What we have experienced in the past whenever India's market cap to GDP has fallen below 60%, which is where we are roughly at current levels. The next three five year returns have been extremely strong.
In the past whenever India's market cap to GDP has fallen below 60%, which is where we are roughly at current levels. The next 3-5 year returns have been extremely strong, Prashant Jain, Executive Director & CIO, HDFC AMC Ltd, said in ‘The Market Podcast’ with Moneycontrol’s Kshitij Anand.
Q) Market and the economy might not reflect the same emotion every time. The Nifty50 is trading around 10,000 levels but growth forecasts from world agencies only reflect pessimism or a negative outlook. The recent one was FITCH who revised the sovereign rating outlook to negative, and the recent standoff between India and China at the border is also causing volatility.
A) Markets are always uncertain in the short term and this has been seen in history as well. Yes, it is true that we are passing through a very difficult environment, COVID, lockdown, negative growth for the first time in 40 years likely in India, and India-China standoff, etc.
But, the key to answering your question is to figure out what is already discounted in the market and what is not. What is the price related to what value we are getting in the market?
Assuming there are no further big shocks and we return to normalcy in the year, then I think the price we are paying is a very good one for the value we are getting.
And why do I say this? It is true that FY21, the current fiscal Indian economy is likely to contract. But, I think we will recover equally fast in Fiscal ’22, because most of the negative growth in the current year is a result of the loss of economic activity for the period of lockdown and assuming normalcy returns that should not be there.
I think interest rates globally and in India are extremely low. Low oil prices work to our advantage. And, we have seen in the past that good reforms or many reforms are carried out in such situations when you are pushed against the wall.
We do expect some more reforms. And, I think the long term drivers of growth in India are intact. And, bear in mind that one year of disruption in the economy or to a profitable business, it does very little damage. The damage could be maybe five odd percent damage to the intrinsic value of a business.
If we look at India's current market-cap to GDP or price to book value, it is now near all-time lows. And, what we have experienced in the past whenever India's market cap to GDP has fallen below 60%, which is where we are roughly at current levels. The next three five year returns have been extremely strong.
What has also been experienced is the best entry points in Indian markets have been provided around periods where FIIs were large sellers.
In fact, on every such occasion or whenever over a three month period FII selling was large, just around those times your returns were quite decent.
That is also an interesting data point because we have seen very high levels of for selling by foreigners in the last few months, so net-net, I feel the risk-reward that the market offers at this stage is actually quite favourable.
Q) Do you think reforms initiated by the Government to make India self-reliant, and the availability of credit which could help India Inc. expand CAPEX related activities?
A) The current year actually is likely to be a difficult year for the economy. We will see a contraction for the first time in 40 years. I think economic pain aside, it will lead to considerable social pain as well.
It will also lead to social challenges because 60% of India's economy is in services, 14% of employment is provided by the service sector, and 50% of households in India are less than 20,000 rupees a month.
And, I think the significant disruption in economic activity, especially in discretionary consumption, both for goods and services, I think, has significantly impacted many low-income households as their incomes are disrupted.
I would say, apart from the economic impact, the current environment will cause a lot of hardship to a very large number of people.
The silver lining is that the external side of India is actually very strong and because of the sharp fall in oil prices, because of India's no dependence to exports, I think our external side will improve and it is likely that India might experience a trade surplus in the current year after many, many years.
I believe India may stand out amongst emerging markets in a year like this.
Q) What is your take on mutual funds data for May? It looks like investors are moving towards safety – as net inflow into equity mutual fund schemes fell 11.6% in May to Rs 5,666.34 crore from April. Even SIPs also saw a marginal dip. Do you think the redemption pressure would intensify?
A) Let me take you back in history. I think the year was either 2001 or 2002, when the total inflows in one full year by all the mutual funds in the country put together was just Rs 118 crores, in the full year that was the inflows.
If you bear that in mind, you will realize that we have come a very long way. In a market like this, when 10-year returns of Nifty are in mid-single-digits, which means equities have disappointed most investors even over a reasonably long period, the MF industry is collecting on an average 5,000 crores to 10,000 crores a month.
I think I would like to congratulate and salute my Indian investors, the IFAs, the banks, the media for building, And I don't think it is a mean achievement to deliver these numbers in a year like this.
What I have also experienced is that after a big fall in the markets like what we experienced few months back, redemptions go up for MF as well.
For example, if the NAV of 100 becomes 60, and 60 becomes 80 or 85, there will be some redemptions, because people who are extremely uncomfortable after having seen that level of 60, they want to move to relative safety.But, these redemptions are short-lived and when markets stabilize at higher levels, these redemptions tend to reduce, and net flows therefore should go up.
Investing in an environment like this is not easy when people tend to lose faith in the equity markets as even over 10 year periods your expectations have not been met.
Q) Liquidity is driving markets higher as the fundamentals remain more or less weak. As we move further into FY21 quality will become expensive. Should one still look at buying those companies? What should be the strategy?
A) I think the market is cheap on an aggregate basis. If we look at India’s market cap to GDP, as I said it is near all-time lows, and our price to book values, are at levels that were experienced after the fall in the markets after 9/11 or Lehman, etc. This market is actually offering very good value.
The definition of quality keeps on changing. It depends on your opinion and it could vary from individual to individual and it changes over time.
And at one point in time, IT companies were considered one of the favorites. There was a time when real estate and power utilities were the hot favorites in the market. There was a time when pharma was on top of the list.
There was a time when small mid-caps, not a few years back, were the most sought after investments, and today we have moved to some other sectors.
I would say that when you are investing since the definition of what is popular keeps on changing, I would simply focus on what is a sustainable business.
What is a reasonable good quality business in the sense it enjoys competitive advantages? And, it is well managed.
And, what are we paying for the business is equally important? If you overpay for a good business, the business is too good, but it may not turn out to be a good investment.
We should be cautious when we are buying very weak or less sustainable businesses, because sometimes they may be optically cheap. But, if your expectations are not met, if the business does not perform, then the optically low price also may turn out to be expensive.
Q) Which sectors are likely to lead the next leg of the rally and which ones will underperform?A) See, for every share that trades, behind every trade there is a buyer and there is a seller.
So what every trades represents is that unless two people think differently the share will not trade. If you ask this question to 10 people, you will get 10 different answers. ‘
I feel that consumption-oriented stocks in India are very expensive. And, the environment also is not supportive of good growth in consumption because as I said earlier that the incomes of a large number of people are being impacted.
Corporate profitability is under significant pressure in a year like this. SMEs, the MSMEs, and even large companies will try to cut costs.
And, I would not be surprised if there are wage cuts, if there are headcount reductions. We should also not forget that given the challenges being faced by several NBFCs.
I feel that the consumption sector which was the main driver of economic growth in India over last few years, the implied growth rates in today's price assumptions are less likely to be met.
If you move away from consumption, I think most other sectors to my mind are trading around fair values or below fair values. I think the private sector, oil and gas companies, telecom companies, the retail banks, I think these are sectors that are close to fair value.
What I mean by that is, the returns from these sectors are likely to be in line with the growth of these businesses. Few other sectors which are offering good value to my mind are trading significantly below long-term averages.
I think these businesses are to my mind are the utility space. Some of the large banks which have good franchise values, I think some financials are quite cheap.
In the EPC space, though the near term outlook for new order inflows is no doubt muted, but I think some of these companies have healthy balance sheets, they have order backlogs equal to three years.
This market thrives on the diversity of opinion and I'm sure there are many out there who would take a completely different view from what I said, yes.
Tune in to the podcast for more.
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