Let’s dwell more on the poser at the end of this post
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What is it that you are telling your clients right now? How should one position ourselves for say the next one year because you still do not know the quantum of the damage because the currency demonetisation is going to persist in the economy? What sectors do we stay away from? Where do we look at buying opportunities?
The advice we have been giving over last year and pretty similar to the advice we are giving now is we are asking clients to look through the damage, look through the pain because there is very little we can do about the damage. Yes Q3 numbers both on the economy and on corporate earnings will be pounded. There is very little investors can do about it. What we need to look out is a year out, year-and-a-half out and say who are the big winners out of this and our unequivocal take is the winners out of this are sector market leaders.
_Whether it is an electrical, whether it is in sanitary ware, whether it is in the financial services, the sector market leaders will win as the informal sector shrinks and dies away. So with my friends, with my colleagues, relatives and friends, we have been discussing extensively over the past three or four months as to how a lots of SMEs plan to shut down their businesses over the next year or two because they saying that if we pay full tax, we simply would not make any money. Hence, might as well wind up our business. As we go through that process of that informal sector winding up, you will see the formal sector market leaders gaining market share and my reckoning is from Q4 results onwards, this talk will gain momentum of market share gains by leading franchises in the listed world. _
_We are pushing our clients towards those franchises, buy them maybe 5% to 10% lower than where they are today but what is unquestionable is we have to build an Indian portfolio out of sector market leaders rather than trying to play second rung, third rung names or names with broken balance sheets. _
_What pockets out there because if I just look at informal versus formal, they exist in the distribution space, they exist maybe in gems and jewellery, they exist in the brokerage names, they exist at multiple pockets. What are the favourite themes? _
The one distinction we are drawing is we want to look at sectors which overall do not get structurally damaged by the attack on black money. So for example, our take is that there is a good chance the real estate sector does get structurally damaged by the attack on black money.
_It is logically not possible for the real estate sector in our country to continue at 2% rental yield. It makes no sense at all. So even though in real estate as well, there will be sector market leaders who will gain market share, we would rather steer clear of that. _
In something like kitchenware sector, you have got a couple of companies which dominate the sector. As the informal part of the kitchenware industry dies away, the market leadership will consolidate around that. Ditto in electrical. You have got two to three companies who dominate the electrical sector in India and again as the informal sector whose market share is as much as 50-60%, dies away, the formal sector market leaders will gain market share.
While there are possibly good opportunities in Sectoral Leaders, aren’t there more interesting opportunities, in sectoral followers ??