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In next 2-3 months, India more likely to underperform: Sandip Sabharwal

“Decoupling in economic performance is possible which leads to higher gains in certain markets over the longer term because markets are slaves of earnings but decoupling of financial markets at a time of huge volatility or drawdowns has never been seen in the past and in my view will never be seen in the future,” says Sandip Sabharwal, asksandipsabharwal.com


Is it time to remain careful and stay cautious, protect your cash and not buy anything?
Logically that should be the strategy at this stage because although a lot of froth has gone out of markets globally, most global markets are down between 22% and 30% this year. Indian markets are down 4% this year at this stage. So there is a significant gap in performance between what we have done and what the rest of the world has done.

Now there are many arguments which say that India is growing faster than others and that we should outperform. But if you look at all historic correlations of financial markets, the markets tend to be highly correlated to each other. From here on, the probability that in the next two-three months, India could underperform becomes much greater than the probability we will outperform. I would still be cautious through October because the typical parameters which define a sort of bottom formation in the US markets also do not seem to fall into place at this stage and could happen sometime in October. That will be the time to dip in.

But let us look at metals. Steel prices have gone higher. So there are a lot of bright sparks where markets are perhaps pricing in a lot of pessimism — steel, banks. Right now, everything is coming down in the same vein but is it time to be selective?
The steel prices would simply go up because of rupee depreciation and even if global prices are the same and the rupee depreciates by 3-4%, all commodities tend to be at par on import basis in the rupee term. So, there will be a small uptick. It is not necessarily because of an uptick in demand. That is a small advantage which these companies might be having.

But global commodities remain a sell on every value. Global economies are going to go through a tough time for the next two years. Yesterday, even the chip maker Micron said that they are going to cut down on capex substantially as they see demand falling. What people do not recognise is that monetary policy acts with a lag and that lag will create a recession for sure and when that recession comes, that will be the time to buy commodity stocks. We have to take a directional call. Today it might go up, tomorrow it might go up because of some reason or the other but six months down the line, will it be higher? I would bet that many commodities would be in doldrums at that time.

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The latest note from JP Morgan says that cost reduction is going to be a key catalyst in new age stocks and that seems to be the key theme for a lot of these companies which are now waking up and taking cognisance of these shareholder concerns. What is your take when it comes to profitability?
They can make statements on doing this but their entire business model is geared towards just growth and not bothered about profits, getting their valuations, getting funding from private equity and venture capitalist companies at higher and higher valuation, now that the story is over.
Coming to liquidity, we see PE, fund flows are going to slow down drastically, valuations are going to compress and these companies’ managements are making statements which please the public shareholders.

The truth of the pudding is not in eating. I would not believe what they are saying. I will believe it when I see the figures being published and on the table.

How are you looking at what is happening with the CCI and the Zee-Sony merger?
I think the CCI commentary is surprising because the question of market dominance at a time when OTT is so prevalent and customers have a choice of watching anything beyond general entertainment on TV etc. is unfounded in my view.

My guess is, ultimately the merger should go through. So, whoever believes that you should be actually buying into general entertainment companies at a time when they are losing market share in terms of advertisement, can take a bet on that but my view is that the advertisements are moving more and more digital and as such the story for the traditional broadcasters who are primarily focussed on general entertainment is not very great.

the stock is at an all-time high now. This company got rerated because of its Covid business and then got derated. But now despite this entire Covid volatility in its numbers, Cipla is one rare pharma stock which is sitting at a new high?
Cipla,

have fallen to almost the same category, Sun Pharma is also a couple of percentage points near an all time high and it has largely been due to consistent performance. Also resolution of FDA issues and no new FDA issues etc. have contributed to the growth. So, different companies have different drivers going for them. We still own Sun Pharma because I think the company’s doing very well. It has repaid most of or all of the debt and cash flows are strong. It is also doing well on the specialty front.

In the case of Cipla, although results of a few quarters has been volatile, but whoever has bought the dip on bad result quarter has made money and valuations from a historical perspective of these stocks are still not expensive although relative to where they traded in the recent fall, the valuations have gone up but historically.

These stocks used to trade at much higher valuations. Today pharma is one of the few sectors that remains defensive. Given the high valuations of FMCG companies, I would think that this could continue for some more time.

2008 has taught me one thing – do not overstretch the word decoupling. There is a real rout in the UK bond yields, fears that pension funds can go belly up. Do you think it is a matter of time that there will be some casualty somewhere? Isn’t it time to be extremely careful?
I think accidents are imminent and they will happen. They could come from any side – credit side, funds or hedge funds holding positions in bonds, cryptocurrencies etc. Decoupling as a theory has been discarded long back but every decade new fund managers, new analysts come up and they track short term market movements and float around the theory of decoupling.

Decoupling in economic performance is possible which leads to higher gains in certain markets over the longer term because markets are slaves of earnings but decoupling of financial markets at a time of huge volatility or drawdowns has never been seen in the past and in my view will never be seen in the future.



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