Correction or Trend reversal

The recent downfall of almost 10-11% has almost shaken everybody. Mid-cap & Small-caps have almost corrected 20-22%. This type of correction really gives lot of pain & tests our patience & conviction. Many players’ gets grind out and men get separated from boys in this type of market. We have been the most under-performing market in 2011 YTD. FIIs have turned net sellers and there has been some shift of money from Emerging markets to Developed markets. There have been headwinds in the recent past which has been responsible for such downfall. However in my view what we are seeing in the markets is nothing but a BULL Market Correction & not a Trend reversal.

The indicators which convince me that this is not the end of our BULL Market and the market has not topped out are:

-          No Euphoria

-          Low leverage in derivatives

-          Midcaps & Small caps are extremely cheap

-          Most analyst on Electronic & Print Media are bearish

-          Valuations are at historical average. No bubble

-          Dow Theory (Higher Top, Higher Bottom) suggests we are still in a BULL Market until we break 5300 on Nifty

This is the time where we need to get confident about our markets and start looking for bargains which were trading expensive some months ago. Good quality stocks which have great managements & strong business model have come down to attractive levels like Britannia, Raymond, SBI to name a few. Investors have jumped to stocks which have free cash flows, low or no debt and transparent managements. Stocks on which investors have little doubt about management & high capital intensive business have been punished like anything. The valuation gap between these two categories has reached historical highs which according to me shall be corrected in due course of time as investors have short memories. India as an investment destination cannot be ignored due to its secular growth.

Happy New Year 2011

We at Concept believe that 2011 would be a year of different themes:

1)    Corporate Governance seems to have taken front seat after a series of scams which hit the country last year like the Adarsh society, 2G, CWG, LIC Housing scams and also the SEBI report on few companies indulging in insider trading. Investors will give premium to companies following highest ethical practices along with transparency. Infosys is a clear example of this. At Concept PMS we focus on quality of stocks that maintain highest corporate governance standards.

2)    Infrastructure sector has been a laggard in 2010. After Lok Sabha election in 2009, UPA got a thumping majority without any support from the Left parties. This gave confidence to investors that Government would give thrust to reforms with Infrastructure sector being one of the major beneficiaries. Mr. Kamalnath, the Highway Minister proposed a plan to built 20km road a day. But nothing concrete has happened till date as a result of problems with land acquisition & also environmental clearances not coming trough. Despite these problems the sector presents immense opportunities with India’s infrastructure being woefully inadequate. Last year the growth was consumption driven & as a result many companies are short on capacities and as a result there should be a pick up in the investment cycle and as result we are bullish on EPC companies which are reasonably valued. Our Concept Marvel scheme (Mid-cap) has under-performed in last 3 months on the back of higher weightage to the sector.

3)    Banking Sector is a play on both the consumption & infrastructure story. In December credit growth was healthy at 23% while deposits grew by 15%. This indicates that consumption theme is still in tact. The infrastructure space also needs huge investments which would also spur credit growth. Thus the banking sector we feel would be an outperformer in 2011 and as result have allocated highest weightage in both our PMS schemes to the sector.

4)    Strong Rural demand as a result of good monsoons and rural economy continuing to be largely agrarian coupled with the NREGA (National Rural Employment Guarantee Act) bearing fruit rural incomes are on the rise which should spur demand for FMCG products, autos, tractors & consumer durables. We at Concept have positions in all these sectors that are a play on increased rural demand.

5)    Unknown and Unknowable (UU) are things that are not visible but there are chances to make a lot of money. While the risk is high (three out of four calls may go wrong) the returns could be highly lucrative. Investors need to keep in mind three things namely: business outlook, management caliber & valuations. To identify the next Infosys one will have to continuously think about the opportunities the market is not able to visualize. So the investing strategy of UU is to invest money in Company’s not in favor, but after due diligence.