At WhiteOak we are a team of bottom-up stock pickers and hence we end up having an exposure in practically every sector. Barring the tracking of macro as it applies to specific companies and their operating environment, we do not follow macros as a consideration or as an origin for stock picking.
Coming to general expectations on sectors, it’s more of the same, but with a lot of new engines added. For as long as I remember banking and financial services and consumers are two sectors that have consistently rewarded in the Indian market.
But over the years, the BFSI investible universe has expanded from just state-owned banks to private banks and now to NBFCs. Within NBFCs again there are verticals like mortgage finance, vehicle finance, wholesale and real estate finance, gold loans etc, and then it includes capital market entities like broking, wealth management, asset management, market infrastructure participants and insurance. There is widening of the universe accompanied by many new entities even as penetration itself remains a huge source of value creation.
On the other hand, the consumer sector has evolved. I remember when I began my career around 1999 the AMC I then worked for launched an FMCG Fund. For the first few years, the FMCG fund meant holding HUL, ITC, Britannia, Marico and maybe a handful of other names. It was a struggle to see the portfolio go beyond all of 10-12 names and all conversations were on penetration in the times to come.
Today the consumer sector itself is not just FMCG, durables is a large segment and conversations have quickly moved over to product categories, customer segments and most importantly premiumization. So I think these are sectors and sub-sectors will remain a happy hunting ground for stock pickers. It is just that one needs to be discerning about consumer habits and evolution.
In addition, there are new areas like Engineering Manufacturing Services where were are seeing rapid growth in the manufacture of mobile phones, white goods, auto ancillaries, specialty chemicals and the like. This is due to shifting supply chains and in certain areas the Indian market coming of age or at least it's about time we became a meaningful part of the global growth engine not just as an outsourcing base but also as a domestic market. Select manufacturing ideas are likely to reward.
Staying with global trade for the moment, the Indian IT sector continues to grow and gain dominance while widening the scope of value addition in the global IT set up. The same applies to the salience of the Indian pharma industry in the global scheme of things.
Tactically one must remember, right now we are counter-cyclical to the western world as far as the economic cycle is concerned. COVID set us back by 6 months but otherwise right from mid-2019 till February 2020 we witnessed a loose monetary policy and expansionary fiscal policy with the tax cuts. As a result of COVID, the latitude and accommodativeness for these policies are bound to last longer and get deeper too. This in itself should spawn a new economic cycle in addition to the long term trends.
While everyone has been watching for stimulus from the Government, one can not underestimate the stimulating effect of historically low-interest rates with abundant liquidity and benign external macro-environment. Everything which depends on interest rates and availability of finance can see a tailwind.
For instance, on residential real estate, the recent spurt in Mumbai has been attributed to pent up demand, reduction in stamp duty, festive season, etc., but it can not be ignored that there is a 10-20 percent drop in prices and interest rates are at historic lows; haven’t heard 6.75 percent home loan before; which means there is an equally big cut in EMI outgo for the buyer. If real estate comes to life the ancillary benefits cannot be under-estimated.
Lastly, markets are a slave of earnings and for the first time in many years, we are seeing in Q2FY21 that corporate results are way ahead of consensus estimates. There is a lot to look forward to and significant gains to be made in the coming 2-3 years.
The writer is CEO at White Oak Capital.
