The market veteran believes the months that follow could see a massive influx of foreign money in India dedicated funds, and “if simultaneously the broader EM basket were to see a positive turn, India could attract unprecedented foreign investment”.
Although Khemka claims to be sector agnostic, structurally he tends to find more attractive investment opportunities in certain sectors like private sector financials, consumption—staples as well as discretionary, IT, and healthcare. Amid worries over a severe global recession, the market maven expects demand in the IT sector to stabilize and pick up next year. Edited excerpts:
To begin with, after strong buying by foreign institutional investors (FIIs) and domestic institutional investors (DIIs) in 2023, how do you see inflows from them in 2024?
India is experiencing a positive trend, this is despite the fact that overall emerging markets as an asset class have seen choppy flows. FII interest in India has been rising recently, and going by the number of enquiries coming in, ensuing months could see a massive influx of foreign money in India dedicated funds. If simultaneously the broader EM basket were to see a positive turn, India could attract unprecedented foreign investment. DIIs have been investing at a very robust pace in the last several years. And this is expected to continue if the market remains stable to upwards or there is no massive correction or pullbacks.
Could the election be a bump in the road for inflows?
Strong performance of Indian markets lately has made global investors optimistic. Even when some prefer to wait until after the elections to invest, there are many that have expedited their decision-making as they now believe the outcome is less likely to disrupt the market. Some are entering partially now and plan to wait a bit before fully committing until May.
So, what gave them that kind of confidence to enter the market now, even if Indian equities are hovering around record highs?
All-time highs do not really bother investors even though some of them may say that it concerns them; historically, usually you see significantly more investment at market highs than at all-time lows. The reason being, investors are more comfortable taking action when the macro-economic narrative is positive. That, in a way, also helps justify valuations. Therefore, record high market is not a negative for flows.
How is India placed within the EM basket, considering there has been some kind of euphoria in the broader market?
There are some concerns about India’s valuation in comparison to other emerging markets based solely on relative PE multiples, which we believe are naive.
This viewpoint overlooks crucial differences. India has consistently traded at a premium due to its unique combination of being a well-functioning democracy, boasting a superior growth rate, and having a profitable corporate sector. Historical data shows that democracies, on average, command a significant premium over authoritarian regimes, and India stands out as one of the best-functioning democracies among EMs.
So, if one wanted to invest in the EM basket, would you suggest India as the right option at present or are there other bets?
Despite having significantly different PE multiples, it does not imply that the higher multiple is overvalued compared to the lower one, or that it would yield lower returns. Nor for the matter vice versa. For instance, China at 8 times PE and India at 20 times might both be fairly-valued.
That said, many foreign clients are increasingly inclined to invest in India. Over the last three years, numerous investors have reduced or completely exited China, redirecting funds to India, and that is mainly because of China’s shift towards authoritarianism. This shift in demand is evident in demand for EM ex-China funds. Our client base shows a noticeable trend of withdrawing or reducing exposure to China and allocating a significant portion of those funds to India.
How do you evaluate sectoral valuations across large-cap, mid-cap, and small-cap stocks? Do you foresee additional re-rating and valuation adjustments in the market?
Valuations of certain segments in the mid and small cap space, particularly those with lower liquidity, could be elevated due to impact of money flow rather than fundamentals in the very short term. But, overall, the market seems to be reasonably valued.
At one point, there was significant optimism surrounding export-facing companies. However, in the current geopolitical landscape, has the enthusiasm for these companies diminished?
For a considerable period now, sentiment in domestic cyclical sectors has been overwhelmingly positive, bordering on euphoria in certain segments. The more cyclical and domestic a segment is, the greater the excitement about growth prospects. The prevailing assumption is that India is uniquely poised for robust economic growth, especially in sectors like manufacturing, power, real estate, and industrials. Fuelling these expectations is the fact that corporate earnings in these segments have also grown the fastest in recent years.
Do you see any dark horses in terms of industries/sectors or any that could be a potential re-rating candidate?
We are sector agnostic, though we do structurally tend to find more attractive investment opportunities in certain sectors. Like we have always found a lot more attractive opportunities in private sector financials, consumption-staples as well as discretionary, IT, and healthcare.
In the financial sector, given its size and scale, it’s not uncommon for 25 to 35% of the portfolio to be allocated here. However, for segments like defense, power, and manufacturing, where opportunities are limited, it’s not our approach to have a substantial 25 to 30% portfolio exposure. In these deep cyclicals, our individual exposure typically ranges from low to mid-single digits, with a combined total of around 10 to 15% in the portfolio.
Has the worst period passed for IT companies? With the Federal Reserve suggesting multiple rate cuts in 2024, has this altered the narrative for these firms, even if only slightly, considering the potential end of the slowdown?
I believe that IT services demand environment might bottom out over the next 6-12 months. Currently, the chances of a severe global recession are far lower than feared earlier. If the economy does not enter a prolonged recession, IT demand should stabilize and pick up next year.
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Published: 14 Jan 2024, 11:15 PM IST