Financial Year Trends: Atul Suri on Building a Trend and Volatility Proof Portfolio for the New Financial Year

“We have to insulate our portfolio from daily volatility and look at themes or trends that we think will circumvent volatility in the short to medium term and continue to force us to invest,” he says.
Atul SuriFounder and CEO,
Marathon Trends – PMS

We have started a new financial year. Consumer stocks have fallen from grace, old economy stocks are back. What’s the big megatrend you’re watching in the new financial year?
As we are today, the markets are surprising everyone. Remember, there is the conflict between Russia and the Ukraine, commodities are soaring, and the stock index is only 6% away from all-time highs. There is a lot of bad news globally, but the market is absorbing it very well and that surprises most participants. There is also a sign of relative strength in the market. So overall, there is a lot of negative news and negative talk, but I remain bullish on the market.

I also think we are going to have a lot of legs in the coming year. The central issue will be the price of raw materials. They surprised us last year. Obviously, I don’t think they’re going to redo what they did last year, but we’re going to have ups and downs, and linked to commodities, there’s inflation and bond yields. So the narrative for the year ahead will be where commodities are headed, what impact they are having on inflation, and how the liquidity situation depends on how the US Federal Reserve behaves.

This will be the theme. I’m not a bear, but I think this is going to be a year where people will turn bearish, the market will go higher, and when everyone is bullish, the market will surprise to the downside.

We will have a larger market. However, some themes will develop and it will be one that is a little bit out of the way because as I said before, commodities are going to be the focal point and if you have businesses, sectors, themes or trends that are not going to be affected as much by the ups and downs of the moves of raw materials, I think it will be a good strategy to move forward.

For us, in the last year or months, when the markets corrected, we increased our allocation to technology and we think IT services are very interesting plays. They were doing well and they are definitely a mega trend. But they are not very dependent or directly dependent on commodity prices. So for the time being I am trying to keep my portfolio away from the direct ups and downs that are going to happen with commodity prices. Next year will be more about what topics, what sectors, what trends are developing rather than the broad market as a whole. But overall, it will still be a market where we can make money.

Did you use the recent 10% correction to accept your regrets and would you share their names?
Essentially, we reduced our weighting in consumer-related stocks because we feel they will take a hit. While the top lines may be intact and indeed grow, we think there will be pressure on margins because as the cost of inputs increases, that is one area where we have reduced our exposure. We have increased our exposure in technology, technology services and also more in the mid-cap space because we believe there are some companies that are very well positioned to make this transition to mid-cap and large-cap.

Another theme, another sector, another trend that we have invested in or used in this correction is investing in the entire capital market space. There is a huge explosion taking place in retail investors. Previously, when markets used to correct themselves, retail investors were the first to flee, but we are seeing them hang on and there is a massive mind shift taking place in investment patterns in India. We feel that the capital market space, which is brokerage firms, exchanges, deposits are going to be big beneficiaries and we see that developing as a big megatrend. We have allocated in this space.

So these have been the two slots where we’ve used this fix to increase the crew. The common theme is trying to stay away from commodity volatility because there can be 10% swings overnight and it’s hard to predict. We look at companies, topics or trends that are not going to be so directly affected. That will be the game or theme for the next few months or next year.

It should be tracking the charts for crude as well, as it has definitely cooled down 30% from those odd $130 levels. it’s still at $100 a barrel. Will we ever get back to the $80-90 levels or is $100 the new base that is forming on the charts?
We’ll go up to $100 for sure. I feel that the breaks are taking place, the pressure is coming and it is not that the demand for crude oil has risen exponentially. It’s just the supply constraints. First, OPEC had kept it very tight despite what is happening in Russia Ukraine. One can see from the statements that the OPEC countries are laughing their way to the bank and are not under pressure to increase or speed up production.

Therefore, the supply side will remain tight. It is not that the demand has increased and this is going to continue creating those fluctuations. I see crude falling below $90, but the issue is that even at $90, how does it behave? Will it go back to around $60? I have my doubts. That was a beautiful stage that we enjoyed for almost a decade. Since 2008, the CRB index has been on a downward trend. Commodities and deflation have been a topic for almost decades and we had actually forgotten something and when you forget something for a long time the market definitely reminds you.

Once again, these things have taken center stage. I don’t see them repeating what they did last year but they won’t lose their memory. You will have days of ups and downs and that will really affect corporate and business profitability. But should the cost of entry continue to be very volatile, that is where the challenge is and that is where we will start to differentiate even those sectors where these commodities make an impact and how well they manage one of our large overweight positions.

We’ve had specialty chemicals for almost three years and that is definitely affected by raw material prices. But we strongly believe that this is a sector that will be able to navigate through this. From our research, we have a feeling that these companies will do well and that is why, even when the markets have corrected, most stocks are still pushing towards all-time highs. This really goes to show that yes, not everything about commodities is bad. It depends on how well the companies are going to navigate,

So, just to summarize; we have a large overweight position in specialty chemicals; we keep keeping it. We have increased our exposure to IT and a new sector, theme or trend that we have added this fall is capital markets. And that’s how we plan to sail next year.

The other intriguing thing going on right now is the serious disconnect between the stock markets and the bond markets. Are you worried about what you are seeing in the bond markets?
The narrative changes day by day. About a month ago there was talk of seven rate hikes and it was cut to four and then 50 bps. So based on data flowing almost every week or commodities moving every week, I see a lot of narrative shifts and I think this is going to be a dominant theme. To be honest, nobody knows. We don’t have the answers. It is like predicting the end of the war between Russia and Ukraine. The participants themselves do not have the answers. So one really shouldn’t spend too much time working on them and it can’t affect your portfolio because they are big unknowns.

We have to play with knowledge and as I said, it seems clear to me that this will continue to occupy a central place. It’s going to be volatile. Bond yields are a reality. The flow of money is getting tighter, but as the narrative changes from day to day, at the end of the day, if someone is going to suffer, someone else will also benefit.

We look at trends that are developing, even in trading ranges, those trends that develop will pay me back, those stocks or those companies that continue to perform in a volatile or challenging time will continue to deliver returns to investors. In general, we will have good days, bad days, and when everyone turns bullish, the market will surprise you and when everyone turns bearish by consensus, the markets will surprise you to the upside. That will be the theme.

At the same time, we need to insulate our portfolio from daily volatility and analyze themes or trends that we believe will circumvent volatility in the short to medium term and continue to force us to invest.

Are you still as optimistic about real estate as you were about six months ago?
I’m still optimistic about that. Input costs and raw material prices are rising. The important thing is which company can transmit it to the consumer and that is the crucial thing. It is the key and even in the real estate sector, we are seeing challenges, but personally I think that after Covid, the demand scenario has changed a bit and companies are recovering.

I feel like this is going to be more demand driven and some of them will be able to stream it effectively. So yes, rising commodity prices have been a brake, but this is a very large long base pattern of 10-year underperformance. It may be delayed a bit, but it has to work because the way we are positioned as an economy, we are in the cycle and there are very few participants left compared to what we had many years ago. So it may take a little longer, but this will develop over a period of time.

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