Raamdeo Agrawal: Long & Short of Markets: Investing mantras from Raamdeo Agrawal and Nilesh Shah

History may not repeat, but it definitely rhymes! Looking at the macro numbers and market data, today’s forward PE of global equities at 20x is very close to that of 2003-04 levels of 17x. The rally of 2003 was led by smallcaps, cyclicals, commodities, accompanied by a macro environment of rising inflation and cheap credit. Sounds familiar? Read more about this trend mirroring; Raamdeo Agrawal’s take on cyclicals; Nilesh Shah’s unlock theme and much more in this weekend’s edition of ‘Long & Short of Markets’.

Déjà vu of ‘04? Only Fed is not rhyming!

Today’s markets and macro-economic data have a lot of similarities to the rally of 2003-04, finds Morgan Stanley strategist Andrew Sheets. However, the rally saw a pause in 2004. The only difference here is that the Fed was hawkish in ‘04, rising interest rates and today the central bank is at least 2 years away from this policy stance. “Early 2004 did mark a midway point between the end of easing rates and the start of tightening. That has a little more in common with today,” he adds.
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Rising bond yields not a worry?

The rate of rise in bond yields can be a concern for equities as higher bond yields may call for rerating of stocks, which is not a good sign for ‘fancied’ midcaps and ‘narrative’ stocks, opines analysts at Kotak Institutional Equities. But Dalal Street is of the opinion that this time a rising cost of credit can be offset by higher earnings.
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Decoding the short-lived cyclicals

Dalal Street veteran Raamdeo Agrawal opines that investing with 3-year ideas is typically cyclical investing. You buy at the bottom and exit at the top of the cycle, if you’re lucky enough. Taking Tata Steel as an example, he says, after years of underperforming and when the tide turned, investors made 3-4 times return. It’s a quick boom and bust in cyclicals, he adds.
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Pro-inflation bets and cyclicals, the mantra ahead

Veteran fund manager Nilesh Shah believes that in this bull market and with India in Unlock 2.0 phase, investors should build their portfolio with stocks related to unlocking the economy. Corporate profitability and the likelihood of a higher nominal GDP growth points towards better economic days, he says while advising investors to pocket stocks related to pro-inflation and cyclicals.
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Macros favour domestic focussed cyclicals

India is still in an early stage of its up cycle after years of corporate profit underperformance as corporate profits to GDP ratio has been falling for the last five years and the pick up has been very recent, opines Manish Gunwani of Nippon India Mutual Fund. The Indian economy is coming out of a down cycle as sectors such as cement and power saw huge underutilisation and the pent-up demand in the economy is enormous. Hence, domestic cyclicals such as banks, cement, real estate are better bets than global cyclicals.
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