Where do you think the market’s fall will end and why is the market giving up its gains?
There was a time when pessimism was extreme and commodity prices started to fall. We have seen a market pullback, but the days of rising interest rates are not completely behind us. The quantitative withdrawal will start or has just started this month in a significant way and will continue.
While commodity prices are stabilizing across the globe is certainly having a comforting effect, the cash out will still have to play out over the next few quarters and we will have to see the impact on that in general. We have seen a good setback. Markets are seeing profits again or maybe waiting for the Fed’s next move. There are speculations in the market that the Fed might be a bit more aggressive, given the kind of jobs numbers coming out of the US.
So until we hear from the Fed, we will see that kind of environment. It’s part of a normal cycle. Right now, the whole world is in a debate over whether or not developed markets are going into recession and what will be the pace of slowing growth. This is where the story is. This is where a lot of things are going to be a determining factor and that picture will only be known in the future. The market will continue to play in this range until we see this clarity.
I believe you came up with a carnelian change strategy. Frankly, we’ve seen a lot of sector rotation from the rally through the June lows to the high drop right now. What is this change strategy?
This focuses more on a ten-year perspective. We have seen this post-pandemic, two very major shifts taking place in the Indian economy that will create a massive amount of wealth over the next 5-7-10 years. One of them is manufacturing. We believe that from a manufacturing perspective, where China was in 2003-2004, India is probably starting to see this kind of trend led by Atmanirbhar Bharat, the government’s goal of making India self-reliant.
“ Back to recommendation stories
Manufacturing is our biggest vulnerability and the second big trigger is China more of a playing theme. So huge amounts of opportunities are being created in the manufacturing space and as we see this is happening because manufacturing doesn’t happen overnight, it requires investment and requires a cycle of investment. We believe our manufacturing GDP will double over the next five or six years from $450 billion to $1 trillion and any time this type of growth occurs in any sector, it creates investment opportunities massive and that is what we are aiming for. This time around, the likelihood of that happening is far more positive than it has ever been in the past. This is a very important structural trend that should materialize.
The second change we talked about is that every business globally and locally is being forced to spend a lot more money on technology than they have ever spent and this is also going to see an acceleration. Given what’s happening in the US demand environment right now, there’s a bit of nervousness about a short-term downturn; but it’s good. What we’re talking about is a five-to-ten-year trend where spending on those two is going to increase and those are structural opportunities.
I’ve seen many companies in the manufacturing space that we believe will become future multibaggers, future leaders despite being tiny today. In the IT space, in the mid-90s, we saw many companies that were small become big in 10 years. A similar trend may be happening in manufacturing as this is a once-in-a-decade opportunity and luckily it seems most stars are aligned for this to happen.
Manufacturing is a big industry, how would you like to play it? ?
The idea is to invest in sectors where there is either import substitution or export opportunities, or a combination of both. There are six or seven segments where we still see huge opportunities, one being specialty chemicals, where we’ve already seen some things come out.
Automotive and automotive components is an area where India has a unique advantage and, from a cost and capacity competitiveness perspective, where India can do very well.
Textiles and more specifically apparel is another segment where China has 35% market share and India can gain its own, as our labor costs are much lower than China’s. We see a massive focus on defence-related stocks; import substitution and the export angle continue to play.
Building materials is another area where capital spending has started and capital goods is another sub-segment where we can see great opportunities. Each of them has its own nuances, but the underlying theme is manufacturing. There are opportunities in manufacturing through both import substitution and the export perspective. Companies tell us that they have never seen this kind of export demand environment in their lifetime.
So we have to understand that something is changing globally and it will happen over the next three, four, five, seven years and the idea is to identify good quality companies that are well positioned in this kind of tailwind or emerging theme and in various sub-segments that I’ve talked about and invested in for a long time.
How about what’s going on with some of the ancillary manufacturing businesses? Is there a subsector within manufacturing?
Like I said, capital goods is a very big sector to play the investment cycle and you can play it.
How to play with manufacturing, with cement?
Some companies are aligned with the investment cycle in these sectors. Let’s say we wouldn’t play sugar, but we can play sugar because there’s a lot of investment going on. So we can play on sugar capex businesses and similarly we can play on capex games in the steel cycle because the capex cycle has started in those respective sectors.
So, if one does not want to play certain sectors directly due to their own peculiarities, one can play through the auxiliaries who will benefit from these sectors and are also less prone to the vulnerabilities of the main companies.