Markets: Global markets in a Goldilocks scenario; not seeing any red flags: Atul Suri

“So, the second quadrant, which even debt or bond yields are on a quieter phase. The third area is about currencies. Again, you will find that globally, there is no major upheaval as far as currency grows,” says Atul Suri, Marathon Trends – PMS.

Markets are looking slightly jammed and global volatility has kicked in. Are we in for a volatile and a tough second half of this calendar year?
Atul Suri: Actually, I think that it is human nature to be worried about things and you can see the markets yesterday, what happened in the US, down 500-600 points on the same data, closed 100-200 points higher. So, the thing is that when I look at a bigger picture, I feel that the world is in a Goldilocks scenario. So, what really happens is there are four asset classes. So, if you look at first, commodities, you will find that one of the biggest problems the world had one-two years ago was about inflation.

But the way the commodities have taken a backseat and correcting, so the issue of inflation for the moment, thanks to cooling commodity prices is pretty much rested.

Linked to that is bond yields because as commodity prices and inflation goes up, interest rates went up, we saw that in 21, 22, 23 and you will find that even there, there is a talk about now the Fed cutting. So, the second quadrant, which even debt or bond yields are on a quieter phase. The third area is about currencies. Again, you will find that globally, there is no major upheaval as far as currency grows.

In fact, the DXY is near 100, which also is where it should be. And the fourth quadrant, which matters to all of us is equities. And equities is at lifetime highs.

So, if you ask me, if I take a step back and I am not talking about the day-to-day volatility or week-to-week, but the fact is that globally, as each asset class should be positioned, I think it is positioned there. It is what is termed as a Goldilocks scenario, where there is growth, but no hyperinflation.

And I feel that we are in a very-very sweet spot. Yes, things will change. The Fed comes in. There is data every day.
But overall, I mean, there is nothing, there is no real big red flag. Day-to-day things will happen, one blip here, one blip there. Markets move 500, 700, 1000 points. Yes, they do. Markets are never static. But in the larger scheme of things, the world is in a Goldilocks scenario.

And for equities, the asset class that matters to us, all the major global markets or markets that matter are a few percentage from lifetime highs if they are not already there.

Let us pick up on those four indicators that you talked about. And I want to first talk about commodities. The fact that copper is at a 16-month low and some say in bear market as well, is that not a red flag enough?
Atul Suri: If you look at copper, you will find that in the last few months, copper had really spiked. In fact, it had gone and made a new breakout levels. So, from that point of view, copper is just cooling some of the excesses it made two or three months earlier, so that is something which I feel is really playing out.

The commodity that really concerns India is crude. And if you find Brent at 70-71, where it is positioned right now, for Indian markets per se and even the globe as a whole, yes, these are very-very healthy signs.

Yes, commodities should not crack, they should not be like get decimated, because that signifies that, well, there is a problem with the economic recovery or economic growth, that there is a demand issue.

But a lot of these commodities have corrected. Because what happened was we went through a very abnormal time post COVID, where they had crashed at COVID time because demand got hammered and then they spiked, in fact the CRB index went up 3x, from 100 to 300 or thereabouts.

So, right now, it has come back to something like 250-260. It is good. It has to kind of rest. And more importantly, if it stays within a range for elongated period of time, that is very-very healthy because this was a very big issue for corporates worldwide and for markets.

Cooling commodities, that is where I started, very-very healthy because it puts to rest that whole inflation issue which caused a big problem globally.

So, let us talk about themes which we have discussed in the past, the leadership in the market was with cyclicals, defence, perhaps shipyard, and even railway names. A lot of those stocks have corrected. And it is quite ugly if I look at railways and even in shipyard companies, 15% to 20% is the correction. Is the bull market still intact in those stocks or are happy hours over?
Atul Suri: What was really happening is in the last one to two months, more so post elections, you will find that there is a dramatic shift happening thematically. The risk on trade which were the industrials; were some of your PSU banks for that matter, PSU banks were the best performing sector for two years back-to-back; defence stocks; etc, they have all actually cooled off.

I am not saying that they have cracked, because if you look at the move, the move has been 200-300% from where they moved. And yes, if they have corrected 10-20%, it is normal.

These things had run up. There were excesses. And what I feel is that they are just cooling off. The trend has not broken. I still feel that this bull market, which is a multi-year run, is going to be led by industrials.

However, there is a need for the rest of the market to also catch up. And the world is moving towards a defensive scenario, in terms of the Fed, in terms of all that, so much narratives that are coming, you can see even in our domestic market you will find that the three sectors that stand out is IT, second is pharma, and third is FMCG.

And you will find that these sectors have done well. These also sectors were actually underperformers for two years prior to that. So, what I feel is that the rest of the market is catching up.

So, if someone who has run, needs to rest, the market or the sectors that were lagging are catching up. So, you rightly put, I think the question is very relevant that I feel that the themes or the trends are changing.

However, what led this in the last one to two years, it is not over, it is just resting, it may take a few months or a few quarters but that is great because what happens by this playing out the market breadth improves.

You cannot have just industrials leading the complete bull market and a lot of these so-called quality stocks did nothing, nothing, they were absolute no gainer for two years, but now you will find that they catch up and then once they catch up then we actually get set for the next leg of the bull market.

I am very bullish for the market as a whole and there is a sector rotation happening right now which really is the issue that I grapple with on a day-to-day basis.

The issue is not about being in cash or being invested. I am fully invested. The issue is that the overweight in industrials and PSUs and defence has to now tilt slightly to IT, pharma, and FMCG.

And how much would that weightage be, so let us say in April what was your weightage towards industrial cyclicals and PSU, how much is it now and what to your mind should be the idle mix of FMCG versus pharma versus IT and industrials?
Atul Suri: We had almost reached about 60% to 65% in industrials that includes your PSU, it includes some of your defence stocks and now we have been able to clip off a good 15% and our weightage has increased dramatically to pharma.

We feel that pharma is one sector that has been ignored for many-many years and there is a lot of improvement in their performance.

They have been able to clean up the house for them and we feel that pharma is actually getting poised for a very-very big up move. So, we find that major allocation has gone into pharma and FMCG. I also get a sense by looking at the market that the whole rural theme is playing out.

You can also see it between four wheelers to two wheelers that the government post elections has had a bit of a reality check and they feel the need that there is rural distress, they need to remedy that.

The feeling is that a lot more money is going to flow in there, plus we have had a fantastic monsoon, so you are having records sowing, so the output is that you may have excellent-excellent harvest.

I do think that the market is moving towards the rural driven themes that is why when we talk of FMCG and stuff like that, you will find that they are doing very well. Some of the fertiliser stocks are doing very well. So, I feel the market is moving on a bigger play from a risk on to a bit of a risk off mode.