Equity

Our perspective to some commonly asked questions (part 2)

What risk in the market do you worry about the most at present?

Markets seem to be ignoring the risk of significantly higher inflation down the road and abrupt change in monetary policy.  At present, the markets are complacent that the US Fed will not raise interest rates in the short term and are justified in this because the US Fed, the most important Central Bank in the world, is still buying USD 120 B of Bonds monthly which keeps long term interest rates low.  However, company after company is reporting higher inflation in the US even as economic growth in the US is surging.

The shocking resilience of India’s stock markets

Commentators are wondering why the Indian stock market is “shockingly resilient” amidst the devastation caused by the Covid second wave.    Their premise is that Covid’s second wave is causing significant devastation and death.  2021 GDP growth has been downgraded.  Rising raw material prices will erode margins. The virus has spread across the country and will cause massive unemployment.  Analysts have started downgrading estimates.   Stock price valuations are 2X of China.  So why has the market fallen only 5% since February?

The futility of taking cash calls

In our last blog we explained we don’t intend taking cash calls just because markets may seem overvalued.

In this note we provide more rationale for the same.  Even if one was to get market timing – selling and re-entry – both legs perfectly right, and that is a big assumption, the net impact on your incremental IRR vs staying invested is marginal.

Our perspective to some commonly asked questions (part 1)

4 common questions we have recently been getting

1.      Is this still a good time to enter markets?

2.      Will you invest all additional capital at present?

3.      Will you take some cash calls because markets have run up so quickly?

4.      Will you rejig the portfolio as cyclicals may do better short term?

Is Value Investing dead ?

Over the last few years, traditionally defined “Value” stocks have continued to get cheaper while “Growth” oriented cos have done very well.  The divergence is stark and is now prompting questions whether Value Investing is dead. 

The categorization of stocks between “Growth” and “Value” is erroneous.   Anything that is low PE multiple and out of favour with markets is typically labelled “Value” and anything with high multiples and fast growth is labelled “Growth”. 

Implications of SEBI new guidelines on Multi-Cap Funds

SEBI came out with new guidelines last evening where Equity Multi-Cap Funds now compulsorily need to invest at least 25% of their corpus in “Mid Caps” (firms ranked between 101-250 in pecking order of Market Cap) and another 25% in “Small Caps (firms ranked 251 or higher in pecking order of Market Cap).   This needs to be achieved by 31 Jan 2021.

In this note we want to address the following issues

a)      How did SEBI get here?

b)      Our view on this order

c)       What this order means for Small and Mid-Caps in the short term?

Update from the front

We are in the midst of an economic shock.  India has not been able to flatten the curve and the number of infections continues to rise. There is no visibility of a vaccine or a cure.  SMEs are in distress. Neighbourhood shops are doing very little business, if any at all.    Yet stock prices seem to ignore market conditions and have reached the levels of February 2020.   

What is going on? Are markets ahead of themselves? Should Solidarity be taking a cash call at present to preserve some of the gains?

Strategic implications of SBI- Yes Bank Bailout for Banking sector

We had shared an earlier blog, ‘Why Mid-Sized Banks are strategically disadvantaged’ as they are forced to take on more risk in a business where success needs to be rooted in conservatism.

The collapse of Yes Bank will further widen the competitive gap between the leaders (SBI/HDFC/ICICI/Axis/Kotak) and the others.

Why do we not own any Mid Sized Banks

A question that remained unaddressed in the last Q letter to Partners was “Why do we not own any Mid-sized Banks?”

Banks can be attractive businesses to own as they enjoy natural growth tail winds of growth while delivering 15-18% ROE.  However, over the last decade, only 3 Banks (representing < 15% of Industry Assets) have delivered over 15% PAT growth or above 15% ROE consistently.  

Implications of re-pricing of credit risk in India

India has implemented two significant regulations in the recent past.   GST and the Bankruptcy Code.  We argue that a third one is on the way which will lead to Re-pricing of Credit risk