Not all is great for Indian markets, right? I mean, I do not know whether it’s coming at the back of underperformance vis-à-vis China because suddenly they have lifted all their curbs and a lot of money is moving into that market.
Yeah, I think last year India had a very good year in terms of outperformance from the emerging market standpoint and the big underperformers were North Asia, China, Korea and Taiwan. Those three combined are almost 60% of the emerging market benchmark. So we are seeing a comeback from them. I mean, China in the last three months is up 50%. That’s a 30% benchmark weight for MSCI and that’s up 50%. That’s a massive move for a market. So I think when there is volatility in emerging markets Indian markets don’t do well. Markets like India do very well when the markets are down or if it’s a steady move. When you see sharp moves, money tends to move out of markets like India. So that’s what we are seeing right now.
But is that a knee-jerk trade? You know, that’s the question. Or are you going to see a long-drawn patch of India underperformance relative to other emerging markets?
No, I don’t see a long-drawn patch. I think it is more tactical right now because large markets are moving very fast and India was a consensus overweight. In fact, it wasn’t a consensus overweight till about third quarter of last year because we were seeing continuous FII outflows.
I think the FIIs are chasing the market right now. So I am happy that I am not an emerging market fund manager right now because these are very tough markets to manage right now.
But I think overall, I would say over a period, India will outperform. But short-term underperformances are possible. Plus, India’s on a valuation basis is more expensive than what it is normally.
Still it is.
Yes. I mean, it has always treated at a premium, but currently that premium may be one standard deviation higher than normal. So that’s where I think we are. So these are times when India may underperform.
So we should brace ourselves for another 5-10% downside from here? I don’t know.
Even it could be a time correction for all. I do not know what comes in the Budget because there are a lot of rumours about changes in capital gains and stuff like that. We do not know what will exactly come. So I think the markets are a bit nervous also on what happens on 1st February. If nothing happens, the markets will rally. And if nothing major happens, a little bit of tinkering around, I think it is priced in. So we will have to wait and see how the markets take.
But I think post that, earnings would have been also over. We are seeing some softness in earnings. So let’s be fair that we’re seeing a K-shaped recovery and anybody who is in the middle to bottom half is seeing some sort of challenges in terms of growth. And we are priced to perfection as far as growth is concerned. So our own view is that value will continue to outperform growth, at least for the next six months. And then once growth comes back, then that is maybe the time to relook at the very high price growth stocks.Value will continue to do better than growth. Does that mean you are still cautious on IT, not convinced by the earnings that we have seen so far?
No, I think for IT, the challenge will come for next year, which is we will know how the year is going to pan out once comes and gives the guidance. If they come and give single digit guidance, then I think they may have some more challenges. We will know more because typically when US or Europe enters into a recession, discretionary spending gets cut first and IT budgets form a part of that. So any change in the IT budget would have an impact on the earnings and the revenue growth for Indian IT companies. So we have already seen some correction. Maybe a lot of it is already priced in, but we would want to wait for some more time. So we are underweight. It’s not like we’re zero, but we are underweight on that sector.
But still you’re more positive on the large caps, because while I do take your point that discretionary spend is the first to go. But if you look at the commentary coming in from the global banks after their earnings Citi, JP Morgan, Wells Fargo, are all talking about how technology remains one of the focus areas and the fact that they are not cutting the spends for now. I do not know what pans out three months from here. But do you think the correction is a bit overdone? And if you have a two to three year time horizon, it makes a good positional trade?
Yes, maybe from a two to three year standpoint. But as you mentioned that they are not cutting the IT spend. The question is, are they growing the IT spend? So we are paying for growth and we are paying for growth, which is not single digit. We are paying for growth, which is at least in mid teens. So I think it is a question of expectation versus reality. And once that settles in, then I guess these stocks will be right, which is why I said that value versus growth right now, because a lot of the growth stocks, actually IT is not really that highly priced so they are somewhere in between.
But it is a cyclical industry. So we have to first accept that they will have cycles where growth will be slow and they will have cycles when growth is higher.
So does the comfort at this point in time lie in the financial sector, because it really seems to be the expectation that this year is going to be very strong for banks across the board?
Yes, so we are very bullish on financials. I know it is a consensus trade now, but we are bullish both on the private sector and on the PSU side. We think that as one of the large bankers said, this is a Cinderella moment.
I think the big thing for financials is that the credit cost seems to be falling very drastically. And the new NPA accretion is far lesser than what even these banks are projecting for themselves. So for the moment, this looks like all the stars seem to be aligned right now.
But tell me, within that also, would you want to perhaps change allocations? Because the problem of the high PE stocks and the overall consensus is now posing to be a bit of a challenge for an and a Bajaj Finance. We saw that after ‘s Q4 updates. has been a no-go because it continues to have that overhang of merger. So do you now change the composition and the allocation within banks and financials?
Within banks and financials, we are overweight on banks. We prefer banks over NBFCs. So that’s the first starting point. And within banks, we were amongst the early ones to get into this whole PSU bank trade back in early 2021. And that time, it was more like a trade. But as things are playing out, it has become more than a trade because they are consistently delivering very good results. We saw one of the smaller PSU bank declare results yesterday. They had 1.3% ROA, 25% ROE, almost 97% coverage. They are actually challenging private sector numbers now. Not all of them, but you can pick and choose from the entire basket. And having said that, on the private sector banks, I think the growth will continue. In some cases, as you mentioned, there is challenge of merger and stuff like that. But we will look through that given that we are long-term investors.
But we think that banks are better positioned right now because the regulatory arbitrage for the NBFC versus the bank is significantly getting reduced. In fact, there is more regulation now for NBFCs than before. As a result, I think eventually large NBFCs will have to convert themselves into a bank, if not today, tomorrow. So we are better off with that is our view. We could be wrong, but we prefer banks over NBFCs in the financials basket.
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