When Economy Reopens, The First Trade Is Financial Stocks, Says Ravi Dharamshi
Financial stocks would be a good bet in the market as restrictions due to the second wave of Covid-19 ease and the economy starts to recover once again, according to ValueQuest Investment Advisors’ Ravi Dharamshi.
The first trade is financials because every economic revival is preceded by a boom in the credit cycle, the founder and managing director of ValueQuest told BloombergQuint in an interview. “The good banks are willing to grow and are already growing at 12-15%. So that tells you that the corporate lending cycle is coming back."
Dharamshi said he was sceptical of financials last year as he was worried that the losses of companies due to the first Covid lockdowns would be passed on to the banks. “But what we have seen is the profit cycle ended up being so strong that the banks didn’t face the kind of NPA issue one had expected. And that is also partly due to most of India Inc. being deleveraged prior to that,” he said. “What RBI did beautifully was make sure the banks capitalised themselves properly. That’s the huge change that happened and that’s why the financials rallied fantastically from September-October onwards.”
A deadly second wave of Covid-19 overwhelmed India’s health infrastructure leading to mass deaths and pushing states into reluctantly partially shut down their economies again. While these local lockdowns aren’t as strict as last year, they’re still expected to have some economic impact. Yet, with new Covid cases declining, a handful of states have announced easing of restrictions.
Dharamshi thinks markets are willing to look through the economic pain and discomfort of the second wave, and focus on what happens when the country reopens. “I would definitely prefer financials to play the opening up.”
I think the best proxy for the economic rebound remains financials.Ravi Dharamshi, MD, ValueQuest Investments
There are other businesses like restaurants, tourism, and travel that may witness a rebound, he said. “But there are not too many plays available in our markets to start betting on those.”
Survival Of The Fittest In Real Estate
Dharamshi is also bullish on the real estate sector but the reason for that is not the reopening of the economy. “There are many things that have happened in this sector.”
The sector has been through the implementation of Goods and Services Tax, demonetisation, Real Estate (Regulation and Development) Act, the IL&FS crisis and then Covid-19, said Dharamshi. “There has been like one crisis per year in the last five years for the sector. If a company has managed to survive all of those then that speaks volumes about that company.”
Further, the consolidation in this sector is the highest amongst most sectors due to which the competition is reduced to the extent of bottom 50-60% of the market. “You can see that in the new launches that are happening,” he said.
There is still a lot of inventory left that remains to be absorbed. But I believe if this current pace of absorption sustains then in 18 to 24 months’ time, I think we will have a new boom in real estate also pending.Ravi Dharamshi, MD, ValueQuest Investments
“Usually, stock markets tend to lead the real estate boom, but real estate boom tends to stay longer than the stock market boom,” he noted.
Indian companies will have a bigger role in the global pharmaceutical supply chain, Dharamshi said. Active pharmaceutical ingredient companies in India will have a huge tailwind going forward because India and the world want to reduce dependence on China, he said.
There are risks in the stock market right now but they are more about investors overestimating or extrapolating the current trends into the future, he said.
There is no choice but to be bullish on the Indian markets as the corporate sector has deleveraged and will see its profit grow, he said.
Watch the full interview with ValueQuest Investments' Ravi Dharamshi.