Overweight on speciality chemicals & contract manufacturing sectors: Atul Suri

When the markets bottom out, the new leaders of the next bull market will emerge, says CEO, Marathon Trends PMS.

What is working for you in the market? Are you on the short side of the financials?
I am a long only fund. I am a PMS. What was the darling sector—banking, financials—six months ago definitely have fallen and that is a reflection of what is happening in the economy. Companies and sectors are getting rerated and there is a new normal and you can see where we are. The Nifty is about 25% to 26% from the Feb highs but something like the Bank Nifty is down 45%. So that really explains the shift that is happening and this sector has the highest weightage on the Nifty; so it is really putting a lot of pressure on the market. Yes, it is a new normal. A sector that was the favourite for the last five years has fallen out of favour and that is the way it is because we will all have to adjust to new realities in our lives and we have to adjust to new realities in the market, new sectors and new stocks, and that is the way it is. Nothing is constant and change is the only constant.

I am going back to the financials. It is a large part of the weightage; it is like the heart of the market or perhaps the brain of the market. In this case, they both are not working. Where will markets go if 35%-40% of the weightage is coming down?
It will be a process. If a large part of that has a massive depreciation in price, its weightage in the index itself will come down with this drop in marketcap. However, you have a sector like pharma that is 4% positive. I may have a vested interest in what I am saying but a stock like Reliance is such a giant and has a sectoral push to the market. Reliance is where it was on 12 Feb, which is around Rs 1,400.

The markets are very beautiful and they are very self correcting. If one of the largest weights fall out of favour, a lot of other spaces and opportunities will come up and for me as a fund manager that is the crux. For me to be able to beat the index and to be able to beat the benchmark is the only way I can justify my existence and that is only possible if I am able to navigate my portfolio away from what is moving out or where the trend is getting destroyed. So I look at the market as half full.

Yes, we can talk about index levels but the fact is that there are a lot of new normals happening in our lives. If there are new normals happening in our lives, why have there not been new normals in our portfolios and in our stocks. I would rather not be an ostrich and put my head in the sand. I think there are new realities and it is very important that we adjust and you can already see the benefits of that adjustment happening because the move away from financials about two months ago towards pharma has played out pretty good. So I think these are the new realities and it is very important that we adjust too.

Just look at what is happening on the charts of Bharti. I was just going through the entire list of brokerage upgrades post the earnings which came by yesterday and the price target is Rs 700 plus across the board. What is happening here?
A sector or a stock that has been out of favour for the last many years suddenly becomes a market favourite; that is what I call change in trends because what is happening is that the trends are changing. The last major trend change we saw was in 2018 when we saw a big shift from the small and midcap towards the largecap but now we are again going through another shift and that is exactly the case in point. There are new realities and new sectors and it is very important to realign ourselves to these new realities. I mentioned pharma and telecom is another interesting place. I feel a lot of agri-based stories are also emerging. Again, you will notice that the market is not differentiating a lot between largecap and midcap. If you see, Nifty is down 29% from the top and the midcap index is 29% down; so it is falling at par.

The differentiation that was happening between largecap and midcap has now really moved to sector-specific; like the Bank Nifty is down 45% and I think the game has moved away from the largecap and midcap game. It has really moved towards sectors and themes. We have to see who are going to be the beneficiaries of this new reality. I think they can have massive upsides from here and that is what we are playing out. That is our thought process. I have been in the market for 30 years and I have seen four crashes and I have really seen that the stocks that have outperformed in the up move tend to really underperform when the markets fall for years to come and each fall throws up new realities. That is where your next ten baggers or hundred baggers are. The fact is that there are going to be new realities and with new realities come new opportunities and for me the key point is if I go out and grab them. That is what we are doing or that is what we are focusing on in our PMS.

Other than the spaces that we have talked about, where else are you scouting for opportunities?
Another space that we were overweight in and have added is speciality chemicals and contract manufacturing. There is also going to be a shift out of China. Now whether India grabs it or how much it grabs is a work in progress. We have recently been a bit disappointed with the government actions; so we do not know how much India will grab it. But one sector or one space where already this transition was happening for a few years is speciality chemicals and the benefits will get further accentuated post China falling out of favour.

As I said, it is not a new trend. We have been doing very well in unknown midcap spaces but we do not even have an index for it and there are hardly any analysts who cover these stocks but I think this is going to be another very interesting space. As I said, we were overweight but we have gone further overweight because this is going to be another new normal.

I will just take a step back and share my thoughts on the market. I know it is not the question but most people are waiting for the bottom. And the question that everybody asks is will 7,500 be the bottom. I personally think that we do not know the answer and nobody knows the answer because this event is not going to end in one day. Bottoming is a process and having seen three large bear markets earlier, I have seen that bottoming takes time at an index level and in this phase when the markets are bottoming out, the new leaders of the next bull market will emerge and it is very important to be able to realign your portfolio. It is very clear to me that the governments are realising that you cannot have a lockdown forever. Already with a three-month lockdown, governments and societies have been brought to their knees. We are actually seeing so much upheaval economically and socially. Look at the way the migrant worker issue is panning out. So I do not think that governments can keep this lockdown for very long. They will have to open up the economy, they have to start economic activity.

Surely we will make progress but economies will have to open. Though the number of cases in India are not coming down, the economy is opening up and that is very-very important. So the markets are going to reflect that and the thing that we have to look for is not a one-day bottom and not a level or whether 7,500 will hold or 8,000 will hold. It is going to be a process but in this process, there are going to be lots of stocks and sectors which are going to be early leaders and for us as investors, the important point is to be in those because those are going to be the new leaders of the new reality.