Market strategy | Stocks to buy: Deepak Shenoy on track to play the broader market

“You have to play electric vehicles as a portfolio and not as an individual stock in itself. The auxiliaries, major OEMs, and some of the other games are best built in space. Unfortunately we don’t have enough in India that are listed but in two years a lot of companies will be listed then says Deepak ShenoyFounder, capital spirit.

It’s a pretty volatile market. What exactly do you think should be the strategy when it comes to broader markets in particular?
To be fair, the market has been on a rollercoaster ride over the past few days, but I also expect the market to continue to be quite volatile as the news feed isn’t over. There’s a lot more to come. There is an ongoing negotiation between Ukraine and Russia, the outcome of which will likely be known after market hours. As long as uncertainty persists, markets will experience volatile days both up and down.

Today is surprising because much of Europe is down. US futures are down. But Indian markets are up nearly one percent. So it’s a little surprising, but in the short term, liquidity and cash flow is all that matters. Even though we see foreign investors pulling back, markets are up because domestic flows are stronger.

Right now we are going to be cash victimized and so for the month ahead I don’t expect anything big on the upside but more importantly you might find opportunities where certain stocks can give us some strength. excellent entry points for anticipating the next three or four years. The whole business system is there. Many stocks fell 30-35-40%. This is a good time to start picking and snacking on stocks. Different sectors are attractive at different points. However, the case may be a point to start looking at stocks from a fundamental perspective as well.

What looks attractive in the metallurgical space or is it a sector you are bullish on?
In metals, it’s a very short-term positive on steel because of Russia. Russia is one of the largest steel producers. If they are not factored in then in the short term we could see some price increases but we are seeing quite a negative news flow from the other major producers including China, Korea and Japan, where production started to rise and come back significantly.

Prices around the world, at least until last week, were either correcting somewhat or not rising much. This particular crisis could lead to higher prices in the next three or four months. But I don’t think this year is going to be very kind to them. Towards the end of the year, the Russian ruble has already fallen significantly. If they somehow return to world trade, their reduced exchange rate or rather the weakening of the ruble will lead to a general drop in steel prices when they return to the commercial market. By the end of this year, I expect this to correct itself.

Aluminum might be a little better off but I’m not very positive on steel. I don’t like gold very much. So no matter what it does, I don’t seem to be a buyer of it. I will be a reluctant buyer, based on technique, but not fundamentally.

What is your opinion on the financial space because Nifty is at around 16,800 levels but financiers refuse to participate and big names like HDFC Bank, Kotak Mahindra Bank are under pressure. In the longer term, say 6 to 12 months, how do you see the prospects for the banking and financial space?
We have some ownership here so we’re a bit biased, but I think the corporate banks will do a little better than the retail banks. Also, banks with significant FII ownership would have seen some sort of dull activity over the past five or six months because FIIs have been constantly selling and their biggest ownership is in the banking sector. I believe here that we will see the banks doing well, but only after about five or six months, when the impact of inflation, in my opinion, will start to lessen, which is after June.

There are also a few other things that happened at this point. There is this crypto tax that has a downstream effect on the bank because some of the things that have grown in the crypto space have taken away some of the areas where the banking space would otherwise have grown. There’s also a bunch of other stuff, including government spending, including infrastructure spending that will come in at the end of this year.

I think business lending should do well this year. So I would focus on some of the corporate-focused banks, which aren’t as interested in PSUs primarily because they’re PSUs, but otherwise have much better balance sheets than they used to.

In the NBFCs, we have to wait until July because the new rules for the NBFCs come into effect on April 1st. which will change the dynamic somewhat in terms of how NBFCs have to report NPAs, earnings and a bunch of other things including whether they can lend for IPOs beyond a certain point And so on. This will change their finances and I want to wait at least a quarter to see the impact of this before diving into the NBFC sector.

Do you think the worst is over for the automotive sector or is it still a long way off?
“The worst is over” is like the four worst words you would hear in the financial industry, because the minute you say that, something worse happens after that. Having said that, it’s been two or three years now, we also have a lot of investment in the automotive sector. I believe we will see a recovery, but it is not easy to predict exactly when.

I just believe that in the next year or two we’re going to see a return to mobility, a lot of which has been affected by Covid and lockdowns and a bunch of other things like the rising cost of insurance, rising metal costs, intake costs and so on.

Some of them remain, but they’re not as inflationary as we thought, so metal prices haven’t risen as much year over year. We are also seeing that crude prices, which are relatively high, will calm down after this crisis, mainly because everyone now understands that we need to isolate gas and crude supplies outside of Russia, which is the one of the largest producers of crude oil and gas.

If the supply increases in the market, it is possible that prices will correct, but it will take five or six months for that and hopefully by then we will start to see a recovery. I have some hope for EVs, but it’s 2025 and up. Until then, we will see petrol and diesel vehicles primarily two-wheelers first and then passenger cars starting to return. Commercial vehicles are doing well, although the real growth should be in two-wheelers and cars.

When it comes to EVs, would you be a little leery of the two-wheeler space just because of increased competition from unlisted players?
In fact, some of them are good because we’ve seen some of these guys promise big and deliver small, which will have people saying let’s get back to the bigger names. If they have investments in this space and all the major two-wheeler manufacturers at least say they have something going on in this space. They have the potential for distribution and the way two-wheelers are currently designed, they are not the same as Tesla, which is a very low maintenance, moving parts type of vehicle.

The kind of two-wheeled EVs we see in this space also have cogs, chains, and gears, which is so weird because an EV isn’t supposed to have that many moving parts. But the designs they have chosen will require service networks. Motorcycle manufacturers already have service networks that will benefit more from the expansion of electric vehicles, but they now represent 1-2% of the market.

It will take about three or four years before they approach the general public. They will go through many iterations and many of these new ventures haven’t even experienced a crisis, especially in funding, in particular in the search for profitability and growth. The biggest players may not be the big winners in the EV ecosystem, but they will have a big role to play here, the listed players in particular. Whether directly or indirectly, they will benefit from this space and even some of the auxiliaries will do very well.

It should therefore be played as a portfolio and not as an individual stock in itself. The auxiliaries, major OEMs, and some of the other games are best built in space. Unfortunately, we don’t have enough in India that are listed that will be directly impacted by EVs in two years. Many companies will be listed at this time.

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