficit is screwed, and now you have this whole NPA issue -- there is always so macro uncertainty and yet there is always renewal in the market. New people come out, we just had for example Rajeev Jain speaking and he has gone from I don’t know Rs 300-400 crore market capitalisation to an Rs 80,000 crore market capitalisation in 10 years. So, there are always leaders who come out in new faces.

Therefore just because the whole index is at a new high is not a reason to say this is the end. In every market cycle you will find at some level the market goes ahead anticipating earnings. If it does not come, of course you will get a correction and I am not for a moment implying that this market does not have a correction possibility already built-in over there. Juxtapose that with the fact that money is just unprecedentedly cheap in the world, so, if you are running USD 13-14 trillion of negative interest rates in global bond markets, I honestly don’t know what is the true measure of valuation because historically I would have said if the market is at a 20-22 time earnings multiple, it is implying a 4-5 percent return on that basis.

However, is 4 percent and 5 percent the right metric in a world where money is available at 2-3 percent? Therefore while I am not suggesting again this is the right valuation, but it by no means is a top of valuation in a world where cost of money is so cheap. The reciprocal occurs also, when money becomes expensive, and we were used to 8.5-9 percent GSECs, at that time the bottom of the market should have been 12-13x and yet market does not recognise it, it does go below that as well. Therefore you will get both these extremes.

Q: In terms of themes, I know you are a bottom-up, you look at stocks, but you also look at the top-down macro picture very closely. From that perspective, any big theme which looks like emerging out of India in the next four, five, ten years?

A: Honestly if you cut India, we used to always do consumption themes and you do export themes and you do financials, and you do commodities and energy, stuff like that. So, if you think of the big pockets of money, that is where they are sitting. Currently the export theme because we have been so generic sort of either the pharmaceutical generic or the IT sort of generic worker, both have been under some crowd and the rupee looks like strengthening rather than depreciating. So, it is not a sweet spot for them to be making money today.

There is renewal to happen and there is a lot of disruption in both the spaces. Surely there will be big winners and big losers in that and it is not something that you can ignore. These are good managements and they have proven themselves against best in the world. So, that is a space to keep an eye on, but it is not currently going to be some big money maker.

When you look at the consumption basket, there are the staples, and then there are the discretionary which is more cyclical in nature. By and large the staples, I don’t think you can justify valuations given the volume growth possibilities over there. So, it is a place to hide out, but in the discretionary space, and largely people have been in auto or media, or stuff like that, there is clearly money to be made there.

You take area three which is financials, financials itself has broad based so much that while some of the NBFCs look really scary in terms of how the market is valuing them and given what is happening now with Goods and Services Tax (GST) and demonetisation, and what happens to the informal economy to whom a lot of these people lend, I think there could be an air pocket there whereas the market has been only focusing on the corporate NPAs, there may be some worries coming over there. However there would be contra trends and therefore opportunities to make money in that. So, lending is one basket.

However, then as you see, there are insurance companies coming, there are asset management companies coming into the market and so on. So, there are opportunities to do there. Similarly you have got in the last year two banks getting listed which have created wealth for shareholders. So, there is always opportunity.

The last of course is commodities where while of course in energy I have certain views on what happens to oil and coal in the long run, if you can milk that profit, deploy it into something sensible, there is still opportunity there because valuations are in your favour.