Saurabh Mukherjea, CIO & co-founder at Marcellus Investment Managers, who has 40% of the best players in portfolio from foreign countries, is increasing exposure to luxury goods companies like LVMH and US banks such as JP Morgan.
Back home, his focus is on healthcare & hospitals. He also finds high quality private sector banks like HDFC Bank well placed to benefit from the ongoing deterioration in retail asset quality.
According to Mukherjea, the wildcard for the markets is the Indo-US FTA. "If this is signed before Christmas, it will help several crore Indian factory workers avoid unemployment," he said in an interview to Moneycontrol.
He noted the bubble seems to be in the Megacap tech stocks such as Nvidia. He has avoided investing in Nvidia over the past 3 years.
What are the key challenges facing the market on both domestic and global fronts in Samvat 2082?
The Indian economy is living through the deepest compression in earnings growth seen in this century. With valuations stretched and earnings growth constantly under the pump, the Indian market is finding it hard to move forward. Given that white collar job creation – the main engine of consumption growth in India – has been weak for the past couple of years and is likely to stay weak going forward (as AI gobbles up white collar jobs), it is difficult to see a sustained recovery for the Indian market.
The only silver lining is the recent stimulus imparted by the Government through tax cuts which is likely to give a fillip to consumption for a couple of quarters. The wildcard is the Indo-US FTA; if this is signed before Christmas, it will help several crore Indian factory workers avoid unemployment.
On the global front, whilst the worst of Trump’s tariff tantrums seem to be behind us and whilst geopolitical tensions (E.g. the situation in Israel) seem to be easing, the main global faultline is the increasingly confrontational Sino-American Great Power rivalry. Even if things don’t escalate into a full blow conflict here, the risk is growing of proxy wars where other actors funded by China or America could take each on.
Do you strongly believe that the market can overcome these challenges and scale new record highs in Samvat 2082?
As mentioned above, it is hard to see how the Indian market can move forward meaningfully given the weak economic outlook and stretched valuations. It is equally hard to understand the valuations of Mega Cap stocks in America like Nvidia. There are however two bright spots in global equity markets. The first is US and European small-midcaps where earnings growth is in the low teens (as compared to 5% in India) and valuations are around 15-18x forward earnings (as compared to 25-50x in India). In our Global Compounders Portfolio we are heavily invested in American and European stocks.
The second bright spot in high quality Indian large caps. These companies are growing earnings 2-3x faster than the broader Indian market and are trading at some of their cheapest valuations in the past decade. In our Consistent Compounders Portfolio we have invested in such stocks for several years and lived with underperformance for much of the past 4 years.
What are your key learnings from Samvat 2081 in terms of stock selection? Which stock(s) disappointed you the most over the past year?
A year ago we had high hopes for Indian exporters – both in Services and in manufactured goods. A combination of Trump’s 50% tariffs and the economic slowdown in the West meant that most of these struggled to generate shareholder value. Back home in India, we were perplexed by the continued in PSU stocks without anything in their fundamentals to justify such optimism.
Have you identified any sectors or stocks that you believe could generate alpha in the new Samvat year?
In our Global Compounders Portfolio we are increasing our exposure to luxury goods companies like LVMH which we believe should benefit mightily from a Chinese economic revival.
We are also increasing exposure to US banks like JP Morgan which should benefit from falling interest rates in USA.
Back home in India, our focus on healthcare & hospitals continues to grow. We also find high quality private sector banks like HDFC Bank well placed to benefit from the ongoing deterioration in retail asset quality.
Are you confident about an earnings recovery in the new year, or do you still foresee challenges to overall earnings growth?
As mentioned above, it is hard to see grounds for an earnings revival in India. In the Western world, with interest rates likely to head downwards sharply and with geopolitical tensions (ex-China) reducing, it’s reasonable to expect an earnings revival.
The grounds for affluent Indians to diversify their equity investments globally are therefore stronger than ever before. Given that GIFT City now offers Indians a chance to invest globally in a tax efficient and cost-efficient manner, it behoves the rational investor to diversify.
Do you expect the IT sector to stage a strong comeback in Samvat 2082?
Demand recovery for Indian IT Services seems more likely than not in the next 12 months. In addition, the odds are pretty high that the INR will blast through Rs 90 to the US$ and head towards Rs 100 over the next couple of years. Indian IT Services firms should benefit from currency depreciation as well.
Do you see signs of a bubble forming in US tech stocks or within the broader AI theme?
Smallcap US tech stocks are trading at sensible valuations which are far more attractive than Indian Smallcap valuations. We have several of these in the Global Compounders Portfolio. The bubble, such as it is, seems to be in the Megacap tech stocks such as Nvidia which we have avoided investing in over the past 3 years.
Do you believe India’s economic growth could positively surprise in Samvat 2082?
If India’s growth positively surprises we – as investors who live in India and are heavily invested in the Indian economy – would be delighted. However, since hope is not a sustainable investment strategy, we have diversified our equity portfolios across the world’s best companies. As in any IPL team, 40% of the best players in our portfolio come from foreign countries.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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