We are celebrating Teacher’s Day with great learnings of Rakesh Jhunjhunwala and Warren Buffett. What has been your great learning from the masters of the world? And what would you like to share as a learning for our viewers today on Teacher’s Day?
Sandeep Tandon: If you sit down, whether you talk about Warren Buffett or talk of bhaiya or anybody who is very successful in the market, I think I have always seen the one aspect which is humility. And second thing they always accepted, even on the multiple public forum, the mistake which they did. And we believe that if you can highlight that, that you have learned from mistakes and I think that is the biggest learning, like even at Quant what we try to say that we as a human being will make new mistakes. The whole idea is that if we do not repeat our mistake, that is the reason we build our system and process around that. So, learning from mistake is something very important and we have to keep on acknowledging it, that yes, as human beings we have made mistakes and we will make mistakes, so there is no point that the day you get that feeling you have arrived, the problem starts.
So, the key message is that keep analysing yourself, analyse your mistakes, and then you have willpower to learn from that and rectify that, that is the important learning I have seen from most of the veterans people.
I am very curious to know what has been your learning in the last three to four months and especially when it comes to your conviction on PSUs, some of those of course have fallen from their yearly highs or lifetime highs, has there been any learning in that process?
Sandeep Tandon: See, first of all, you have to understand, when we talk about a very dynamic style of money management, when we say we live in a very dynamic world, money management style cannot be same. Just to give you perspective, if you notice our last three months portfolio, actually PSU has come down significantly, so which clearly means that we have changed and reconstructed our portfolio based on the prevailing environment.
We always say it is very important to understand from a risk perspective what is the adaptive asset allocation thesis showing, what sort of environment is prevailing and then accordingly you can adapt. But we as a house equally remain constructive on PSU or value as a thesis for a longer-term perspective.
We have pruned down PSU banks, we have hardly any PSU bank, we have cut down railway exposure, but we are not negative. Sometime we are running a very mild risk of period globally which we have been saying from July to September will be the most challenging quarter for this year because we expect global volatility will spike.
And we have seen one round of trailer in the month of first week of August. I will not rule out something similar, volatility can come back in the month of September. So, this is what our analytics is showing. And if data points are showing it is mild risk off, then I will reconstruct and rebuild my portfolio, rebalance my portfolio accordingly and this is what we have done. If you really look at our portfolio, it is more skewed towards insurance sector, healthcare, or pharma, or FMCG, or consumption names, or maybe energy is the only thing which we have in the past continues to maintain as it is.
So, we are a very agile portfolio manager who will change with the prevailing data. So, we are slave of data. So, something has already changed and we have implemented that.
Change according to you and what is the data indicating in terms of, is the long-term bull market in PSU is over?
Sandeep Tandon: Long-term bull market in PSU is not over. Let us talk about India, then I will come to PSU because a large weightage of the Indian economy is linked with the PSU itself. So, first of all, we are very clear. We always said that we are in a decisive bull run.
Maybe this decade belongs to us, half century belongs to us. But you have to keep in mind that easy phase of bull run is over, but we are still in bull run and we are in a difficult phase.
This is a standard statement I generally give perspective to explain. Within the same logic, now gets extended to other space. Let us say globally, we believe value as a thesis will be a biggest outlier and Japan is the biggest value theme which has played out.
And what is very important to understand that all PSUs are part of value thesis. So, we remain constructive if I have a decadal view. But if I have a very short-term view of horizon, when we spotted that it is a mild risk-off period and I have to reconstruct, I will change.
But if market corrects, for whatever reason, or becomes more volatile which at least our volatility is very important and if we do get some opportunity, we will participate in rebuilding these exposures.
So, from a structural perspective, longer-term perspective, we remain very constructive. But from a very near-term perspective, we are slightly cautious in this space because from the high beta and we have moved towards low beta.
I also want to talk about your thoughts on private banks because I think the concern is pretty much out there from regulators to central banks, all of them are flagging concerns regarding credit growth and how the money is being pushed out to mutual funds and equity markets per se and your exit of HDFC Bank, I mean, was that a bank-specific case or was it because you do sense a slowdown in the entire private banking space right now?
Sandeep Tandon: So, if you really analyse our portfolio for last maybe one year or so, we have been quite, I will not say bearish, we have been cautious on the banking sector, particularly private sector because we always believe that derating of the sector has begun globally.
When we talk about derating from a valuation perspective, because we believe banks are the byproduct of leverage economy and leverage economy as a concept is going to deteriorate and US is a very classic example.
Multiple data points. Now you look at even India-centric, the credit growth has marginally picked up. If you look at one of the largest public sector bank actually talked about 14-15%, none of the private sector talks about this sort of growth coming.
So, there are challenges on the deposit front, the credit costs has also moved up. So, if you really look at, it is a combination, now valuations are always absolute and relative.
On absolute terms people say obviously it is cheap, but looking at relative to other sectors or relative to the global market, I think the perspective is very different.
So, neither we are very aggressively bullish, nor we are bearish. We think an appropriate opportunity in liquid names, like private sector names if I get opportunity in extreme inflection points, I will be buyer and in extreme inflection points I will be seller.
So, they are no more a core holding for us. They are more of a tactical bets which we keep on playing and HDFC was a classic example of that trade.
When you say that it is time to reduce the beta, what is the thought here?
Sandeep Tandon: So, from a very near term perspective, if I look at the risk appetite indicator for the global markets, if I look at some of the liquidity parameters or indicators which we track on a global basis and even you look at even asset classes, whether it is the base metal or the precious metal or very simply the Nymex crude or the Bitcoin, multiple data points are endorsing that something has changed from a very near term perspective and that will lead to a volatility.
I have always been very vocal about spotting trends through implied Vols data and that is something, if I look at the cross asset cross market data globally and then I try to connect the dot, we are very clearly seeing that volatility will remain high, it will remain elevated, it can spike sharply, we have seen a small trailer again day for yesterday.
So, I think that background is not very conducive. So, that is a strategy. See, it is not like nobody has a God status to give you perspective this is what is coming and this will happen.
We connect the dot and try to say that this is the probability of such thing happening or this event is going to be on higher side, this is what we work through our concept of market implied analytics, what market is showcasing, and market implied analytics is showcasing that this period or this current quarter we expect volatility to remain elevated.
With that background, we do not want to get butchered if something goes wrong, but neither we are negative nor we are too complacent about the market and hence we have reconstructed our portfolio, slightly low beta, more liquid and if I have to call it slightly defensive in nature, instead of sitting on very large cash, except mid and small, we do not have any large cash, except mid and small, definitely we felt some amount of opportunity can come at later stage, so we have kept that cash.
Otherwise, how to play? One opportunity, if you turn very cautious, you raised large cash, then it is one thing, other way is to play safety.
So, we are playing with a more from a safety perspective. Let this phase get over, if data point get changed which we expect should happen and as soon as we get those indication, we will move towards high beta names.
This is what exactly we did in January 2023 when we talked about the risk off period and we said September, October we said it is again massive risk on period and we played that cycle for nearly six-seven months quite well.
So, it is not necessary that you have to be aggressive all the time, I think depending on the environment, we reconstruct and rebalance our portfolio.
