It’s nice to see you smile, but when you look at the screen, the smile just disappears.
The smile was for the rain outside my window, not the markets. Small and mid caps were hit pretty hard. From December 2017 to present, albeit after March 20, small and mid-caps have rallied strongly, but over a nearly five-year period, the small-cap index is down 11% to 12%.
So this isn’t the most recent defeat that small and mid-caps have seen, it’s almost a five-year defeat, and add to that the dollar’s depreciation. and in dollar terms, the small-cap index looks even worse. So that’s what this space has been through for the last four to five years, and in that context, some pockets of value are starting to emerge in this market. In the short term it really isn’t value that is driving the markets but sentiment and we have seen volumes in terms of market cap corrected by almost 50% from volumes seen on October 21st.
This tells us that risk free trading is at play and what is really going to generate significant value now is the pace of capitulation where investors still clinging in the hope that there will be a reversal in trend for people in the Basically come to the market and sell. That’s the structure of this market as we stand.
Aren’t we surrendering yet? It felt like yesterday?
It did. The large caps held up. Small and mid-caps fell nearly 3%. It felt the broader markets were capitulating, but the foam needed to go. The kind of easy money that much of the broader market has seen, particularly in fiscal 2021, and made it feel like this market will only go up, is taking some time to correct.
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Anecdotally, last week I spoke to a woman who is a homemaker, and for the past year, the way she’s made money has been to go long futures and sell options. So on the one hand you make money in the future because it keeps increasing, and in the options you get your interest, ie the selling fees. That kind of setup and that kind of mindset that it’s so easy to make money in the market and take risks and not get compromised needs to go down. There is still a lot to be done before that happens.
Give us two-three ideas where you think it’s time to be a buyer with value and margin of safety on the investor’s side.
There are pockets like that and of course I don’t have a three-month, six-month view. but I have a two to three year, maybe four year perspective. I think there is no choice for India but to indigenize its defense sector and there are some really high quality companies on the defense side that have been languishing the longest. They’ve been gathering some energy lately, but there’s plenty of room to keep going over the next two to three years, maybe even longer.
The size of the opportunity or pie these companies can capture is significant. Due to the one-sided nature of our defense procurement, the growth path is quite significant and there are lessons from the recent Ukraine conflict where inexpensive defense equipment comes in very handy for the Ukrainian military. So that’s a bag where I see a multi-year growth trend, continuing from here to the next three to five years.
Sugar is another area to jump into, whether you’re looking at food security or energy security. This sector absolutely fits into those two segments because on the energy side there is ethanol and on the food side there is sugar. There aren’t too many big companies to actually look at in this space, but there are some very interesting quality names that promise sustained growth over the next few years.
In our opinion, the real estate sector is on the verge of an upswing. Last year we’ve seen volumes go up and as the foam from this sector subsides and end buyer interest starts to pick up, investors have followed and as investors follow suit house prices go up and that’s going to be a positive cycle, because as prices rise, more investors come in.
We are only at the beginning of this cycle. You don’t have to play this through the developers. You can play it through the hardware store and the handyman room. This room looks quite interesting and is of course the main focal point.
India is once again at the cusp of an investment cycle that has significant legs. We’re coming into this cycle after almost 10 years and it’s not going away anytime soon. So the PLI theme and the investment theme that we’re likely to see over the next three to five years is also going to be a big theme.