Do you think this is a good sign that the market is finally aligning with global weakness?
Whenever it becomes too easy to make money, it is important to let the market give you a jolt because reality has to come in, lately, especially the last two months, it has seemed easy to make money. Just invest in X, Y, Z stocks and it will bounce back so anyone and everyone can make money.
It’s not easy, the market is telling you today. It’s important to keep your nerves. In turbulent and uncertain times, having a gut feeling is more important than knowing individual stocks.
I must also say that if in doubt, I would be less worried. I worry when there is full confidence that this market will rise. As we said today, while the market has performed well over the past two months, a lot of people have made some money, and their investment belief is that every bounce, a profit on paper, takes money off the table, so there’s skepticism.
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Also, when we spoke to local companies, the kind of body language and commentary companies provided added to the belief that this is a smooth and strong market.
What is the outlook for the financial sector as a whole? What is the pecking order? Is the line between large and mid-cap stocks clear, or are you seeing a catch-up?
In finance, this is a very bottom-up opportunity. Over a period of almost seven to eight years, we have seen double-digit credit growth in the system, especially in the past two weeks with a 15% increase in banking credit.
This is very exciting because the lifeblood of this economy is liquidity, which has been squeezed for the longest time and is now back. This is why NPA in the system has dropped from nearly 12% in 2018 to less than 6% today. So both of these things go together nicely.
Leading banks have also raised capital and they have enough money to go out and grow. But on the other hand, we also see that in the 2014 to 2020 counter-cycle, the NPA of the PSU banks rose and the growth fell. This has resulted in a price-to-booking multiple falling from nearly 2x to 0.3-0.4x.
Now as the cycle turns, the valuation multiples of many banks will reverse as NPAs are lifted and growth will pick up, which will reverse what happened between 2014 and 2020. To that extent, it’s a bottom – a rise in financial markets. Whether it’s a tier 1 private bank or a PSU bank, we can make money across the board, but of course we have to look at the situation individually and not in general terms, looking at the industry as a whole.
This is a smooth sailing industry, and there will be all-round money-making opportunities.
What about the entire car space? The catch-up in tire inventories we saw yesterday appears to be reversing today. Should you start thinking about the fundamentals of tire space structurally, or was yesterday’s move overzealous?
If you go out and buy a car today, like any leading brand SUV, you will face a 4-12 month waiting period before you can get your hands on the car. If you go for a high-end car, it might take a year to a year and a half. This is the waiting period and demand backlog that exists in the industry.
Now the fact is that if there’s a constant in this industry, it could be electric vehicles, or it could be the powertrain difference due to oil and electricity; but if there’s a constant, it’s tire space, and to that extent, whatever Whether the industry moves to electric vehicles or stays the same, tires will be a constant requirement in the automotive industry.
As a result, the demand patterns of OEMs will also translate to the tire industry. The demand outlook for the sector looks very strong, with a profit tailwind for the sector if commodity prices correct. So after a period of time, this sector will show its strength. During this period, there will be market-led volatility like we have seen over the past two days. But obviously, the strength of the OEM will also translate into good tire performance.