Who would have thought that PSUs would be where they are? It is at a record high for the PSU banking index. I know the majority of the indices are close to their record highs but are you surprised by this move?
Yes, the surprise is the follow-up. Last year was a great year. In fact, the PSU banks were the best performing sector and this was after a decade of underperformance. PSU banks used to be the most hated, shorted space in India. The trade of the decade was long HDFC Bank, short SBI and when it turned, what is surprising me is that after a phenomenal ‘22, they are also having a very good ‘23 and that really shows that when decadal trends change, it does not end in a year. It actually gets elongated. In fact, the whole PSU basket if you see is not just banks, there are defence stocks, a lot of these infra-type plays as well. Like everyone, people who have been in the market for 20-30 years have sworn we will never buy PSUs because many times in their life they have tried and burnt their fingers. They have given back 40-50% drawdowns and the market has ways of surprising. So, going with the trend, being humble, accepting what the market is telling you, is what I have learned. So, the trend is your friend until the end when it bends.
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But the trend right now seems to be this entire rally in defence, capital goods, manufacturing and railways. Do you think there also you just stick with the trend or is it getting a bit concerning? Is it time to maybe take chips off the table?
The price movements have been phenomenal and that kind of vertical moves generally do not sustain. But first and foremost, when things have not moved for 10 years or more and then start making new highs or lifetime highs, these things do not fizzle out in six months. They tend to be elongated. Yes, the short-term run may be large. Yes, they may correct, they may shake out. There is a lot of retail and a lot of days when on a broker report, stocks fell 5%, 10%. But these things are very important because if they do not correct, then very often it ends very badly.
So, I, for one, would be actually happy if we see some correction, consolidation, because you cannot have these 90-degree moves – 200-300% moves in a year. Those raise concerns. We have seen they do not sustain. But I personally think that the whole PSU move is a decadal shift. There is a decadal shift in sectors and themes. Engineering, infra, construction never moved post 2008. So, when they move, they tend to be rather sticky. We have learnt this from the 2003-2008 period. A similar set of sectors were moving, similar themes were playing out and that was a phenomenal bull market and it kept surprising us. We kept saying oh, it is too much, too much but ultimately, it lasted five years.
Look at what we saw, let us say, in a Page Industries or a Shree Cement or in MRF. From 2008 to 2020, those were the stocks which moved from two-digit to three-digit and three-digit to four-digit and four-digit to five-digit.
Absolutely.
So, are we looking at that kind of an action in PSU banks?
It is because that is what I saw between 2003 to 2008. You will find that similarly, a lot of these stocks which were considered engineering, boring, like…
The backbenchers.
Yes, because, in 2000, we had an IT bull market and I remember all these things got smashed and nobody wanted to touch. A friend of mine very well put it, he said jis company mein se dhooha nikalta hai, woh nahi lene ka (one shouldn’t get into smoking hot companies). That was the IT bull market.
So power and other things you do not buy…Right now, it is I think get into smoking hot stocks – railways, power, everything.
He put it very nicely and then it did very well 2003 to 2008 and then those things did not do well and as you said, rightly, there was a very narrow market. It was a very narrow market right up to 2020. Those few quality stocks, one bought at any price and then again the trend has changed. So, the market has a way and our ability to predict the long future is very limited.Think about it, ITC also. Which are other decadal trends which you think are about to peak, that is also important, right, what not to buy? Recency bias tells us that you buy something which has worked in the past. So, when it comes to a decadal trend, you will always be looking at private banks, you would always be looking at IT. So, it is important to avoid also, right? So, where would you avoid?
So, I do not know decadal avoidance, but what is concerning, which I said is the price of crude and we know that it is a very big input for a lot of industries. So, you will find a lot of stocks which have done well in the past, whether it is paints, chemicals, agrochemicals, you will find that their input cost will really go up if crude sustains at these levels. And I feel that again, like how last year, a lot of them got derated. We could be in that kind of situation.
Again, these are great companies, they will do very well. I do not know the decadal trends on the negative side. If overall, you see a market up move, everything will participate, everything will hopefully make money. But yes, for me, the concern for the next quarter is going to be these kinds of spaces or sectors that are going to play out.
One sector I would just say on the positive side, which we have suddenly gone overweight in our portfolio, after almost two to three years is pharma. Post Covid, pharma stocks did not do well, the trends changed, that was the highest overweight position and they all got trimmed down. But in the last two months or so in our PMS, we have gone overweight pharma after three years.
So, which are the healthcare names, diagnostic, manufacturing?
Not diagnostics, but there are some which are the actual pharma places, they are a lot into exports, we sense that the pricing pressure in the US is decreasing and yes, in healthcare, there are some hospital stocks. That is phenomenal, that could be a genuinely a very long term great compounding story that is playing out.
So, we are in those kinds of spaces. But that is surprising, because that is a sector that is less talked about. But that pharma is shaping up very well. You will see a lot of the pharma stocks have actually not done well for years and years and are pushing towards lifetime highs and that could be again something that has not done well for very long. When it starts pushing to 52-week highs, lifetime highs, you know that something big could start.
