“We will see in the next six to eight months if the interest rates keep going higher, markets will continue to struggle. In this backdrop, when you look at macro factors there is nothing else that you can point to which could stem this fall because inflation is still a concern, raw material prices are high and inflation may come down but for the next two to three quarters, margin pressure will remain on the companies, so corporate earnings are not going to improve,” says Rajat Sharma, Founder & CEO, Sana Securities.
Have you been a buyer in this current decline or are you just sitting out and waiting for the poison to get out of the system?
Broadly, we have been sitting out and the stocks we have more of are
, , and essentially energy stocks. Consumption is a theme which I have really started liking since the markets have turned and these companies where raw material prices going up could be passed on to the end consumers, which have no debt and companies that can pass on the increased cost to consumers – the basic goods companies have started looking attractive.
Having said that, broadly, I have still been sitting out. Honestly, if you look at why the markets are falling, I am clear that the reason is primarily the upwards interest rate revision. If you think about it, from February 2020 till May 2020, interest rates were revised down from 5.15% and credit became cheaper by 22%.
Keep in mind that the year before that from August 2018 to about August 2019, they were already reduced by 17% from 6.5% to 5.4% and in the last two-four years from August 2018 till about March 2020, interest rates were reduced by at least 40% and since August 2018 we have not really seen any upwards revision in the interest rates.
Markets did not immediately go up within a week after the interest rates were revised down, it took a year for markets to like to rocket up to 18,600 levels on Nifty. In the next six to eight months, if the interest rates keep going higher, markets will continue to struggle. In this backdrop, when you look at macro factors there is nothing else that one can point to which could stem this fall because inflation is still a concern, raw material prices are high. Inflation may come down but for the next two to three quarters, margin pressure will remain on the companies. So, corporate earnings are not going to improve.
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The Ukraine-Russia war does not seem to be ending and the OPEC nations have even more power to control oil prices. The demand is growing, and the supply is controlled by a group of nations. Russia is the second largest producer of oil that is banned from supplying to most countries and higher crude oil prices can never be good news for India. So, at a macro level, no matter how I look at it, I cannot really reason why markets will go up substantially from these levels, so I have been sitting out. I have made this point for about eight to 10 months.
What would be your outlook when it comes to ? It continues to be pounded day after day. The shares are now staring at a relentless cut of nine straight days on the trot. It is a far cry from the issue price of Rs 949 apiece. Though fundamentals are strong and a lot of analysts had said that it is a quality stock to be in, if you have a risk appetite for the long haul, is that assessment now getting challenged?
I can only talk of myself and a couple of days before LIC IPO was to open, I said I am very negative on the stock because I do not know how you look at fundamentals but from my perspective, the fundamentals of LIC are weak. And I will tell you why I say this. This company has come to market when its business is completely matured. It is constantly losing market share to the likes of and ICICI because their products are unique and those companies are far more advanced in terms of coming up with fewer money back and endowment plans.
Two or three days before LIC was to list, I said we have a business vertical where we do distribution of third-party products, we have seen more and more investors and insurers looking at the likes of HDFC which is constantly gaining market share and ICICI, and shunning LIC because the IRRs on the policies of these private players is higher.
So, how can a company which is losing market share to private players have strong fundamentals and beat stocks of those companies which are anyways underperforming? I really do not see why you would expect it. I am not surprised the stock is down about 25% as of today.
If you look at the last one month since it listed, in fact less than one month and I do not expect any significant jump up, maybe the stock goes down another 10% and bounces back or maybe it bounces back 5-10% from here, but that is not really a reason why you buy a stock; you buy a stock because you feel for the next many years there will be growth, the stock would double and triple and quadruple, I do not see that happening, it is a completely matured business, there is nothing in LIC, no reason to buy it or hold it.