investment strategy: Focusing on banks & commodities to beat the Street, says CLSA’s Vikash Kumar Jain

“This will be a year when benchmark returns can be more limited and so this is a year when one should focus on the right areas to focus on and that is essentially what we think about. The right areas we are focusing on are Banks and Commodities. The areas we don’t like are consumption and technology to some extent and that’s how our portfolio is located,” says Vikas Kumar Jaininvestment analyst india, CLSA,


It is not clear from the global cues of the market, selling of FIIs, inflation, where things are heading in the short term?
It is usually never completely clear. Maybe this time there are a few more obstacles than we used to. From that perspective yes, we need to be with them. If you look at the current market setup in India, the popular concern of most foreign investors is that India is very expensive compared to other markets and much of this can be colored by the fact that they compare it to EM benchmarks or Asia. are doing. Former benchmarks that have an impact on what happened in China as well as Russia.

However, even on an absolute basis, valuations are not helpful, but the way to look at it is if we look at it from a more bottom-up perspective – the Nifty is made up of 50 stocks and only one-fourth of them trade at over 50. are. % premium or where they are significantly higher. Nearly half of the Nifty is trading below its historical average valuation. There are still opportunities there. This is something that we have maintained since the beginning of the year. This will be a year where benchmark returns will be difficult to achieve but this is a year where sector rotation will be far more important and that is what we need to focus on.


The so-called long-running FAANG trade in the US has already reversed. What effect could this have on liquidity and emerging market equities?
This is not something that started yesterday. Many of these stocks have been corrected. In fact, in our report at the beginning of the year around January 4-5, we highlighted that over the past 20 years, the Fed’s interest rate cycle has changed and in both of those instances – for the first 50 bps increase and The first 100 bps increase – technology has very clearly underperformed banks.

Which has been going on since January. In fact, what people seem to have forgotten was before the Russo-Ukraine war began, the Nasdaq crash in January and, as investors digested the risks surrounding the war, they risked another big hike by the Fed. Came to the forefront of the discussion. , So rising yields is a reality, rising commodity prices a reality, we have to guide our portfolio through these concerns and look at potential winners.

Increasing yield is good for value, expensive is not good for growth. That’s why many technology companies versus its history are at a huge premium. We have been underweight in our focus portfolio over the past six months. We are focusing more on value. In fact, the PE of that portfolio is at around 40% discount to the Nifty PE. Clearly this tells us that we have great value in that focused portfolio.

Are commodity prices going to affect Nifty EPS? The two largest sectors that make up the Nifty—IT and Banks—have no direct correlation to the uptick in commodity prices. So it is largely FMCG and other consumption stocks that are going to be affected by commodity prices?
this is right. The report that we came out with and what you are referring to has taken a scenario that we do not fall into the critical third derivative effect of a large jump in commodity prices, leading to a massive slowdown globally. Until that happens, the impact on banks and IT will be very limited.

So far, we’re not really creating that kind of scenario. In fact, to some extent, higher commodity prices mean that working capital requirements may be higher due to higher inflation and this can be good for banks in terms of increasing working capital loan needs that are on a positive margin. could. So the direct impact on these is very less, but what is happening is that these commodity consumer sectors or those who depend on commodities as an input are facing many adverse conditions.

First, these are stocks that are at a much higher valuation than the market in general. The growing environment of the produce is not good for them anyway. Secondly, consumer confidence in India as measured by the Reserve Bank of India is one of the lowest readings we saw in addition to the bottom on COVID versus our own 10-year average or around pre-CoSID levels.

In fact, the 10-year average in pre-Covid or consumer confidence is the worst in India compared to other top 14-15 economies that we see. This doesn’t create a lot of confidence in demand anyway and ultimately it’s the impact on margins that can lead to commodity price inflation. Therefore, one has to be concerned about demand, inflation and margins due to commodity prices.

Finally, an increased yield environment can strike even higher multiples. So, this is a place that we are quite wary of. In fact, out of 13 stocks in our focused portfolio, only one is a consumption name and that too is a relatively high value name in the context of that sector. Clearly this is one place we’re not too sure about.

What should be the breakup of the portfolio and the liquidity level when the market corrects further or we get an opportunity to invest in the market?
Cash bidding is always more difficult in the portfolio we have, assuming whatever equity exposure one is willing to put in and how it should be allocated. However, having said that, if we look at the movement of the market and how much the valuation has increased, there will always be opportunities from time to time.

This will be a year when benchmark returns can be quite limited and so this is a year when one should focus on the right areas to focus on and essentially we think about it. The right areas we are focusing on are Banks and Commodities. The areas we don’t like are to some extent consumption and technology and that’s how our portfolio is located.

You energy. We have started seeing a comeback in Reliance’s stock. Green hydrogen is being seen as a big game. We can see what is happening on that front with the Adani Group as well. What’s your point of view?
I really don’t want to get stock specific. I continue to track energy and the key driver over the past 10 days or so has been an uptick in refining margins and that has helped many other refinery stocks and even groups that have refining businesses. Huh. So, that has been the driver for the recent stock price which is suddenly an area that was not really a big trigger but has become a trigger.

You said you still prefer financial, we have seen what happened with private sector lenders, there is also a rotation happening. The momentum is now coming with shorter names. Is there anything that you guys like?
At this juncture we still believe. So, maybe you can break it down into three or four sub-buckets. There is a more retail type of bank which was doing well even before 2017-18 anyway. Then these were corporate private banks and also small banks and finally PSU banks. We are focusing more on large corporate banks right now and that is where we are comfortable. This could mean even among large PSUs but we are not yet confident enough to go further down on this.

We don’t even see the need because we still see substantial opportunity on the larger corporate side of banks as many of these saw fairly long de-ratings through a large part of the last decade when there was a long balance sheet deleveraging cycle. that they were passing. It’s really kind of average reversion, because the worst part of that balance sheet concern is behind us and their performance is clearly improving.

On the other hand, there are some retail banks which have become very expensive and are seeing some kind of possible reversal in their valuations. There are so many big corporate banks that we love.

While banks will benefit as the income and credit cycles begin, the working capital requirement will become higher due to higher commodity prices. But ultimately if interest rates rise higher, it will have an impact on demand. If demand is low, it will affect everything. How far are we from the lack of demand?
There are several indicators that are not very encouraging. For example, we have already seen the inverted yield curve in the US. Typically, these have been indicators that we are in a serious growth slowdown. However, what we have generally observed is that it has taken an average of one and a half to two years from the time this happens.

So, maybe we have a little more time before that happens, but if we also look at commodity prices and historically a broader position is that if the spike reaches certain levels, it will be bearish as in That was in or in 2008. ’70s. We have not yet reached that level on various parameters. If we look at where global GDP is, there is probably some other way to go before we reach that point.

But yes, after all in a situation where all the central banks are going to be tough, it is not very easy to do a soft landing with that and hence it is a clear medium term risk which one cannot ignore. But my personal opinion is that we are still a few months away from becoming a major risk to the markets.

(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent the views of The Economic Times)

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