Do you expect the market rally to continue into the new year?
Normally, going into the new year, I feel the market returns will be in the mid-teen range because that has been our history. Across any periods of 5-6 years, the annualized returns of Indian markets have been in the mid-teens. Also, from the perspective of earnings growth, it is reasonable that you get returns in the mid-teens. This year might still be better because it could be a year when both FIIs (foreign institutional investors) and DIIs (domestic institutional investors) are buying. And if the earnings come back in a strong manner, the returns can be higher. But at the same time, if they are much higher, then you might have to settle for lower returns later. You can’t make higher returns just because of higher flows. In the end, you are not making much more than mid-teen returns over longer periods on annualized basis. For me, it is not much more than even earnings growth. But I am little bit nervous about January itself. Whenever there is a lot of excitement, lot of flows are coming, FIIs are coming, IPOs (initial public offerings) are happening, I am a bit wary. The December-quarter earnings will start trickling in from January.
How do you see valuations at this juncture?
You can still justify market valuations by saying that last year, markets (S&P BSE 500 Index) were up 25% in rupee terms. The year before, it was up 4%. So, in two calendar years, it is up 30%. In two calendar years, 30% returns are not a lot. But what has happened is that the large-caps have not gone up, financials have not gone up, and IT (information technology) has not gone up. So, relatively, the valuation of the large-caps, which account for 70% of BSE 500 Index, has not gone up. Actually, in dollar terms, BSE 500 Index is up only 20% in last two years, because the rupee depreciated 10% over this period.
What is your view on interest rates?
In India, despite high interest rates, there has not been any major pressure points seen in the economy. But as and when the US Federal Reserve starts to cut interest rates, India can also breathe easy in terms of not having to increase rates and also in terms of currency issues. So, right now, the US is expecting three cuts. But it may not happen in the first six months of 2024. This is their chance to achieve what they want, but the old excesses were too high and they have to withdraw their old quantitative easing. So, they might as well keep a buffer, for any future crisis. Right now, there is no crisis, so why pump it up again. From their perspective, the more you hold it, you will have more room to cut later on. A lot of sell-side analysts are now saying that the cuts in US will start from July 2024, which is okay.
The markets have had to deal with a number of global concerns last year. Have these eased off?
They have clearly eased off because people have been wrong. They thought that the high interest rates will slow down the economy after a point, but it didn’t happen. Now, when people are saying that the phase of high interest rate is over, you can’t say that the risk to economy has increased. If it happens, it will be a bigger negative surprise. The Israel-Hamas war has not spilled over into a regional conflict, so that concern has eased for now.
Which sectors are you betting on and where have you turned cautious?
We continue to bet on financials. We are now very negative on IT. Stocks have gone up even though, again and again, they have disappointed. It is also the first time in 25 years that hiring in the IT sector has shrunk. They have guided down, again and again. Even in the US, there are concerns due to the changes in budget allocation of companies. There was a news article recently which said that the IT budgets are the same in US, but some of it is being allocated to AI (artificial intelligence). So, the rest has to be cut and right now Indian IT is largely non-AI. So, right now I am not positive on IT.
Have you cut positions in IT in your PMS?
We have been cutting positions in IT for a long time now. From June 2022, we have been running our positions at close to zero. We used to have 15-20% in IT, which we brought down to zero. Some of it was cut in January 2022 and some in June 2022. Then we bought just one IT name, which was just 3% of our portfolio’s allocation.
So, where have you increased allocations?
We added to some of our existing financial holdings and bought some PSUs (public sector companies). Usually, we have stayed away from PSUs, but we found a couple of interesting opportunities there, which seemed attractive on various factors including valuations, dividend yield, growth expectations, etc.
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Within financials, are you betting on any new sub-sectors?
We bought couple of market infrastructure companies and a broker-type business, to bet on growing retail participation in the markets, rise in demat account opening and also rise in speculative tendencies in the market.
Have you bought stocks of any AMCs (asset management companies)?
No, not yet.
How are you playing India’s consumption story now?
For whatever reason, Indian consumers are now spending more on experiences. So, we have hotel stocks. Now, we have a railway stock, we also have airline stock. So, we are playing it through the travel theme. We are cautious on consumer durable and consumer staple.
What will be the investment philosophy of your new fund house?
Getting the mutual fund licence was a big highlight for us in 2023. Our investment philosophy will be the same that we already follow in our PMS. So, today no one knows who is going to be a potential winner in the next 20 years. But one can avoid the obvious bad ones; companies which have bad valuations, bad earnings projections, history of poor corporate governance, bad track-record, etc. We don’t believe in doing any trade-offs. So, we won’t compromise on valuations for good management or track-record of strong earnings. We believe that even one of the “bad” factors can affect the probability of a company doing well.