Given the fact that the dollar index has moved quite sharply against some of the other emerging market currencies, do you believe there are any signs of bottoming out for the dollar index?
We believe that the dollar index should ideally peak out closer to 105 mark; we already crossed 104 levels currently and if one dissects the dollar index component, then one will realise that both the Japanese Yen (JPY) and Euro, which are the large components, are also showing signs of bottoming out. There also we are seeing extreme pessimism.
So if one has to look at the larger perspective, even the developed market, the G6 currencies versus dollar is showing signs of reversal whereas emerging market currencies have actually started reversing. The Brazilian real has already appreciated for the last three or four trading sessions. If The South African ZAR is also up. It started appreciating and so is the case with most of the commodities country.
A lot of commodities currencies are giving early signs, which is the first reflection that something is much better in the emerging market as compared to developed markets. We remain very constructive on the emerging market as a theme. It is a theme which can play out for the current decade and India should be a decisive winner in that theme.
We are not in for an earnings upgrade cycle. There are problems in the world, but the market always climbs the wall of worry but for that to happen, either valuations have to be attractive or something has to change at a global level. If nothing changes, the war lingers on, crude stays above $100 and inflation remains strong, then are the valuations attractive enough to warrant a buy? In a slowing economy, why should one buy stocks trading at a premium?
We have to look at the global backdrop and dissect which are the stocks quoting at premium? Even if one analyses and dissects the Nifty component or Nifty 50 or even Nifty 500 component, the frontline indices make you realise that this expensive nature is coming because of the growth portfolio and not because of the value portfolio.
The Nifty has technically a skewed structure where only outperformers are kept and underperformers are removed. One cannot even compare that index from the global point of view. So it will remain in outperformance from a longer term perspective. But if one looks at a slightly more diversified Nifty100 or Nifty200 basket and then tries to see growth versus value, then we will see that growth is still very skewed in terms of valuation.
That is the reason the overall indices’ valuation from the India point of view looks very rich but if you look for an opportunity in value, then they are not expensive. There is deep value in the emerging market as well as some of the developed market also because overall emerging market qualifies as a value theme and within that value theme, if one can focus on the value stocks because these are beaten down names, look at the energy sector, power sector which are doing extremely well or the way the refining margins are inching up.
We remain very constructive on the energy space. I think this is a space which can last for many years. It is not going to be just a crisis which we are seeing. We have just seen a trailer of this power crisis globally. There is a shortage on the nuclear front, people have not built capacity on the coal front and so these are the challenges which are real. One has to look at relative opportunities. Both on absolute and relative basis, there is deep value in some of the names or value theme which we are talking about. It is best to capitalise on that opportunity and then prune down these so-called expensive and most admired category stocks. This is the trend not only in India, It is the trend which we are seeing globally and it is catching momentum.
Where will FMCG fit in now? They are not cheap but they have gone through a time-wise correction?
FMCG stocks have seen a good time-wise correction. I will call these stocks as part of a tactical strategy. They can also give a decent return from the current level but keep in mind that most of the FMCG companies have the raw material challenges because I expect agri prices to remain elevated for a decade. So with this background, the HUL or
or Nestles of the world, are dependent on agri prices.
This is the inflation which we have seen. It is very,very early stages. Our view is that agri commodities right from 2022 till 2030 can give 100% to 1000% returns. That is the inflation we are talking about in agri commodities. So we will remain very cautious in these names. Maybe from a tactical perspective I can participate but these are not our core portfolio from the decade perspective.