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    Big action seen in 6-12 months as profit, economy and credit cycles catch up: Madhav Dhar, GTI Capital

    Synopsis

    “Earnings explosion coming over next 18-20 months and maximum upmove will be in cyclicals.”

    Madhav Dhar1ET Now
    It is frankly a testament to how big and powerful the upmove has been in the last two and a half years that we are thinking of a 5% correction off the top as a big buying opportunity.
    In an interview with ET Now, Madhav Dhar, Managing Partner, GTI Capital, says that there is not enough pain in market for a meaningful upmove. For the market to go higher at 22 times earnings, either more fear or tremendous positive impetus is needed and both are absent.

    Edited excerpt:

    The last time we spoke, you said this party is going to go on till the wee hours of the morning and we are nowhere close to an end. Now post budget, with LTCG tax, redemption coming in mutual fund inflows and crude getting back to $72, things are looking a little toppish. Where are we right now in the party?

    Sometimes you are bullish, sometimes you are bearish. Right now, I feel sort of sheepish. On a serious note, one of my concerns late last year was that there were two forces that were colliding. A) Very high valuations; and B) trade friction. Also the leaders in global market -- FANGs (Facebook, Amazon, Netflix and Google) who one thought simply could not go wrong, ran into regulatory hurdles.

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    There have been speed bumps on both those issues which is trade frictions in general, particularly with China and the regulatory reaction to Facebook. As a contrarian, those things have always worried me. Both those big factors are unfolding, which is trade and regulation of some of the most beloved and most over-owned stocks.

    I do not think that is a good combination. What India has in common with the US is that interest rates are not going down, valuations are high and there is no real reform momentum. On top of that, the long- term capital gains tax was obviously a negative.

    On the other side, there was a two-three months of sideways drift, maybe a 10% correction that we are bouncing from.
    But my gut says it is not over. There is not enough pain which I think is essential for a meaningful move to start over. That is my best guess at this point.

    From the February-March lows, we have seen a rebound in the index. But it has been a very selective move in IT, metal and consumtion stocks. For the index to scale up higher from here, do you think the leadership is going to remain with these pockets or is it going to be across the board?

    I do not know. I do not think the correction is over yet. The path of least resistance is actually down but I think you could have a change in leadership towards more economically sensitive areas and one of the indicators that I have followed for 30 years is looking at Australian mining stocks relative to Australian financial stocks.

    That has always been an early warning signal of a trend change and I have liked infrastructure, cement and commodities is because of that. I think a trend change is going to be seen. PEs are as high as they are going to get and the move is going to be growth related. If it is going to be growth related, the economically sensitive areas around the world will do better which is why Brazil and Russia and those countries have had the kind of a huge move in the last two years.

    Within the sectoral area, you are seeing a transition where these stocks end up outperforming the big consumer multinationals and some of the other areas including the regular banking financial stocks.

    The typical way to invest is to look for bad news. There has been a lot of bad news in Indian banks. PSU banks as well as private corporate banks have corrected. Are you fishing in some of those old banks where right now news is bad but maybe price is getting better?

    Ideally what you want is bad news to affect the overall market and then buy the good stocks. Right now what has happened is that the stocks where the bad news really is have corrected the most and one of the areas where this kind of contrarian thinking is dangerous is in banks. Anytime something is leveraged like Punjab National Bank, it is not enough to buy cheap value because in a bank cheapness can go to zero and can go to bankruptcy which it cannot with a company that has underlying assets.

    I am willing to buy Russian mining stocks that were bombed out two years ago but it has assets. I am less willing to step up to an opaque balance sheet in a levered bank like Punjab National.

    Just like during the financial crisis in 2008-09, the banks had exploded and everything went down with it. Once that happens, you can buy anything. You do not have to buy the banks necessarily.

    What has happened now is that the things that have gone down are selective, things that have gone up are selective and the market net-net is only 5-6% off its high.

    It is frankly a testament to how big and powerful the upmove has been in the last two and a half years that we are thinking of a 5% correction off the top as a big buying opportunity.

    This makes me queasy, especially when interest rates are rising both here in the US and there are trade frictions and there is a long-term capital gains tax.

    We have had a downside but I am not sure that you have had enough of a pullback to really create a generalised fear in the system. You may have fear in PNB. You need to see generalised fear and a bit of a give up. We have not seen that yet. For this market to really go meaningfully higher at 22 times earnings, you need either more fear or you need tremendous positive momentum on the economy and I see neither at this point.

    Two years ago you said consumer companies are great companies but those are ridiculous prices at which they are trading. In last two years, the PE multiples have expanded further. Forget about buying these stocks, somebody is actually chasing these stocks?

    Again, that is late cycle behaviour and frankly these companies over long periods of time have been great investments. I am not suggesting that you have to be crazy to buy these stocks at 30 times earnings because they have proven that the valuation does not compress much and the earnings compound reasonably well.

    I would not make a big point about bad mouthing these companies as investments. I just do not think they will make you rich. A lot of money has been made and they never tend to go down very much. They may go sideways, then go back up.

    That is where the big action is going to be over the next two-three years. Big action is going to be seen as India’s profit cycle and economic cycle along with credit cycle starts to accelerate. Unfortunately, it is probably six months to a year out as we clean up the banks. That action will be a little more cyclical in the commodity area.

    Life insurance, housing, housing finance, road building, constructions, steel are all cyclical. That is where you will get a bigger move rather than playing it ultra safe in the big well known as high quality consumer stocks. I still believe they will underperform.

    If you are expecting the safe bets to underperform, would not that lead to rather than booking profits or going off them or doing a tactical shift like reducing allocation in a stated portfolio and increasing allocations to potentially high alpha generating opportunities?

    Again it depends on your risk profile, depends who your audience is and I am not a trading oriented person. I am just saying that if you are a typical retail investor looking at this show, I stay with those companies and you should forget about it and go about your business. I never want to sell India. I just think that this is a 15-year story and so every significant dip in India is a buying opportunity.

    By the way I felt that since the first time I invested here which was in 1986 and frankly it has turned out to be vaguely right. It is a big structural move up and even now when I feel indifferent and think things are not that great, I would never aggressively sell down. All I am saying is there is not enough compression to load up in general and I were to load up in general, it will be a little more in the cyclical area in the earning sensitive.

    There is an earnings explosion coming over the next 18-20 months and the cyclical aspect will have a greater upmove.

    Cyclical rallies tend to last only two-and-a-half or three years whereas structural rallies last much longer. So if you are more risk averse and playing the odds, you should buy the big consumer plays.

    You should buy HDFC and just forget about it and those are good solid plays. But if you are remotely in the competitive game of trying to beat the markets, the odds are little higher in some of the areas that we are talking about. But it is a riskier game because cyclical companies are lower quality by definition and are also more dependent on the economy doing well. But that is the game we are in in terms of trying to predict when the odds favour taking those bets.

    I guess I am going out on limbs saying that at the margin the odds favour taking those bets. But the whole thing is going to go up from lower levels.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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