India has always been a bottom-up stock pickers’ market: Nitin Raheja

“It is not unrealistic to see this year as a year where fundamentals catch up and there is a valuation de-rating. It started last year and may continue for some time. But that could very well set the ground somewhere in the next six months for the next round of equity returns to start taking place,” says Nitin Raheja of Julius Baer Wealth Advisors

What about HDFC twins? Stark underperformance last year, do you expect things to turn this year?
We have always believed that this stock has seen a tremendous amount of de-rating led by some internal issues, including growth and technological issues. I think most of that is now behind us. The only key issue is in terms of the merger and there are some issues with regard to the deposits, CASA and so on, so forth. Clearly, from a valuation perspective, it is very attractive, growth coming back on track. And, I just think that the premium at which it is traded is also gone. So, they are looking quite well poised.

Metal stocks went down a couple of days ago on fears of recession. Now metal stocks are coming back on excitement that China is making a comeback. What is the right picture: Are metals in a bear market or a bull market because the price action this time has not been very linear.
Well you know both statements are true. So yes there is this fear of recession, which we have not yet seen but it is sort of expected and you know stocks try to price that in. However, more in the short term the absolute unexpected response that China gave in terms of opening up and then complete opening up and you know going away from a zero Covid policy.

And, of course, the kind of slow down that they have seen, there is an expectation that there will be some amount of stimulus. So, while the whole world is trying to contract or banks are trying to contract, China could see the reverse. And China has been one of the major drivers of metal prices and metal consumption in the last many-many years. So China may come up with a stimulus package to sort of revive the economy and may see consumption go up — I think it is not unexpected. One should not be surprised to see a strong demand for metals and prices remaining elevated. However, I think this is not a multi-year bull market if you were to say, because you know clearly I mean the global economy is also at the same time slowing down and there could be a recession. So I think metals are going to be sort of trading in a sort of volatile range. But I think the important thing is that in the short term you would see some amount of buoyancy in prices as well as demand.

Markets in the last one year have given absolutely no returns, they have underperformed. State Bank of India’s fixed deposit this year is giving you 9% return, bond markets are likely to give you 9 to 11% returns because interest rates will go down. From the current level, if I look at the estimates of CLSA, Goldman Sachs, Jeffries, Citibank — all of them are talking about a year of no return. So, if somebody has to weigh options, why should one buy equities at all when the best of the brokerages are saying this is a year of no return and the safest of the safest fixed deposit SBI is giving you 9% assured return?

You are absolutely right. I mean, so there are two elements to this. Let me just kind of highlight this. Clearly, I think in the short run, the next three, six months is the time when you should be locking in your fixed income portfolio because I think, give or take maybe another 25 to 50 bps hike from here if that happens, you would see the peak of the interest rate hike cycle taking place over the next three, six months.

And that is a good time for you to sort of lock in your fixed income portfolio. But if you take a little bit of a longer term view, clearly, if you take the last, 25, 30 years, equities have delivered a sort of a 12% compounded return and if you had just done passive investing, the point is that you have had two great years prior to the last year. In the short term, you are going to see that consolidating phase. Now, this year, most brokerages, as you said, have put out notes saying that it is going to be a year of no returns. If history or even if you go by what Howard Marks says, most of them are lousy predictors of the future and things have actually moved contrary. But I mean, it is not unrealistic to see this year as a year where fundamentals catch up and there is a valuation de-rating, which started last year, continues for some time. But that could very well set the ground somewhere in the next six months for the next round of equity returns to start taking place.

So, I think, you know, if I look at the next six months, probably fixed income. Lock in your returns and as the interest rate cycle changes, you make money there. But at the same time, you will also start getting opportunities for equities post the next six months and so on so forth. Further and more importantly, India has always been a bottom-up stock pickers’ market, last year being an anomaly where the index actually delivered and most active managers found it difficult to outperform. But otherwise bottom-up stock picking has always delivered returns and you have such a wide diaspora of stocks that are available for you to pick from. So, I think you will start getting those bottom-up opportunities where you have to stick around and be there. So, equity clearly long-term fixed income, clearly short term is the area you should be in.

For somebody who is aiming to get a double-digit, mid-teen returns, what combination of stocks are you advising your clients?
I think, clearly top of the pack, if you ask me, is the whole banking and BFSI space. I believe that this is just the beginning of a cycle that we have seen as far as BFSI is concerned. Growth is the most visible out there. Valuations are not unreasonable out there. So I just think that that is one of our preferred areas and one of our large bets in our client portfolios as such. Then you are seeing short-term opportunities that arise for example in the consumption basket if you ask me. There has been a good correction in the recent past in a lot of consumption and retail oriented stocks on the back of a festival season, which has not been as great as expected. But I think it sort of sets the stage because these are all multi-year stories. So, domestic consumption and BFSI are two preferred bets.

Wanted your take on the auto sector as well. Tata Motors was talking about how there is still a bit of overhang with respect to the international business as well and that stock is under pressure today. What is your expectation with respect to the auto sector specifically with respect to passenger vehicles?
As far as passenger vehicles are concerned, there is very strong demand on the ground, especially within the SUV or the mini-SUV segments. You should see a quarter where you would see the impact of high volumes as well as softening of some of the commodity prices and a lot of the auto majors have also taken price hikes to that effect.

So, people focussed on the PV side should do well as far as the results are concerned. Two-wheelers is going to be a soft space, within that premium two-wheelers have actually done better and we should see a good set of numbers coming from companies who are just pure premium players out there. CVs, of course, is going to be a story which should play out well and there is only a couple of companies that one can play for the pure play CVs growth engine out here, just as you mentioned Tata Motors has got many facets and many plays, domestic does well, sometimes the international business holds it down, something international does well so it is sort of mix bag for them.