It’s good to see you smile, but when you look at the screen, the smiles disappear.
The smile was for the rain outside my window, not for the markets. Small and mid caps were quite hard hit. From December 2017 to date, although after March 20, small and mid caps have rebounded a lot, but over a period of almost five years, the small cap index is down 11% to 12%.
So it’s not a recent rout that small and mid caps have experienced, it’s a rout of almost five years and add to that the depreciation of the dollar. and in dollar terms, the small cap index looks even worse. So that’s what this space has been going through for the last four-five years and in that context, in that market, some pockets of value are starting to emerge. In the short term, it’s really not value that will drive the markets, it will be sentiment and we’ve seen volumes correct almost 50% in terms of market cap from volumes used through October 21st.
This tells us that there is a risky trade involved and now what is really going to generate significant value is the pace of capitulation where investors who are still holding out in hope that there will be a reversal for people basically come to market and sell. This is the current configuration of this market.
Aren’t we in capitulation yet? It felt like it was yesterday?
It made. Largecaps resisted. Small and mid caps were down almost 3%. He felt the broader markets were capitulating but the moss had to come out. The kind of easy money that much of the broader market has been experiencing, especially in 2021, which has made it feel like this market will only go up, is taking a while to correct. .
“ Back to recommendation stories
Anecdotally, last week I was talking to a woman who is a housewife and throughout the last year the way to make money for her has been to go long on futures and sell options. So on the one hand you make money in the future because it keeps going up and in the options you get your interest i.e. the selling fee. This kind of setup and mindset that it’s so easy to make money in the market and take risks without being impacted needs to subside. There is still a long way to go before that happens.
Give us two or three ideas where you think it’s time to be a buyer with value and a margin of safety on the investor side.
There are pockets like that and, of course, I don’t have a three-month, six-month vision. but I have a two to three year perspective, maybe four years. I think there is no choice for India but to indigenize its defense sector and there are some really quality companies on the defense side that have been languishing for a very long time. They’ve had some energy lately, but there’s plenty of room to continue over the next two to three years, maybe even longer.
The type of opportunity size or cake that these companies can take is substantial. Due to the unbalanced nature of our defense procurement, the growth track is quite large and there are lessons to be learned from the recent conflict in Ukraine where low cost defense equipment is very useful for the Ukrainian army. So that’s a pocket where I see a multi-year growth trend over the next three to five years.
Sugar is another area to address, be it food security or energy security. This sector absolutely plays in these two segments because on the energy side, there is the theme of ethanol and sugar on the food side. There aren’t too many big companies to actually look at in this space, but there are some very interesting quality names that for the next few years will see steady growth.
In our view, real estate space is on the cusp of a take-off. Last year we saw volumes increase and as the scum in this sector fades and interest from end buyers begins to increase, investors have followed and when investors follow, prices of l are increasing and it becomes a virtuous circle because with the increase in prices, more investors come in.
We are only at the beginning of this cycle. There is no need to play this through the developers. It can be played through the home builders and home improvement space. This space looks quite interesting and is of course the must-see space in the capital.
India is again on the cusp of an investment cycle that has significant legs. We are entering this cycle after a period of almost 10 years and it is not fading anytime soon. So the PLI theme and the capex theme that we will probably see in the next three to five years will also be a big theme.