How do you see India in 2023 versus now as we are seeing that it probably feels that there is a premium which India is trading in this year. Clearly the key highlights among any financial market is that India has not fallen with the global markets?
This year has probably shown that trying to make predictions for too far is not particularly a great way to go about it. I think markets continue to be interesting because we are at all-time highs but there is barely a whole lot of participation or a whole lot of interest or chatter. At the same time the levels of leverage are not particularly high either.
Possibly around mid-September when the UK government went down and they had that pension issues what became pretty clear is that you probably need to bring in support for the bond markets because that is just the way the financial plumbing works. You support the bond markets, it is the collateral for a lot of the huge derivatives markets which drive financial markets all over the world and if that is in place then the selling pressure reduces.
Also, chances are swap lines from the Fed might already have been out which means that while the policy may still be about raising rates a little bit, intensity will reduce. While there may still be officially a tightening thing but at the end of the day if you are giving swap lines it is not particularly a whole lot of tightening. So keeping all of that in mind, a little inflation is not really the big problem at the moment so it seems an okay scenario going into the next year.
How would you look at investing in the market? Would you prefer the midcap names, small cap names or would you advice people to just buy into ETFs at this point of time in India? What would be the names where you would feel comfortable despite the run up?
We have a particular play book by which we go around investing. The first part is essentially to look at the core needs of the country and how does it fit in with the economic, the political and the social interest. So when all of that comes together that’s where we put our investments in.
This, however, has to be kept in mind within a global context of where the world is, where policies are heading and the possibility that a whole sort of reset of supply chains. Secondly we have to look at technology as it is also constantly advancing and therefore it will tend to play a disruptive role in certain areas and a constructive roles in other areas.
So essentially we need to focus on the core needs of the country and then use the macro conditions to time the entries.
How would you look at the beaten down names because we are time and again seeing sectors that were consolidating 8%-10% for 8-10 years are now trying to make a comeback?
So that is a lot of what our thesis really is. You got to invest into what will transform ahead as oppose to what is already reflected. We do not have private banks in our portfolio simply because that is probably the signature trade of the last decade. If you look at where the public sector banks were and what was the cause of their downfall from 2011 onwards, you know some parts of it may have got addressed and therefore they are seeing some sort of normalisation from extremely beaten down levels which is going on. It will of course vary from degree to degree.
Secondly our PSU banks also are following a strategy which the Chinese used more than 20 years back where they had a big NPA problem as well and they consolidated a whole lot of these banks, created four mega banks which went on to do a lot of the capex sort of funding over the next decade for China.
We have had similar moves in our PSU banking space. Also 28-29 banks got reduced down to 12 may be that will come down to five or six. So I think that is where we are looking ahead and investing.
What would you look at in terms of smaller sectors? Do you think pharma has made it sufficient in terms of a very very low weightage? Would that count as a list that it cannot go lower from here and probably can only go higher?
We do not actually have pharmaceuticals in our portfolio as it has been a fairly good trade over the last 15 years. Also again I would not profess to being a huge sort of expert on the pharma space but I just think that with the coming about of the mRNA technologies as well as genome sequencing there could be a fair amount of disruptive activity in this space. The profit pool of the entire industry globally is large enough to encourage disruption so therefore it is not an area we are focussed on at least for now and things may change down the road but not as of now.
In terms of how things are moving on the flows side do you think there is a substantial saving now coming into Nifty or Indian markets in terms of SIP that will provide stability versus any global rout as it has done in this year?
I think that will continue because there is not much choice for people unless for reason if FD rates were to go above 9% then you might see little bit of that splitting of flows going towards fixed income more. But otherwise for people saving money, the expansion of the equity culture, the mutual fund culture, the SIP concept has been obviously bearing fruit.
Again very very similar things happened about 20 years back in China where suddenly the domestic flows started increasing considerably vis-à-vis whatever was the foreign inflows coming in. So it is safe to assume that we are probably be on that path. I mean these things never go in a straight line there are ups and downs which keep happening. But yes I mean that is something you would expect and it may happen through different channels. Whether it happens through the ETFs, whether through the mutual funds whether even through insurance it could all come in through those areas.
How would you play the savings theme? Do you think AMCs and insurance companies are attractive? They do not have substantial weightage and they also do not have risk of NPAs, they are mostly fee based model. Do you look at that side of the financial market if not the banking names?
We do look at it. We have not got a position on currently but again, that may change and I think we do look at that entire ecosystem which is not just the asset gatherers per se which is whether it is the insurance or the AMC names but also the market infrastructure players.
We might want to see a little bit of prolonged phase of neglect in the markets and possibly look at them at that point. I think a lot of them got fairly heated over the last year or so.
Also just would like to highlight that our markets are opening up, we are getting different kind of IPOs which are listing. Do you think a lot of new sectors would emerge and that is the space where investors should focus on considering valuations because that is the space where markets would try to find a value over a period of time and that is where a mismatch can happen if something is valued quite significantly lower than what it has been globally?
Yes, IPOs keep happening but keep in mind that while the previous era of IPOs was essentially promoter owned companies. This is a slightly different scenario which we are in today where it is essentially owned through several rounds from angel to VC to private equity and then coming into the markets. So it is literally the last buyer who is out there on the public markets today.
We do not actually look at too many IPO companies simply because it just does not give us enough of a trading history to take a view since a lot of them also are not necessarily profitable today. I mean, they become profitable down the road but they are not necessarily hard to anchor it on anything whether it is on valuations, whether it is on trading patterns. So we do not look at but I am sure the more the amount of IPOs which keep happening broadens the pool overall and it kind of goes back to your previous question about the capital market ecosystem itself.
I think the ecosystem benefits so you may want to look at derivative plays of the ecosystem expanding rather than directly going to the IPO itself.
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