Interview

“This is 3-4x bigger than the 2008 crisis”

Despite the sharp correction in the Indian market, Sridhar Sivaram, investment director at Enam Holdings, has decided to stay away till volatility peaks out

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Published 4 months ago on Apr 25, 2020 Read

When the S&P 500 Index sneezes, the world catches a cold. Investors experienced this in 2008, when the collapse of Lehman Brothers triggered a worldwide credit crunch. Global markets didn’t recover till Wall Street did. Therefore, the COVID-19 toll in the US is a matter of grave concern, and Sridhar Sivaram, investment director at Enam Holdings, is moving cautiously. While he sees select opportunities, he is steering clear of Indian and global markets until the spread of the virus is contained in what he calls “the mother of all markets” — the US. He outlines his strategy to tide over these uncertain times.

Has the market rout passed its worst? 
I don’t know if the markets have bottomed or not. Probably it hasn’t. The biggest market — the United States — has completely messed up. Every day, I wake up and check their numbers, and they are heading towards a sort of medical disaster. There are two ways of handling this, one is a complete lockdown like India, China or many other countries have done. The other is, of course, by building herd immunity, by ensuring that fitter and younger people can move around and slightly older people stay indoors. The US has done neither, and they have clearly lost the plot. In this sort of a scenario, it is difficult to take a call on the Indian market.

Are you tracking the US market closely because the country provides Indian and global markets with liquidity?
The US market is the mother of all markets. If hypothetically, the US market corrects 20% from here, the probability of the Indian market rallying is low. If the US market corrects, it is highly unlikely that any other market will do well. Therefore, I don’t need to watch any other market. Though the Fed and the US government have provided monetary and fiscal stimulus, we will have to wait and see how this plays out because, at the end of the day, the human tragedy and the fear will dictate how the economy shapes up. And that looks very bad right now.

Then will stocks, which have higher ownership of foreign investors, face excessive pain?
Yeah. If you see most of the large caps, all of them have a large percentage of foreign holding. This is especially true of financials. But there is pain in financials for multiple reasons. One is that the foreign holding in these stocks is large. Two, they are the ones that will get impacted the most due to the lockdown, with SMEs and individuals unable to repay their loans. Even corporates will find it difficult to repay. So, we are seeing a significant fall in even the strong names in financials.

Will the US government stimulus revive sentiment or will it just provide temporary relief?
My personal view is that the relief is temporary because the situation in the US hasn’t improved. In fact, it is deteriorating, with poorly equipped hospitals. So, I think what we are seeing currently is that the markets are on steroids. Once these steroids wear off and reality steps in, I think we may be in for some pretty bad news. I am saying this, particularly for the US. 

With the coronavirus escalating India’s woes, is the local market readying for a rough ride?  
It’s a tough year. We have to brace ourselves for capital protection, and reset a lot of our expectations and numbers. I have lived through 2008 and I was in Morgan Stanley at the time. We were one weekend away from shutting down. This is probably 3-4x bigger than that as a crisis. The real economy in 2008 was still functioning. However, right now, literally, the real global economy is also shut. 

The Indian market has already seen a substantial correction over the past two months. Hence, in terms of valuation, are there any stocks that you believe are undervalued or still overvalued?
This is like re-living 2008. Who would have expected that some of these banks would correct 80%? Some were really the market darlings. So, if this is going to be far worse than 2008, then I am not really looking at valuations right now.  I wouldn’t be in a hurry to jump into the market. I would miss the first 15-20% rather than being the flag bearer to announce that I caught the bottom. Until the US numbers stabilise, I am not a buyer in any market.

A few months ago, you said you are bullish on banking and discretionary consumption. What is your assessment now?
That fairy has gone out of the window. My bet on discretionary consumption still holds but not on financials. The way financials were rallying before this pandemic, I think it may take a lot of time for financials to get back to the leadership position. On the other hand, anything which is more consumption related or in any form related to the real economy, once the dust settles down, they would make a comeback. 

Who could be the worst hit in the banking sector — retail or corporate?
Unsecured loans in my view will be the worst hit. So, that would mean segments such as credit card, microfinance loans and general personal loans. If a person has two loans — mortgage and unsecured — and he or she is short of cash, then it’s reasonably clear that one will default on the unsecured. So, any bank that has a large portion of unsecured loans would be at the top of my list and it will get impacted the most.

Is it possible to quantify the impact of the economic slowdown on unsecured lenders?
It is difficult to quantify. The largest segment of unsecured loan is the microfinance industry, which is worth more than Rs.2 trillion. Keep in mind that this is sub-prime lending, which means lending to the bottom of the pyramid, and many in that band have lost their livelihood. Suppose one of them has taken a microfinance loan and also taken a gold loan, it is certain that the gold loan will be repaid first. You would end up with a lot of non-performing assets, like we saw during demonetisation. Then, it was for a short period and it was more a question of not being able to access the cash that a person has. But today, people have lost their earning ability, so the impact will be far more severe.

If consumers default on paying personal or unsecured loans, wouldn’t discretionary consumption also get adversely impacted?
It will get impacted but at some point it will bounce back. For example, take the case of auto or two-wheelers. We have had poor two-wheeler numbers for six months now because of BS-VI transition. Along with it, we have been hit by COVID-19. We have demand building up for almost six to eight months now, so when demand returns, it will come back roaring. The comeback is still some time away, but meanwhile you have to keep your ammunition ready. The two-wheeler segment would be the first one to recover, followed by passenger vehicles and then commercial vehicles. Some of the auto ancillaries are also looking interesting. The inventory with the dealers was almost zero, because of BS-VI transition, so they will have to build that once the lockdown is lifted. We believe the demand will not come back till the festive season.

In the consumer discretionary space, apart from auto, is there any other sector that you are bullish on?
A few of the larger listed media firms look interesting because they are cash-generating companies and have no debt. During the current lockdown, we are seeing a lot of consumption of media. But at the same time advertisement revenues have fallen sharply. In this space, you are getting companies with cash flow, possibly very low valuations and good dividend yield. A few of the media companies are at their 15-20-year lows, and a few auto stocks are trading at 15-year lows. Most of the companies have destroyed a lot of wealth and have gone back 15-20 years.

Investors have favoured growth stocks till now. But due to the correction this year, will value stocks make a comeback?
I have generally been a growth investor. Foreign investors come to India — I have an FII kind of mindset because I have worked there — for growth, because developed markets are already offering so much value. So, I doubt if investors would come here to hide their money. They want to make high return. Also, growth stocks have corrected so much that they may fall in the value category. In growth stocks, once recovery takes place, I would look at something that people will get back to using immediately. We are also looking at companies which will normalise over the medium term, which includes many non-essentials too, such as consumer durables. They will grow at a much faster rate than staples but they have corrected a lot. We don’t know when earnings will revive, but one assumes that there will be normalisation in the next 18 months.

Which other sectors are you monitoring in the current market?
Besides domestic consumption such as discretionary and durables, anything that has growth possibility, even cement. We are also looking at commodities such as chemicals, which have a good opportunity given that China has shut down. I am not really a value type of investor who is looking for safe investments. Value has also not been safe and everything has collapsed. If you look at PSUs, which are described as value stocks, they have destroyed more value than the growth stocks.

Volatility has reduced in the Indian market. How do you view this development?
It may be temporary. We will see increased volatility over the next month because of heavy news flow and all sort of other things such as promoter pledges. Any of these issues can trigger volatility, so I don’t see it reducing, at least for the next one month if not more. It’s better to not get caught in this. I am staying away and watching only one market — the US market.

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