FIIs are back but retail has started selling; stay cautious on auto, IT & FMCG: Dinshaw Irani
Help us with your take on the markets because the months gone by have been great for the Indian markets, at least the FIIs have made a comeback. The earnings, especially the kind of disappointment within the IT companies, with the valuations coming to the forefront and investors seem to be liking it. What is your overall mood on the market given that we have already seen a good run-up from those March lows?
Dinshaw Irani: The fact is FIIs are back. In the last two weeks, they had pumped in something like $3.5-4 odd billion into the market and the flow was very sustainable because if you look at the emerging market ETFs or India dedicated ETFs, they have not seen much flows. Basically, what this is hinting towards is that this is active money that is coming back and that is quite surprising.
If you relate it to what has happened in the US, the US debt ETFs have seen huge outflows. Basically, the money which had moved out of India had gone back to the US because they were worried about valuations, about the rupee, and the fundamentals. So, that money went back to the US, parked itself there and that is what is coming back. The fact is the US per se is now coming under a big question mark.
US President Donald Trump has been backtracking a bit and fortunately for the world as such, since he is more worried about the equity markets and it is obvious because twice he has backtracked on big calls that he made in the market. One was obviously the tariffs, once the markets started collapsing, he had to backtrack on those and he gave a 90-day reprieve.
Secondly, Trump has been after the Fed chair Jerome Powell, and when the markets went down, he backtracked on that. So, there is some sense prevailing out there, but frankly, it is still too early to call it out. Secondly, the bigger problem is the India valuations. The quarter went by which is now getting reported. The numbers are not that exciting and valuations are feeling a bit stretched because from now on, you will see cuts in earnings which are already happening. Most of the numbers that got reported saw a cut in earnings and that is where the concern is.
Frankly, we are just being a bit cautious. We are fully invested though. We have some cash – 3-4% – in a couple of funds, but otherwise we are fully invested. In my long-short fund, we are 61-62% net and ready to pull the big trigger whenever there is a pullback. We have seen Trump actually easing a bit on his rhetoric. Are you happy that this weekend you did not have to wake up to some new rhetoric by him? Was it an easy Monday morning so far for us?
Dinshaw Irani: Yes, it was, but the India-Pakistan tension is yet to play out. There something may happen and maybe that will impact the markets. But looking at the past, whenever these events have happened, the markets have only rallied up. Our Indian markets are much more resilient to this. But now the only unfortunate part is the valuations, that is where the concern arises. I do not know how many of you have noticed this but there has been a constant selling by retail I believe in the markets and that is why the midcap and smallcap space has been fairly weak as compared to the largecaps. The largecaps have held up quite appreciably and that is where the major cuts are happening because the IT pack gave a totally disappointing set of numbers. There was a relief rally out there, but I do not think that is sustainable. So, there are quite a bit of question marks right now.
You mentioned some sort of a selling pressure coming from the retail investors. No doubt, month-to-date you have a buy figure coming in from the FIIs. But the retail investors getting a bit jittery is a cause of concern. As you mentioned, the valuations are a bit stretched. Where are you looking for value right now given that we have seen a sharp fall, then a rapid rise. Now you are struggling to go ahead and allocate funds, isn't it?
Dinshaw Irani: Yes, definitely, because we have our comfort zones. One big comfort zone for us has always been the financial, the BFSI space and we have seen results out there. If anything, they have done fairly well, apart from microfinance and some of the NBFCs reporting disappointing numbers. The bulk of the reportage from that particular segment has been fairly strong, that is one area that we are very comfortable with.
Secondly, a set of numbers are yet to be reported by the hospitality sector, and that is going to be a surprise because if you are tracking that sector on the ARR basis, they have been fairly exciting. The numbers are fairly high YoY also. Again, having talked about hospitality, let us talk about hospitals, the healthcare sector. That is another area where we are comfortable with and that is going to report very good numbers going forward. These are the specific areas we are comfortable with and where we are trying to park our money.
Which are the pockets that are not looking that great to you because I just cannot get over the fact that at a point when Tata Motors was hitting around Rs 1,000, you guys came ahead and made a short call on not just Tata Motors but the overall auto space was not looking that exciting to you. At this point in time when you are having a cautious stance on the market which sectors are you betting big on?
Dinshaw Irani: We remain negative on the auto space. You saw the numbers from Maruti. You heard the commentary from the management. The only space that looks good right now in the auto space is probably the SUV space and unfortunately that is what the US is targeting for India. That is where they want to send their cars in and at zero duties and stuff like that. That will create a lot of competition going forward. EV has been a big disruptor anyways in that space. The second space that we do not like and have been negative for the last probably two-three months is probably IT. Except for some pockets here and there, IT is going to be a major sufferer of what is happening in the US. There is a slowdown building in and that is what the world is betting on today. If you look at the way the bond markets have been reacting in the US, it is obvious that they are looking at a slowdown going forward and if that happens, IT is a big loser because the US market is their biggest clientele. Secondly AI will play a big role in disrupting the existing model of IT, and so that is another reason why we are so negative on IT today. It is better to stay away from that segment. Certain pockets within consumer space like paints, we do not see much growth possibility. I do not think that the rally in paints space is going to sustain given the way the dynamics of the Indian economy today. And of course, FMCG where the valuations are again stretched. There was some amount of uptrading happening, but that has also stopped. I do not think that area is looking good. So, these are a few areas we are very cautious about.
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