Bury Consumers & Hail Industrials?
Now that markets have rallied sharply, the consensus view on the Street is to exit expensive consumption names and buy solely into the beaten down sectors.
October 22, 2012 / 11:50 IST
By Sandeep J Shah, CEO of Sampriti Capital
I had argued in Moneycontrol column dated March 28, 2012, that though the Nifty had made a firm bottom at 4500 levels in December 2011, 'What could turn the bull to ..test the bottom again? .. besides a high fiscal deficit, recalcitrant inflation, a weak rupee, .. slow movement in government machinery could make the market crack below 5000 again but hold higher than the .. low of 4500 '. The market went below 5000 to 4700 levels, above 4500 as argued. I had also said that 'the Great Consumer Bull Market which began in 2003 is to continue for many more years to come'. Consumption stocks have had spectacular returns even after the April column and the strong returns last year. Even the hope of the Industrial Bear Market being over was met.. 'industrials might correct sharply once more but perhaps not back to the abysmal levels of 2011'. All the major indices representing this sector cracked but fell short of the 2011 bottoms – the BSE Capital goods, Property, Power and even the NSE Infra index. Now that markets have rallied sharply, the consensus view on the Street is to exit expensive consumption names and buy solely into the beaten down sectors. Would like to remind new found bulls that the FMCG Index has made a new all time high of 5509 on October 1, 2012, even after the measures announced by the Govt. In September ! Some of these FMCG, pharma, banking stocks are 'high growth companies' that continue to grow earnings even in a downturn and should be classified as such and not purely defensive.The Great Consumer Bull Market will continue with corrections.Unless stocks are obscenely overvalued or earnings likely to decline sharply, would recommend to stay invested. We are far away from a bubble, which is a possibility at some time. IT stocks were trading at 100 P/E before the bubble burst in 2000. The most expensive bellwether consumption stock, HUL is trading at 35x FY14.. and HUL has traded at 50x in the past, without any apparent bubble. HUL like many other consumption stocks, has high ROCE/ROE's and sustainable earnings that justify high valuations. Smart investors hold on to their winners even as they let go of their losers just as a businessman restocks fast selling products and puts a fire sale on slow moving ones.Though I had argued at lower levels, that the Industrial Bear Market was over, it might still not be prudent to go headlong and build a pure high beta portfolio. Instead, nibble into the quality stocks in these sectors and interest rate sensitive consumption stocks. Even though the Govt.'s recent & future measures are likely to lay the foundation for a strong long term bull market, it might be a few quarters before the measures start impacting earnings. The govt. inactivity had only accelerated a normal cyclical downturn caused by an a synchronised global slowdown. Cyclical factors like interest rates,etc will also have to trend lower before we have a sustained uptick in earnings.The Govt. actions might not make consumers buy more cars tomorrow even as it might coax entrepreneurs to reconsider investing in this country. Neither will this quarter's earning suddenly rebound even as YoY decline has been arrested and ex-commodity margins have bottomed. Companies have been cutting costs so as sales pick up, profits will surge. However, the IIP nos. as well as the HSBC PMI numbers do suggest a bottoming out of manufacturing with excise collections too rising over 20%.. only partly due to increase in excise rate. Of course more is needed.3 major engines driving equities are firing with constraints, something I had publicly pointed was possible months back..even if ECB is doing only sterilized bond buyouts and the Fed is only buying mortgage backed securities and the Indian Govt. may find it difficult to push through legislative reform, one can continue to hope for more administrative action. However, we have a 5-month window till the Budget, before the Govt. dons it's populist colors again. The fisc could again rise next year. Amongst others, The Food security Bill will require a large outlay.Even as all the bears run into hiding amidst forecasts of 7000 Nifty ..For now am sticking to my 3-month old shorter term market target of 5800-6000. It will be worth then to review whether inflation has fallen faster & whether the Govt. has been able to take stronger steps to revive investments,financial savings and cut the fisc. If not, a small correction is possible, even upto 5200-5400 levels. Keep an eye out for European politicking too.However, even these purely administrative measures taken by the Govt. will help build the foundation for a longer term bull market with a revival in the investment climate. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
