We have cut our positions in financial stocks and moved that cash to telecom and pharma stocks, says Founder, Capital Mind.

While the economy is staying open and we have had several chief ministers clarify that they do not want to go back into a lockdown phase, it looks like the battle with the virus is here to stay and that is going to continue to cast a shadow?
Yes, unfortunately we have got a very tough choice to make. The lockdown will hurt people a lot more and perhaps it is going to be very difficult to lock people down now. But there are also the hospitals in certain cases that are getting overvalued. India is one of the few countries where the recovery rate or the number of people recovered are greater than the number of currently active cases. So that gives you a slight hope that things might improve even if the curve flattens a little bit. But until that happens, this is a fear. The monsoons are also coming and the temperatures are going to fall. We do not know what that is going to bring. So yes, tough times. I just hope next few months will bring up some relief.

Why is ICICI Bank leading the market decline?

I think it is corporate bank versus retail bank. There is obviously a lot more impact currently on a corporate bank. We do not know the impact of retail banks yet but given that a lot of things are coming around the moratorium; whether interest can be charged, how interest can be charged, whether it is compounded or not; I think the corporate buying impact is going to be a little bit more. ICICI has got its arms in multiple fields but the bank is still the primary driver of valuation here.

So any impact on NPA is going to affect the bank a lot more than growth in a subsidiary. But having said that, it is also the fact that sentiment towards the banking system and private banks and even public sector banks have been spared. We can see the interest moving away from the banking sector as a whole and ICICI being number one, number two bank in the private banking space is going to take it on the chin. I feel there is value here in the longer term. They have survived a lot worse than this. Things in 2008 were much worse for ICICI. I think from that perspective its tentacles are a bit wider which can suffer a deeper hit to its balance sheet today than it could may be 5 or 6 years ago.

As a disclosure, we are positive on the bank and we have some positions in it. But I also feel that the pain is not going to go away till December. They should expect more to come and as banking gets it, ICICI Bank will be affected one of the most if not the most in the next six months.

Where do you find covering space and what do you buy on declines if you do have that powder kept dry with you?

Sometimes it is better to just chase stocks that you wanted to buy for a long time but perhaps did not have the position that you wanted because the prices were off. We are actually buying some of the stocks you mentioned not for anything else but just because it is a good time to add to the position. We do have cash levels. But you are dealing with the unknown like Covid; so you are going to have to be flexible. So at some level you are going to take these small positions in certain stocks; whether it is pharma or in auto manufacturing or perhaps in home automation or however you choose and then add on to those bets as the fundamentals start to cool inside with them.

I think it is time to do that. I think that auto is going to do well. If your position is going to be 100, buy 10 now and then add more 10 when you see some real signs through data. So this is one of those times when some stocks will get beaten up a little more than usual and if there is some level of conviction; nobody can have 100% conviction on anything now. But it is time to do a bit of those and add a small set of positions; whether it is a battery maker or a UPS manufacturer; it is just small positions built in order to see if the fundamental theory is going to play out with data as well.

What does one do at a time like this? Would you continue to buy into some of those stocks that you are finding attractive or would you sit on the sidelines until we have a little bit more clarity on the medical news?

If we look at markets overall, even in 2008 the first recovery was about 50% of the fall. It used to take about three or four months but things are much more compressed; so we have had it in two months. The 50% of the slide from about 12,800 to all the way down to 7,600 levels. Roughly the 50% mark comes to around 10,300-10,400. So we have seen 50% recovery on that. This is the market taking a bit of a breather. It is very important to see now what happens. The news is getting worse; it is probably going to get even worse in the month of July when results start to pour in because obviously it is going to be a bad quarter but it will likely be a worse quarter than we have imagined and commentary is going to be quite weak. So I expect the next two months to not have huge triggers on the upside.

Of course, if we find a medical vaccine, that will change the whole equation but typically markets tend to do this over 50% and then fall back again. If it is a deep fall it is going to be much deeper but it will find the lows again. If it is not, it is going to correct to a certain point and then start to move back up again. That is the natural way markets are. So we look at times like these as a potential hunting ground; not necessarily where we are going to say we are going to go all in but we are going to add to positions and find new positions where we want to focus on perhaps a little bit less on financials-oriented stocks.

So we have cut down a little bit of our positions there and moved that cash to some of the other stocks; telecoma and pharma. We have actually moved a little bit out of FMCG just to make room for some other industrial stocks. But again, these are all small bets; so we got to be flexible. I think the time is now to just build small positions and have some dry powder for the next few months because I expect a lot of volatility. It is going to be more on the downside and we should start finding ways and picking it back up. I am not saying that it is a huge value zone right now but I would also say that keep your eyes open; opportunities will come and sometimes stocks will get beaten up more than they should.

But you do not see a retest of March lows on an index level?

I do not know if I can predict it would not happen. I think it is fair to say I will really react rather than predict. If we go back to those levels, it will be because of another wave of extreme panic selling and at the time when it happened in March, multiple factors had led to it. They were more global in nature than local at that time. I do not see that emerging again because the world central banks have come and said we will buy anything that has a pulse or even if it does not have a pulse. But given the fact that you could see more volatility both from the West, we could see something else emerge that is not to our liking, I would not necessarily say that is not the case. I hope it does not happen but if it does, I will be a buyer again probably even at a much higher level than I am right now.

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