Not the time to be contrarian, wait for 3-6 months before buying: Vikas Khemani

“If you are fully invested, don’t panic and sell out to create cash in a big way. I do not think that is a wise idea or smart idea. If you are sitting on dry powder, take your time over the next few months to deploy. Do not be in a hurry,” says Vikas Khemani, Founder, Carnelian Capital Advisors.

I am sure you must be telling your dealers that markets are down, buy right now! No wonder, markets have recovered.
I wish I had so much money that I could help recover the market but yes, I believe what you say.

There is a long list of what has gone wrong, what will go wrong. My question is why should one not sell and why should one not panic right now?
That’s very simple. Right now, we are seeing worry, fear and panic all around us. There is merit in all of this but things which are relevant for the US may not be relevant for India. In a shorter term yes, of course, markets drive sentiments across the globe and we will see implications even in Indian markets, specifically in a shorter term.

But remember, the US is sitting on 8% high inflation while their usual inflation is zero percent. India is on 6-7% inflation, our usual inflation is 4-5%. In the US, the housing rates are around 5.5%, in India we are at 7%. Today, US is sitting on an all-time high balance sheet. In India, our leverage is hardly anything – be it at company level, country level or government level.

So the dynamics of both the markets are very different. Of course, when something happens in the US, it has implications all over the world and that is what we are feeling at this point in time. But if you overlook what can happen over the next three to six months – Fed will increase the interest rate by 75 bps, 100 bps and they will pull out the balance sheet. But the US or Fed has to worry about how to control their damage, how to have a soft landing. They also do not want to create a crisis situation.

So I am sure while markets are expecting very big impact, some sort of countering will be done within the US. So, some sort of soft landing is possible. From India’s perspective, we are very differently positioned this time around as compared to the last Fed cycle. Last time, when the Fed started raising interest rates, our current account deficit was 4% of GDP, our domestic flows were not as strong as they are today.

Despite such a large outflow from Indian markets, we have been still holding on and that shows the robustness of local money. That was not the case last time around. Our investment cycle has begun, our banking system is far more better placed, manufacturing as a trigger was not there but is there this time around. If one combines a lot of those factors, India’s structural growth story can be the best in the world. I do not think there is any other market which offers this kind of growth story.

In a shorter term, all these things will be questioned when fear and panic is there. But in the medium to long term, we are seeing that in the middle of the fear and panic, lies the opportunity. I do not think in the middle of March 2020 or April, May, June, anybody could see any positive coming through. Negatives were all around us. When I am saying that the markets have bottomed out, markets cannot go down, all I am saying is that a large part of the damage is done. I do not see a situation where markets can sell off in a major way from here on.

Another thing is markets always sell off when there is a big short value and which is partly what we are seeing now. Currently leverage positions in the markets are low. The expectation of the worst is probably more and if those kinds of things happen, I personally feel that the sharp cuts are very hard to combine in this kind of situation. If panic does not happen when you expect panic, panic happens when you do not expect panic and which is what has partly traded out right now.

I think that in the next three to six months one can build a great portfolio vintage because long term fundamental stories do not change. They remain as strong as they were before. Yes short term demand disruption, growth slowdown can happen for a couple of quarters. But when one is looking to value equities from a terminal value perspective, long term growth perspective, a few quarters of slowdown can be adjusted and that has been partly factored in the pricing as well.

As risk unwinds and we have seen how when the deleveraging starts everything just gets hit. If the world is not deleveraged and we know that in the short term, compulsions are at play, how does one prepare because it is very disappointing to see that for most of the investors the Covid gains have gone?
The point I am making is I do not think Covid gains could have gone but for people who invested in 2021, definitely those gains have gone and some amount of bleed probably also would be happening but if somebody invested in 2020, he would still be sitting on a decent amount of gain.

In investing, vintage decides a reasonable part of your return and if you are buying among fear and panic, you come out well over a medium to long-term perspective. But in times like these, there is no point in being very brave and say that things have kind of bottomed out and should start. Things are still yet to pan out, we have to see how far the interest rate raising cycle in the US can go, where energy prices will settle down. So rather than just being a contrarian out here, I think the next three to six months would decide. Let us wait for the situation to settle down and then buy.

If you are fully invested, don’t panic and sell out to create cash in a big way. I do not think that is a wise idea or smart idea. If you are sitting on dry powder, take your time over the next few months to deploy. Do not be in a hurry. But I do not see a situation where one should sell off and go away.

If somebody does want to deploy cash and if your clients are saying that they want to buy into fear, where are you seeing pockets of opportunities? You have been talking about banking and auto for a while now?
Yes, it will not change. Banking in my opinion again is a very good opportunity. Once the fear settles down, you will see it doing very well. A mild interest rate rise sort of helps them and we are just beginning to see credit picking up so banking looks very good.

Automobiles, is a good trade which is building in especially from the recovery of volume perspective. We know that because of the semiconductor chip shortage, demand and growth has been muted but 2023 could be a very good year from that perspective.

On the manufacturing side we continue to remain bullish on many stocks and some segments have corrected 25-30% or maybe even more. They could be very interesting opportunities to look at. Even within IT, I feel that pockets of opportunities are very strong. Stocks have corrected and come into mid teens to high teens kind of a valuations and growth environment has not ebbed yet based on whatever commentary companies have been giving,

It is not discretionary demand and is likely to continue even if the US were to slow down. A sector like that, offers a reasonably good cushion in the portfolio. So, I remain very positive from a medium to long term perspective. We have to navigate the next three to six months; one should not panic.

Have you used the recent dips to buy into stocks? The last time you told us was about JK Paper?
It was a while ago but we keep looking for ideas. Right now, we are sitting on some amount of cash and we will deploy it. We have still not deployed and are waiting for things to settle down and a little bit of clarity to emerge rather than be contrarian and brave at this point in time as things are going to be fragile in the next few months.

We will buy in dips at some point in time, we are ready with the thought processes, ideas but we are still 85-90% invested and so if it rebounds, we will definitely capture the rebound but deploy part of what we are holding now over the next few months.