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Get real, the five-year bull run is long over: Gautam Trivedi, Nepean Capital

The current bull run began September 2008 and ended almost e..

The current bull run began September 2008 and ended almost exactly five years later, Gautam Trivedi, Co-founder & Managing Partner, Nepean Capital, tells ET Now.

Edited excerpts:
How are you assessing the markets currently?

People need to get real about the fact that the five-year bull run is over! A lot of people are still not able to grapple with that, especially the newer investors who came in the last three to four years. A lot of retail investors are first-time investors and either they have a miss or they thought this could go on forever. Historically, if you look at bull markets in India, they do not typically last more than five years. The previous bull run began in January 2003 ended exactly on the 4th of Jan 2008 because of the global financial crisis. And the current bull run began in September 2008 and ended almost exactly five years later. This is the new reality people have to deal with.

If the bull market is over, are you then talking about reversion to the mean? What could potentially open the downside in that case?

There are a bunch of things that have helped the bull market in the first place. We saw interest rates falling, a stable government. The government is still stable. I am not saying that has changed but the fact is there are a bunch of things that actually went in the favour — falling oil prices and a stable currency. All of that have reversed with the exception of the government. As a result, people need to digest the fact that this cannot go on consistently.

We are heading into a very turbulent time with respect to elections. Earnings, higher oil prices and forex will impact earnings for the current quarter which will be reflected in results starting in seven weeks. That issue has not been fully digested by the market. I see further weakness in the market.

Rupee at 70 plus is supposed to be good news for India because 60% of the Nifty numbers are dollar denominated. So, metal, IT and pharma will gain. How would you counter that point?

There is a fallacy in the market in India. It is said rupee depreciation helps the exporters. Over the past about three weeks, I have spoken to over 20 exporters who are in different businesses. Some are traders, some are in the textile business, some are in the metal exporting business as well. What they have said is that the rupee depreciation does not necessarily help them.

First and foremost most of them are hedged and are not able to take advantage of the spot fall in the rupee. If that comes in, that will be only six months from now when they start fresh hedges. The second and more important factor is that unlike China, we do not have the basic infrastructure for exports at the plant level, plant to the port and the port itself. There are some progresses there, but we are still way off as far as that is concerned.

The third and the bigger problem is that a lot of customers are actually demanding discounts given that rupee has fallen. So, they are not really seeing a big benefit of rupee depreciation. It could be positive for some sectors like metals. But, it does not help exporters in the long run. You need other factors that can help exporters and clearly we lack lot of those.

What is your take on the IT space?

Historically, with every depreciation of the rupee over the past 10 years, the margins have been pretty much constant for TCS at about 25% to 27% and Infosys at 24-25%. At the end of the day, it is not really helping. But given what we see even now for the next six months or more of turbulent times for the market, IT would be a good place to be in.

Which sectors would you steer clear from?

I am not comfortable with the NBFC space especially the housing finance companies (HFCs). The real estate space in India is going through a very turbulent time and it is a global real estate correction that is happening all the way from Los Angeles to New York to Dubai and in Hong Kong, China as well.

The real estate space in general is badly impacted. You will see more issues with that space over the next six months. A lot of HFCs are very confident that there is no problem and they all say that they lend only to the top 10 developers in the country. Of course, if one or two of them have a problem, then it will have a cascading effect.

Coming to home developers, a project initially was sized for two kinds of buyers – an actual buyer and the investor buyer. The investor buyer has gone to zero and the actual buyer is down to about 60-70%. You have a lot of unsold inventory sitting in India which is clearly going to impact cash flows for the developers which in turn impacts the ability to repay the housing finance companies.

So equities in a bear market and property in a downturn?

Well property has been in a downturn for the last five years.

What should one do?

I would say buy Titan, I am serious.

Buy gold?

Buy Titan.

If you think it is a bear market and the bull market is over, that means stocks will come down. Should one avoid equity as an asset class?

I am definitely saying that. Having said that, there always will be stock specific opportunities. Let us not ignore that. It is not necessary that the entire market is sell and everybody should just liquidate their positions and we will be sub-8000 or whatever Nifty.

And Titan is one such opportunity?

Titan is a great story. It deserves the multiples it actually trades in. It is one of the biggest beneficiaries of GST versus a lot of other sectors that just have not been able to capitalise on GST as yet.

Ashok Leyland is also part of your list, is that right?

Yes, we have actually been covering and tracking Ashok Leyland since it was just about Rs 15 and it remains a secular growth story, subject to the economy doing well.

The CV cycle is in a five-year bull run and if the economy peaks, the CV cycle will peak out. So, if the economy is going to go through a painful period of grind, then Leyland should be the first stock you should be getting out of?

I am not so much concerned about economy. It is more the equity market itself and the valuation of the multiples of the market. A lot of what I am saying will also be impacted by the strong flows that we are seeing domestically. FIIs have been in and out this month but in general, as long as the flows remain strong, people will have to invest and the market may not necessarily fall that much.

Where is scope for more price correction and where is scope for time correction?

The ceramic industry, which a lot of people had bid up, hoping that GST would weed out the unorganised sector and the organised players would significant benefit. But that really has not happened. The unorganised sector continues to flourish and the organised sector has not really been able to make an impact in terms of pricing etc. Kajaria is down 50%. It has gone from 44 times earnings to 22 times earnings FY 20 PE. But having said that, at 22 times, is it a buy? I do not think so yet.

How are you looking at the overall valuation picture versus the core fundamentals when it comes to consumption?

Over the next six months, besides IT, the other place where I would stay invested would be the FMCG space. A lot of money will gravitate towards these sectors. As a result, valuations in the FMCG space are not necessarily going to contract.

What do you like within the space — a rural-based theme or select midcaps?

Majority of the stocks in the FMCG space are largecaps. There are a very few midcap plays out there. I would stick to largecaps like the Levers or the Emamis and so on.

When it comes to private banks what is your assessment? Will they remain a standout vis-à-vis the NBFCs and PSU banks as well?

Yes. Outside the PSUs and NBFCs, within the private space, I would still stick to the usual suspects like IndusInd, Kotak and HDFC Bank. As far as Axis and ICICI are concerned, merely changing the CEOs does not solve the NPL problem. I need to see more evidence of that before I get comfortable with them.

Are you are looking at gold finance companies?

Yes, that is the other thing. Within the NBFC space, we like the gold finance space. Mannapuram is definitely one stock that we are looking at because the ALM there is very limited. It is backed by gold. It is about 70% of their business and that is the reason we like it.

They say on the Wall Street that every man has a number? What is the number you are chasing?

The number I am chasing has got a many zeros but let us not talk about that.

How much would you allocate in equities and in fixed income? The sense we got from Ray Dalio and Howard Marks when we interacted with these legendary investors was “diversify, diversify, diversify”. In the next 12-24 months, would you diversify immensely?

Yes, The next six months will give enough opportunities to invest in equities — stock specific versus the broader market. We do not know what the outcome of the May 2019 election is going to be but that will give opportunities over the next six months to put money into equities.

Having said that, putting money into fixed income products temporarily and waiting for the equities to rebound is a possibility.

Secondly, it may not be such a bad idea to actually deploy some money in the real estate space given where the prices are. If you walk up to a developer with a cheque book, he will be able to give you further discount. I would certainly look at that.

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