I generally avoid a macro view on stocks. It is quite difficult (for me) to analyse a macro event and then come to a stock specific conclusion.

However there seems to be broad trend of dollar depreciation (that not news 🙂 ) due to variety of reasons – subprime, US current account deficit etc etc. A drop in the dollar does not always translate into a rise in the rupee as ours is a managed currency. However inflation and its impact on elections is a powerful motivation for the government to appreciate the currency (imports such as oil become cheaper).

Recently inflation hit 6%+ and it is quite likely that one of policy decision could be to allow the rupee to appreciate. Sudden or slow appreciation? I don’t know. However an appreciating rupee impacts my stock strategy as follows

– IT stocks could get hit further. I doesn’t matter that some are selling at 2-3 time PE and are being priced for bankruptcy. The market is not rational always. If IT stocks could sell for 100 times earnings, they could drop further.
– Oil companies could benefit ..the key word is could. For all you know, the government could drop the prices and pass the benefit of the rupee appreciation to the consumer.
– Export based industry such as textiles etc could be in for a tough time. Makes sense to find the strongest players and invest only in those companies which can pass some of the currency impact to the customers.

I am not changing my stock specific plan drastically. No moving out of export dependent companies and moving into import driven companies and all that. It is quite diffcult for me to figure out the exact impact of such macro factors in the long run.

I am not a contrarian by nature, but going against convential wisdom has been very profitable for me. So as it becomes an accepted wisdom that IT companies or other export driven companies and their stocks are doomed forever, I plan to look more closely at them (and buy if I find them attractive and oversold). and I will not blame you if you feel I am out of my mind to think of IT or export driven companies. I am now very used to that feedback 🙂

10 Comments

  1. VISHNU says:

    Hi Rohit,

    What a coincidence , I was thinking on the same line yesterday after reading famous Buffet FORTUNE article on Markets.(1999)

    Where he sets the expactation of invetser return to be 6% and real returns 3% (after considering infaltion 3%).

    If this is the expactation from a Genious, we have helluva opportunity available few months back interms of Fixed Deposits by ICICI / HDFC / YESBANK when they offered 9% interest rate .( 3% Real returns after considering 6% inflation)

    Again this brain dead method of investing ( No need of brain 🙂 )

    One more coincidence on the IT scenario, few days back an ITES company went below 85 crore Market cap ( Liquid MF Investments alone around 75 Cr)..I bought it in small chunk as the opportunity existed only for few days..Plus low investible cash available at that time for me

    Let me know your thoughts

    Regards
    Vishnu

  2. Anonymous says:

    Yes. Quite a few IT stocks beaten down there. Have bought one as well about a month ago. Lets see how it plays out over a 2-3 year period.

    Also, there is atleast one stock which looks like a P/E of less than 2 and almost all other ratios, growth too good to be true.

    Went through the AR. Pretty confusing. Skipped it. Despite demergers and trading at 4-5x P/e for almost the past entire year, the stock has sunk. Looks like the “E” part of the ratio is very circumspect.

    Guess you know by now which stock I am referring to.

    Prashant

  3. Anonymous says:

    Hi
    aztech?

  4. Rohit Chauhan says:

    prashant – i think you are referring to teledata.

    hi vishnu
    i agree ..a lot of midcaps, especially IT stocks feel to 3-4 year lows. i too picked up a bit, but i dont build position without detailed analysis. so i am still working on it ..however i think there are still plenty of opportunities ..just that one has to careful and not go by a simple PE calculation

    but for me personally, after a long time i am getting to choose between very cheap to ridiculously cheap stocks.

  5. Anonymous says:

    Hi Rohit,

    definitely agree about availability of good companies at cheap prices.

    Haven’t focussed on any one sector in particular. but the collection is beginning to look a mish mash of sectors.

    regards
    venkat

  6. Shankar says:

    Hi .. perhaps the biggest visible hit of an increase in interest rate, will be on the financial sector esp. lending companies. This happens because a number of reasons –
    1. The interest rate increase, which means more people will postpone their capital expenditure. This eventually means low volume off-take. So, while banks are flush with funds – there are no takers for it.
    2. Additionally the cost of funds increases which means even corporates start borrowing less. Similarly, NBFCs face a higher cost of funds.
    3. From the consumer end, a higher inflation means a larger part of his household income is now going towards payment of the rising bills. The effect of this increase, is the rising defaults by existing loan holders. This again amounts to peril for these lending banks and finance companies.

    Warm Regards
    Shankar

  7. Rohit Chauhan says:

    venkat – my experience is a bit similar. i have found value is multiple sector …but that is by accident …not by design. i generally dont take a top down sector view and find companies. i prefer the bottoms up approach more

    shankar – i agree inflation’s impact for the consumer. however i think the link to banks and financial companies may not be clear cut. inflation and interest rates can have an impact ..but also depends on how the bank is managing its asset liability mismatch and the durations. a lot of banks can eliminate the interest rate risk through derivatives and variable rate loans too

    regards
    rohit

  8. Anonymous says:

    Hi,
    Inflation can take banking stocks further down. But they already seem to be attractive levels.
    eg – Punjab National Bank, Allahabad Bank.
    Now as government will be bearing the cost of farm waiver, then debt quality has improved.

    Rohit, Shankar,
    Your views about these banks at current levels.

    Regards
    Amit

  9. Rohit Chauhan says:

    Hi amit

    these banks look cheap ..but the loan waiver may have created a moral hazard for these banks

    fresh borrowers in rural areas may be lax in paying back in the future ..expecting such waivers again

    i am not sure how big problem would be in the future

    regards
    rohit

  10. Shankar says:

    Hi Amit,

    Banks seem to be fairly valued – arent too many doubts on that. But I suspect there are chances of bank stocks to go down further during Q1. Some problems, the impact of which has not yet been seen –
    a) Unpredictability of interest rates movements
    b) Rising delinquency on the retail finance front (credit cards and personal loan delinquency is on the rise)
    c) Lower growth of loans esp. mortgages which is about 45% of every bank’s asset base. (if interest rates increase, then volumes go down even further)

    I think banks will not declare these problems just yet (Q4 is never the time to do this). These observations may come out in Q1.

    Warm Regards
    Shankar

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