Hitesh portfolio

Yesterday Federal Reserve of US announced 50 bps rate cut. US markets initially cheered the news and then ended in the red. Indian small cap and mid cap indices are down ~2% as of this writing.

I have been following the rate cut event this time and there were contradictory views expressed by various writers of WSJ and FT on daily basis. Some of them are written below –

• Economy has weakened too much, fed is behind, we need 50bps rate cut. Weak economy means stocks should be sold.
• Fed is not cutting rates, which means economy is strong (demand/unemployment). We should ignore interest rates and focus on strong economy and buy the stocks.
• 25 bps cut is too less; 50 bps rate cut is too much.
• past rate cuts (2001, 2007, 2020) have resulted in recession. This time also it will result in recession – sell stocks.
• This time rate cuts are different as companies balance sheet are in great health and economy is growing at fast pace. This is soft landing, and strong economy will be maintained.

There is so much flip-flop in consensus market views – that it was confusing and rather pointless.

Eventually, I felt that all of this is ignorable.

The mid and small cap indices have run up quite a bit for last year or so and valuations are significantly above long term averages. So some correction is par for the course.

That being said – liquidity in the Indian markets is very strong as can be evidenced by multifold subscriptions to IPOs, most MFs are sitting on 10% type cash, most of the salary hikes post COVID seem to have found its way in the markets, equity participation of retail investors has widened (I think number of equity account holders is something like 16cr).

My sense is that this kind of liquidity inflow would not be deterred unless there is a large Indian focused event. My past experience of liquidity drying up in Indian markets are – 2016 demonetization breaking the Modi Rally that started in 2013. Small/mid-caps were making suffered between 2016-2018 and had started to make a comeback by Jan 2020 – when COVID hit. I don’t know what that large negative event would be but till then there would be sector rotations.

Being a concentrated investor, I am focused on holding on to what I believe would be winners for next 2-3 years. I am looking at any price correction in existing companies as opportunity to add more. This obviously assumes that business performance plays out as I have envisaged. Any deterioration in that would be a far stronger signal to sell.

I am also keenly looking to find winners into newer sector and hopefully we can find some at decent valuations.

Disc – Predicting (macros or markets or elections or anything else) is a sucker’s game. One would be likely to be wrong than right.