- Will be a buyer if market falls 5-10% irrespective of mandate.
- We are at the top end of the valuation range.
- Financials provide structural opportunities.
What is your view on politics and its impact on markets?
The markets are looking forward to continuity. Markets are basically pricing in or factoring in that there is going to be Modi 2.0 and the incumbent government will get voted back. Obviously, it is very hard to predict the verdict but clearly the markets are at this point really not prepared for any kind of an outcome which goes against this view.
Market reaction to three scenarios. a) Return of incumbent government with absolute majority; b) return of incumbent with outside support; c) change of administration.
Well scenario A is where the current government basically gets a majority on its own, the pre-poll NDA. The markets will cheer that and you might see a 5-10% up move in Nifty from the current levels.
If it is basically NDA with outside support, the markets will be pretty fine with that and within that one will have to see which are those political parties which will lend outside support. The markets will be more neutral to that kind of scenario. You could probably get another 3%-4% up move.
If it is not the current government, then there are different scenarios open up. Is it going to be a Congress-led government or is it going to be a third front with outside Congress support or outside support of the BJP? I probably think that is going to be a doomsday scenario where the markets initially will take it as a shock and you could have a 2004 like scenario when the Vajpayee government did not get re-elected and the markets fell by almost about close to 10%.
Will you be a buyer if markets fall 5%-10% irrespective of the mandate?
Absolutely!
Irrespective of the mandate…
Irrespective of the mandate and that is because one will have to go back into history and see that right from 1991, right up to 2014, we always had coalition governments and in that period India saw a growth of about 7% irrespective. If you look at last five years, 10 years, 15 years, 20 years, 25 years, the GDP CAGR has been around 7% give or take 25 or 50 bps here or there. So, I do not see growth getting impacted, that is number one.
Number two, we could see the government loading up on the fiscal side in the sense that then you might see a lot of populist measures going ahead which in turn will create a bit of challenging scenario for the economy. But then India reforms the most during challenging periods and that is the way I would look at it from a positive point of view.
So, if the markets were to correct 5%-10% because of an adverse or a non-consensus verdict, that would be a good time to load upon Indian equities.
Eight out of 10 times, in an election year, markets have gone up. Also, data of FII flows show there have been only three instances when foreign institutional investors (FIIs) have been net sellers in last 15-18 years and that has nothing to do with election. So, are we just trying to get into a scary mental build up looking at the election result?
Clearly, if you look at economic policies in India ever since the economic reforms were unveiled in 1991, by and large both the national parties have remained committed to reforms. It is just the nature of economic reforms which get priority during the tenure of a specific government.
Even during the third front government, it really has been very important who is the finance minister and if we roll back to 1990s, we had the dream budget unveiled during the third front government. FDI in a lot of sectors got opened up actually during that period between 1997 to 2000 or 1996 to maybe the 1998 period.
Economic reforms is the way forward irrespective of which government is in power, it is only the of posturing which that government adopts that is different. Clearly, if there is a selloff, if there is a knee jerk reaction, there is very good chance that foreign investors will continue to load upon India because of the strong structural long-term growth story. There will be a fantastic time even for domestic investors to step in and not really get unnerved or distracted by the noise of the election verdict.
How should one approach their portfolios in the run up to the election — have 10% cash, 15% cash or have no cash whatsoever?
The FPIs or foreign portfolio investors could have a different, more long-term capital but they also have many options. So, for some reason, if India falls out of favour with them, they can probably go to other emerging market or back to a developed market. They can go back to their home market.
But for domestic investors this is the place, India is probably the only option that they have and within that, you have equities where you need to take a long-term view. I actually believe that if there were to be a knee-jerk reaction, that would be a fantastic time for domestic investors to look at it as an opportunity to go ahead and invest.
I respect that view but you need to have cash in portfolio in order to buy when markets fall?
Yes, absolutely.
Which means should one keep 8-10% cash in their portfolio if this market falls you get an opportunity?
It might be a good idea.
Would you do that in your portfolio?
We in fact have some bit of cash as well. So it might just be a good idea because the markets have inched up. I would not say moved up or accelerated but markets have inched up. Valuations, especially in the largecap space, are not necessarily compelling. If at all, we are at the top end of the valuation range.
You should always keep some powder dry probably because of the election verdict or because of any other event which could essentially kind of bring back some kind of normalisation of valuations and maybe that is a good time to step in. Election or no election, ideally it makes sense for investors to have some cash so that you could deploy it when Mr Market offers you that opportunity.
Even if the current government comes back, what will change from a market standpoint? If there is more of the same, that is not good?
Well what will really happen is markets are about the future and no matter what we say in terms of job creation or whatever, the reality is that in the last five years, India has remained amongst the world’s fastest growing economy or maybe the fastest growing large economy. That is essentially fact number one. Fact number two is that what will drive or sustain this growth even in the future is a lot of the steps and reforms which were undertaken in the last five years.
There was some sluggishness in economic activities because a lot of landmark or defining reforms were unveiled — be it RERA, IBC, GST. When economic reforms where unveiled in 1991, probably for the first two, three years, the impact was not seen. Whatever the Vajpayee government did was probably not felt as much during that term but essentially it laid the foundation for a stellar growth for India for the next five, 10 years.
Whatever this government has done essentially will be seen over the next five years.
Then it does not matter who the next prime minister is! Earnings recovery is coming because that is a cycle which you will see!
Absolutely. It is important maybe for basically this government to win the second term because it is a huge sign of stability. It is a huge sign of continuity that basically political risk is not there. For global investors, political risk becomes an important aspect.
Like premium is justified.
Absolutely. It is like saying there is no political risk. It is back to growth and earnings.
The third most important thing which could play out in the next five years is basically interest ratesWith inflation where it is, we need significantly lower interest rates and higher interest rates is one thing which has been blunting India’s competitiveness in the global arena. If we continue to see subdued inflation, based on that we will continue to see lower interest rates, There will be a huge positive for economic and earnings growth, especially for sectors like infrastructure and real estate.
Between 2014 and 2019, the mid and smallcap stocks got re-rated. Before they got de-rated, they got re-rated. What could happen in next three or five years as a trend? Where do you see that opportunity?
What has worked for India over the last 5, 10, 15, 20 years are basically three large pockets which is essentially financials — private financials, consumer and technology or any IP led businesses. These are the three pockets which have worked extremely well.
You will continue to see that playing and these will remain relevant for the next 5, 10, 15 years. These are structural opportunities. Within financials, things could expand. Right from focussing earlier on just credit plays, it is now time to look at other pockets like life insurance, general insurance, some of those kind of pockets.
What have you bought there?
We own two insurance companies. We have earlier owned Max Life Insurance and then, of course, we now also own ICICI Lombard NSE 0.73 % General Insurance.
Why do you like general insurance?
General insurance is a fantastic opportunity. It is basically the financials and consumer, all dovetailed into one. It is kind of perfect blend of both the opportunities. Financials because it is the nature of business. You need to cut cheques and all of that but basically it is non-discretionary and if you really look at it from a pecking order, general insurance is a good proxy for economic growth. It is a good proxy for increased home ownership, car ownership and some of those other things, more travel, health insurance, medical insurance.
These are big opportunities and millennials think more about themselves and they do not think what do I leave for the family. Clearly in the pecking order, general insurance gets higher priority versus life insurance. That makes the space interesting, Also, dependence in general insurance on investment income is a lot less. You write premium for a year, at the end of the year you write one more premium cheque.
Source: economictimes
