I am looking at the market positioning, what FIIs have done, what DIIs have done, what the retail participation is. Why is the market positioning so fractured? FII net shorts high, DII net longs very high. Why is market so divided in ahead of the election verdict?
DIIs have only one market to focus on, which is India. So, life is simple for a DII. FPIs have a lot of distractions. So, what has been happening over the past three months is that China, the biggest emerging market is on a tear, it has gone up like over 30%. And when that happens, it will suck in moneys from around the world. So, last 90 days FPIs have been consistent everyday sellers. We believe over the next month or so as that market tapers off, that bit of selling and the confusion that you see there would also subside.
A lot of market men are also of the view that the net short from FIIs is actually good, which means that if the election verdict is right, they could be coming back, they could come back and buy what they own, which is banks, IT, consumer autos, could that trade work?
What happens is, a lot of the overseas investors as we understand, we are domestic, do not want to pre-empt a risk, they would act after the resolution is there.
Few percentage point here and there does not matter as much as certainty does. So, outcome after elections, a good budget, both would have a positive impact. Now, the thing is, when a lot of money comes in, the spaces which can absorb a lot of money is banks and large IT, this is 50% of the index and well, something similar happened after state elections and this space does tend to do very well in that period, both new money is getting absorbed, shorts are here, shorts getting cut, and so on. However, the point is that while these spaces were growth leaders in the past and our belief is FPIs come to an emerging market for growth, they are no longer the growth leaders. So, as it happened after the state elections, this space bumped up. But after that period, other spaces which had a higher growth trajectory came back strongly. Same could happen this time around as well.
What should be the strategy because everyone is a little circumspect about what to do with PSUs and ex-banks that is because many believe that if the election verdict also is going to go the market’s way, are you going to see a serious bout of profit taking because that is one pocket which has already run up? I mean, would you belong to that camp or would you say stay put because that is a story which is here to stay?
These are large events. Outcomes are unknown. But if you ask me, I would stay put. India has a great story going for it and we believe market levels are very sustainable. Let us specifically talk about the policy stocks. While if the government comes back, the policy continuity will be there. But looking at what the current estimates are, everybody is betting on a continuity of the current government. These stocks have run up. You may want to call them policy stocks, you may want to call them Modi stocks. So, do you think we are at the juncture of the market where some of the policy/Modi stocks are pricing in next two-three years of earnings?
I try to stay away from talking on this thing but let me make a point slightly differently. A lot of what is happening in the market is how the globe wishes every country, every individual in the world to be. So, stuff like electric vehicles, hybrids, renewable energy, do you think focus changes either ways whatever may be the outcome? There are things that India have got. Per capita is increasing, so capital market, jewellery, travel, tourism, better housing, etc, etc, do you think that changes if the government changes? Yes, in certain spaces where the influence of the government is more, yes, the favourites will change. Now, if we look at our portfolio, we have, let us say, zero exposure to construction space which we believe gets influenced. We have very little exposure to, let us say, PLI winners, we have some, so if I put a ballpark in our funds, 8% to 12% kind of exposure there, so there the outcomes may change.
We are very aware of what can be at risk. We believe we are actually far away from spaces that get influenced. We are with policy direction, which we believe within line with the aspirations of the country whichever government comes in, ultimately the government is the representation of the people and the policy direction, the push of the global society.
When your positioning is such very good government will change growth outcomes by a tad, a very bad government or not so good government will pull it down a tad, but that may have valuation implication, markets may move up or down but it does not or should not have outperformance implication.
We believe whatever be the outcome, we are nicely positioned for outperformance over a period of a month and except for that one month when big money comes in and find its spaces.
Let us talk about the fundamental thing which has been driving the Indian market and that was the Indian demographics itself. And affluent India premiumisation was one theme that worked very well over the course of last 12 to 18 months. Going forward, do you expect that to continue or is it time that rural recovery will start playing out and time to churn your portfolio a bit towards that?
Two are not connected. As long as you expect per capita in the country to keep increasing, we are one of the poorest countries globally. If it moves to the level of Thailand, if it moves to the level of Malaysia, well, that is 3x, 4x from where we are, a lot of what we are seeing will continue deep into the future.
Now, as our country develops, it sucks in people from rural India into cities. Now, if you suck in people from rural India into cities, that reduction in percentage population in rural India will also contribute to a seemingly lower growth in rural India versus urban India.
So, rural India overall bump up maybe because of some good monsoon, good something, which is periodic, short period, would not sustain for longer.
The story, I mean, in every country’s growth is urban-related, which is where value addition is more. So, longer period, the wealth effect, the urban India spaces should do well.
You have been overweight banks. Are you looking at buying banks now?
We are hardly overweight. In our funds, banks are 8% to 10% of our portfolio.
No, you were underweight banks, are you looking at buying into banks now?
Why are we positioned? We are quality and growth guys. When we say growth, we want a growth delta of 3% over index at the minimum so that even after charging fees, there is something left for the investor as alpha over index. Now, very few banks will actually cross the hurdle of 15-16% index growth into 25 and 26. The banks which would are part of our portfolios and, of course, where valuations make sense.
What to your mind could be a combination of decent growth, reasonable growth and decent or reasonable valuations now for next two-three years?
Valuation context to our mind should change something which was growing at 30%, commanded a particular valuation. When it grew at 20%, should have commanded a different valuation. Now things are growing at 15%, should command a different valuation. So past is not a perfect picture for the future for banks is one sense. But this is the conversation we are having now. We obviously keep looking at what you are suggesting. If thoughts change, we will bump it up. But very clearly, the thing to remember is expect us, our funds, to be present in spaces where three- to five-year growth trajectory is, let us say, minimum 2% to 3% delta over index.
I also wanted to take regarding this question that we have been posing in our ET Now CIO poll as well and that is where you find the biggest outperformance delta to be going forward. Is it going to be largecaps, midcaps, smallcaps? Do you have a view on that? Is there more margin of safety in largecaps perhaps?
I am no longer the CIO. But I will answer that. See, this period is very different from earlier periods. So, 8 to 21, largecaps did 5% earnings growth, mid did 4, smalls did 2.8%. Now, this is a period after 21 where large are doing 20 plus, mids are doing significantly higher and smalls are doing significantly higher.
In the mid and small, there are several new businesses which have come up. Just like you got a Maruti in late 80s, early 90s; you got software in 94, 95; you got defence; you got renewable; you got EVs; you got EMS now.
And like somebody said, luxury consumption. Now, here the runway of solid growth over a very long period is there. I mean, yes, valuations can move up and down and that bit can happen. But the runway of super solid growth deep into the future is there. Our belief is stock performance lies where there is earnings growth. Earnings growth here would be higher. Look at our fund. We are positioned there.
