A lot of market participants right now are very-very confused to the end that on one end clearly it looks expensive, there is euphoria in parts, there is that liquidity gush, but on the other hand you have a massive FOMO and you miss out on the rally if you do not deploy. What are you doing about it?
Jigar Mistry: So, as you mentioned, I think all of us are in a very similar boat. What has transpired is two things. Till October 2023, all of us were of this opinion that the fundamentals and the underlying valuations are broadly in sync. But after that, I think two events happened that completely changed the trajectory of the Indian markets. The Fed appeared to pivot sooner than expected. For almost a year, nothing happened and obviously the US markets reacted to it. But when you look at the Indian markets, given the sort of wealth that the retail has generated over the past three or four years, the valuations continue to remain more expensive than what we would have imagined. Add to that the actuality that you had the most orderly wind-down of any rate hike cycle since the 1980s that we have seen with the Federal Reserve. So, 1980 obviously resulted in almost a 20% contraction of GDP and all subsequent rate hike cycles, the late 90s, 2007, and obviously the 15 to 19 one all of them resulted in some or the other crisis. This time around, they have raised the rates at the fastest pace since 1990 and nothing seems to have happened. And I have just written
an article yesterday in ET explaining why that seems to be the reason.
But with that in the backdrop now, I think what is really happening is how the retail which has generated some phenomenal amount of wealth is now taking over the entire situation in India and therefore, if you look at just from a flow standpoint, it is quite possible that we would remain at these elevated levels and all of us will now have to acclimatise to surviving in this climate so to speak.
And broadly, where do you see more value coming in? Obviously, the answer would be largecaps, but even in largecaps which are those sectors where you are seeing value to come in?
Jigar Mistry: I think a couple of sectors. BFSI clearly comes to mind because if I look at the earnings trajectory, one, if you look at the overall BSE 500 which is likely the broader market and covers almost 93% of the entire listed market cap in India, when you look at that space, I think the June quarter results showed that the earnings growth is slowing down.
So, at the overall market level, you are seeing growth slow down. Secondly, within the sectoral space if you look at the dislocation, so where the earnings growth has come through versus where the index performance has come through. So, clearly you are seeing sectors like say real estate, utilities and industrials where the sectoral growth has been faster than the earnings growth, so index has moved up way ahead of earnings estimates. Whereas there are sectors like pharmaceuticals and BFSI where the earnings has been reasonably resilient but given ownership issues, the stock performance has not been as great and I think that is where our incremental focus is at the current juncture, even FMCG and durables.
But within BFSI where is it that you are finding the maximum amount of comfort because BFSI has become too broad right from private, public banks to insurance, financial ancillaries, the AMCs of the world. What is looking poised for the best amount of risk reward?
Jigar Mistry: If you look at say private banks over the last year, the earnings have grown at something like 28%, but the share prices have, if look at the Bank Nifty for example which I agree is a little bit distorted because two banks account for almost 40% of index weights but that has not really moved all that much and I think people attribute it a lot to the fact that it is more difficult to get deposits and all those fundamental reasons, but all those fundamental reasons are reflected in earnings.
Despite that, the index not moving was pretty much I think a factor of the ownership issues. So, wherever the global interest rates are elevated, FIIs have been net sellers if you leave out the past two months or so and in that scenario they can only sell what they own. If you look at the 10 largest overweight positions of FIIs in India, 6 of them were banks. So, I think they sold what they could sell which were banks and I think we are sort of masking that to mean that there are fundamental issues. If the earnings trajectory more or less continues, then I think with FIIs returning as interest rates start getting cut,
I think private banks would tend to benefit the most followed by PSBs. PSBs have re-rated. We have held a lot of them over the past three years or so, but incrementally I would say that the business model dictates that their fee income, their cost to expenses their cost to income basically do not allow their ROE tree to mimic that of a private sector bank in which case some amount of gap is par for the course and they now appear broadly well poised. The least favourable sector within that is the MFI space. So, we used to own a couple of names in the MFI space which we now no longer own.
