With Diwali festival on us, CNBC-TV18 in their special show 'Samvat 2075' spoke with veteran fund managers, Nilesh Shah, managing director, Kotak Mahindra AMC; Navneet Munot, chief information officer, SBI Mutual Fund and Manish Gunwani, chief information officer - Equity Investment, Reliance Mutual Fund, on how to light up the portfolio.
Watch the video . here Edited Excerpts: Since equities haven’t given us any returns this year are you buying gold for your wife this Diwali? Shah: No, I am anti-gold. I think whole of India has bought more gold than what is needed and hence I am avoiding buying gold.
More importantly, equities have become cheaper because they haven’t given any return last Diwali, it is likely that this year they would give better returns. So it is time to buy equities rather than gold.
So there is a Diwali sale as they are calling in the equity market. Navneet, you were telling us that this is the best time to be buying but sentiment has really been punctured. How do you change that? Munot: So that is the best time to buy when sentiments are not good. When sentiments are good, last year at this time, we were celebrating the implementation of GST, IBC (Insolvency and Bankruptcy Code), RERA (Real Estate Regulatory Authority). The expectation of growth will come back next year, corporate profitability is coming back but so valuations were also high.
So last Diwali sentiments were better but valuations were high, so this time maybe some of the risks we thought last year whether it is from trade war, global monetary tightening, higher oil prices etc... valuations are cheaper and so we are also not buying gold and putting more money in equities, especially SBI Equity Mutual Fund.
You said about valuations getting corrected but have they come to a buy zone right now, or do you think there is still froth, simply because earnings have not picked up in the last four years. Earnings have been flat, while valuations have reached 21-22x, still, there is a room for correction? Munot: So there is a fallacy of average, you put a person half in deep freeze and a half in oven and say that average temperature is not worrisome, the same thing is happening with the market, whether you look at valuations or whether you look at earnings growth, it is a very similar story. There are pockets where valuations are high, and today those pockets have become large where valuations have become reasonable if you take a slightly longer-term view. I was listening to your videos where you spoke about broad outlook in the near-term and even you believe that it is right time to look at equities as an asset class, vis-à-vis the other asset classes. Your take on equity as an asset class and within that what is your view on midcap and smallcaps because they are the ones that have corrected sharply? Gunwani: There are two ways to look at it. In terms of historical attractiveness, I think we are somewhere in between. So rather than take a subjective opinion if you look at our asset allocation model or other asset allocation models in the industry, everyone is in the middle zone.
I think neither are we in the 2009 or 2013 kind of bottom but nor are we in 2008 or 2010 top as well. We are somewhere in the middle, so just to buttress what Munot was saying, I think there is fair amount of value because interestingly, even globally if you see, from 2011 to 2017 was broadly a growth style working over value style but over the last few months after a fairly long time, we are starting to see value style come back. The FANG (Facebook, Amazon, Netflix, Google) stocks have also started correcting, whereas the traditional old economy stocks have started doing well globally.
So, there is a trend towards value and over the last 6-7 years, a lot of the asset based industries/companies which are close to book value are quite cheap right now because they haven’t gone anywhere for the last 5-6 years.
What about you because a lot of people are drawing parallels to the 2013 kind of scenario. If that is the case then this is perhaps the best time to be buying stocks, would you agree with that argument? Shah: This is the best time to buy stocks provided we are lucky and we are sensible. We need a little bit of luck from oil prices. They have come down from $80 to $75 and our markets are up 4 percent and smallcaps up even more. So we need oil to go towards $70 and then towards $60 then this is the best time to buy.
We also need to be sensible because there are state elections towards the end of the year, then general elections in mid-2019. Clearly, the market has priced in a stable government and if we get a coalition government then this is not the time to buy equity. But if you are going to get a stable government then this is the time to buy the equity. So we need to be a lucky little bit, we need to be sensible in voting majority.
So you are saying because there is an election coming up there could be a lot of uncertainty and perhaps the worst is not over? Shah: It is a binary even if we get a stable government, the market will continue to rise further, if we get a scenario where no one can form a government then undoubtedly it will correct. If you again see over a longer-term. Does election matter to the market? Not much.
In 2004, markets corrected on election results day but after that unleashed the mother of the bull market from 2004 to 2008. In 2009, markets went up 20 percent in a day post-election results but thereafter for next five years nothing happened. So over a longer period of timeframe it doesn’t matter what election results are but on the day of elections you could be rich or poor by 20 percent depending on how you have voted.
Keeping the fundamentals aside, what is the retail sentiment indicator suggesting? Because same time last year you said retail investors were advising you what to buy and what not to sell. This time I am sure nobody is asking for advice as what to buy? What is that indicator suggesting you at this point? Shah: This time my feeling is that when I go for Laxmi Pujan at my relative’s house, I would probably be cornered into a room saying that sit here and don’t do anything. Clearly, people have lost money in small and midcaps and microcap and minicap stocks.
The good part is that in the market now there are matured people, so they have brought good quality companies. They have continued to invest throughout the downturn. They have used SIP (systematic invest plan) to invest, they have followed by and large asset allocation. But in the same market there are many newcomers, who have tried to trade in IPO, tried to trade in dabba- market, gray market, who have tried to invest in all those companies whose names I don’t even know, so those guys have lost money.
By and large, matured investors have behaved quite nicely and it is on their flows and their stability that we are seeing today’s market getting settled.
Is that the feeling, is there a loss of confidence amongst retail investors or is there still faith that this is just a correction in a bull market and retail sentiment is still intact? Munot: I think retail investors in India have shown huge resilience. I think despite the volatility that we have seen since the beginning of the year, rising SIP flows clearly indicate that investors are taking longer term view.
I think they are a lot more disciplined than what we think about the retail investors and a lot of credit goes to our advisors, to the people like you and to the industry also in terms of promoting the whole concept of “Mutual Fund
sahi hai”. People are taking a view that ‘ sahi hai’ but for long-term with a disciplined approach and that is clearly reflecting in the discipline in the SIP flows and the pension fund flows that are coming to us. Right now the way to look at global markets is looking at what Trump is going to tweet and what other players are going to tweet. Broadly what is the global setup looking to you like, are we in a sweet spot or do you think there is going to be a bit of an accident in global markets as well? Gunwani: Personally, I feel from a global perspective we are getting into a sweet spot. My simple framework is, India does well when either the US is not doing too well or not doing too badly. If the US is an extreme, what happens is, if they are doing too well, then the dollar is too strong, and if it is doing too badly, then the world is in a recession. So you do not want both of that. What is happening is, the pendulum is moving from the US doing too well to somewhere in between because the dollar seems to be peaking out.
I think the expectations of the US growth today are so high, and they are entering a phase where they will have fiscal tightening relative to what was happening this year, they will have monetary tightening, and they have currency tightening because the currency has tightened. In that sense, given all these headwinds, I would expect that the US will slow down next year or somewhere close to that. Therefore, you might see the dollar weakening a bit. So, I think the pendulum is kind of moving in India’s favour at this point in time.
Shah: Talking about some interesting things, in 1984, India and China were of similar size. Today they are seven times bigger than us. In the last 24 years, they have dropped us by seven times. They became manufacturer to the world, we did not. However, now due to tariff war, due to the cost increase in China, due to their stringency on pollution, the manufacturing base is shifting. An article in Economist said computers are going to Taiwan, electronics going to Thailand and Malaysia, footwear going to Cambodia, clothing going to Bangladesh, and food processing going to Vietnam.
I wish this is our opportunity where all of this can come to India and we have seen that in inorganic chemical industries where growth is more than 40 percent year-on-year (YoY) for last three quarters, in mobile handsets we are seeing now production happening in India. So if we can take advantage of the supply chain disruption, it is like what Y2K did to Indian IT. Today we are number 1 IT services provider in the world; the same thing can happen on the manufacturing side if we can take advantage of the supply chain disruption.
Do you think that is just going to remain a dream because, I know that our Ease of Doing Business ranking has moved up, but still there are so many regulatory hurdles that businessmen and the industrialists talk about. Do you think it is going to take a long while before any of this happens? Shah: In was in the US recently and we manage India’s one of the largest offshore small and midcap fund and obviously in dollar terms fund has not done that well. However, none of the customer complained to me and I was talking to my sales guy saying that you are doing a great job in customer servicing, no one complained.
They said very plainly, do not give any credit to us, others have fallen so much that our fall is not looking like. So, we are talking always focused on India, we have this hurdle, that hurdle, but go and try to file income tax return in the US and you will realise filing Indian income tax return is much simpler.
The other big sector which is in the limelight and which is being talked about very largely off late is the entire NBFC/housing finance space. We have seen a bit of liquidity crisis in that space, looks like there are real attempts being made to resolve this liquidity crisis. What do you make of the whole crisis and is this crisis giving you a lot of opportunities to invest in the NBFC and housing finance space? Munot: Structurally, given some of the powerful forces in financial services, disintermediation, digitialisation, differential regulation, and you also add some of the things that have been happening in India in terms of formalisation of the economy, financialisation of savings, financialisation of assets, household borrowings were low and that is why there was a huge opportunity for the whole NBFC/housing finance companies space. With the added liquidity advantage particularly post demonization, they have grown much faster.
However, I strongly believe in the capital cycle much more than an economic business profit cycle. Too much of capital chasing a particular sector can lead to some issues and we have seen that. Structurally if you ask me, there is still a lot of opportunities for a lot of non-banking entities. However, at least for sometime, I think the banks who lost market share, for them there is a lot of opportunities. They have better liability side, they can gain on multiple fronts including lending to these NBFCs at better pricing, they can buy portfolios at a good price, and they can regain the market share from these entities. So I think banks are going to be beneficiaries.
However, well-run NBFCs and housing finance companies, who have a good liability side, good risk management, underwriting standards, recovery mechanism, they will also do well, there is a lot of opportunity in India.
The one big sector which has done really well from last Samvat to this Samvat is the IT space. The entire IT pack has done really well. The index itself is up some 35 percent. Is the big tailwind behind all these IT companies now given that rupee is now back to 72.50-73 per dollar and if the US slows down, probably there will be a growth consensus as well. What is your view on the IT at this point in time? Should one look to book out of IT? Gunwani: I am kind of cautious on that space because as I said, I do think that the US is growing above trend. The long term growth in the US is 2 percent and right now it is growing at 3 percent. When that happens, you have to be cautious about an economy. So, given that if the US slows down, the stocks have done 50-100 percent over the last 18 months, I would be kind of cautious on the space.
The other part is at least if you look at largecaps, the market capitalisation is so high, for them to become multi-baggers is not very easy. So I think there are a lot of other sectors where India’s market capitalisation is quite low which I think will do relatively better from here.
Likes of? Gunwani: As I said, at least in the midcap space, I see a host of industries which are asset-based and where stocks are close to book value. So whether you take utility, cement, real estate, textiles, a lot of these segments and I think the value style since it was not in favour, a lot of the stocks are cheap and either there is an acceleration of growth or deceleration of growth, what will happen is, if there is acceleration of growth, these guys will have earnings upgrades and will do well. If there is any disappointment globally, the well-owned stocks which are growth stocks, they may suffer more. I was just looking at some data and historically in India, space which has really created a lot of wealth for investors is the consumption basket. I was looking at the Motilal Oswal’s 23rd study, and all the 10 wealth creators, fastest wealth creators came from the consumption space whether it is Maruti or the Marico’s of the world, Dabur’s of the world; always been expensive, what is your take on the consumption basket, should one still look to buy those stocks? Shah: On the consumption side, valuations have already corrected. Second, some amount of discretionary consumption is coming under pressure. The NBFCs will not be able to provide easy credit for automobiles or for consumer durables and to that extent sales will get impacted. So we will see some amount of corrections in consumption related stories and that is where one can wait to get the right price to get into these stocks.
On the other hand, there are some consumer stories where for the last two or three years they had stagnated. They were not driven by leverage, they were driven by actual consumption. The growth was looking patchy compared to leverage consumption. Now those sectors, those companies, those items could be at the break out level. So, I think it is time to move away from leverage consumption to non-leverage consumption.
We are going to do a rapid fire with you. Not going to give too much time to answer. So very quickly, first, which is the one or two stocks which was your biggest hit and biggest miss between last Samvat and now? Munot: There would be several of those. If you see the carnage that has happened in the mid and smallcap space, there are so many stocks that have fallen 30-40 percent. However, thankfully for us, there are a lot of other stocks that have made up for it. Identifying one or two, there are so many. There is huge divergence. You cannot give me politically correct answers, you have to tell me the biggest mistake you made. Munot: Huge divergence in performance. If you look at Nifty if you remove the top nine stocks, the remaining 41 stocks. Nifty is flat year-to-date, the index is down 15 percent if you remove the nine stocks. What about you Manish? Gunwani: For us, call on pharmaceutical went pretty okay, one year back. Some of the IT stocks did pretty okay. Where we went wrong in industrials because to be honest, we did not expect this kind of rupee depreciation and volatility in the macro. The crude spike was kind of unexpected. So those are the hits and misses we have had. Nilesh your hits and misses?
Shah: Success came from IT, failure came from NBFC space. Success came in largecap, failure came in smallcap.
All three of you, in terms of ranking, small and midcap, microcap, or largecap your first preference from a one year point of view, this to next Samvat? Shah: Smallcaps will do well. Microcaps? Shah: Microcaps, you have to be really choosy and if buy microcaps you mean those small exchanges, I have no idea, I do not track that. What about you? Gunwani: Small and midcaps. Basically a multicap fund over a largecap fund. And you? Munot: Seems to be a consensus, small and midcaps. You have been saying that for a while, your fund has done phenomenally. Munot: Last year, I mentioned that for four years our view was that small and midcaps would outperform largecaps, but I think last Diwali I said, no there is a lot of froth in valuation now, you need to be careful for next one year. However, I think that froth has got cleaned up quite a bit. What is your biggest stress buster? Shah: Spending time with my daughter. Gunwani: Same, plus playing badminton. Munot: Meditation. You also meditate, you do yoga, I thought you would say yoga is your stress buster. Shah: That is the second stress buster. When my daughter gives stress, then I have to use that. In the next one year from now, Nifty down or up 10 percent in one year? Gunwani: Very difficult to give short-term targets but one year not sure, in three years double-digit. Shah: It would be 10 percent plus if you are lucky and sensible and 10 percent down if you are unlucky and insensible. Munnot: 10 percent plus regardless of anything unless if oil goes to $100 per barrel and there is the trade war which blows out of proportion then it would be a different thing. What about you in terms of pockets that have fallen a lot like NBFCs that have got hit the hardest, some of the infrastructure companies, do you see a revival or are these places not to touch at all? Gunwani: No, definitely I see a revival. I think there is a genuine need for some good companies and so the good companies will bounce back a lot. You have burnt your fingers in NBFCs, would you touch them again? Shah: Undoubtedly, I have put my debt money as well as equity money on them but we will now be more cautious in approaching this sector. Clearly, we have to invest in those NBFCs whose liability franchise is strong. We were more looking at asset side growth and quality of asset but liability franchise is also necessary. I have something funny to ask all three of you – next Cricket World Cup can India win again. Munot: I don’t follow much. Gunwani: Typically, lighting does not strike twice, so I am doubtful. Shah: India will be a winner by a margin. Narendra Modi and Trump getting re-elected? Munot: That is a difficult call, Trump I am relatively more confident it is unlikely, which will be very different because last several President’s in the US have been re-elected but history might change. Gunwani: Whatever mass media says. I have no insight to add. The newspapers are saying probability is more than 50 percent, so I will go with that. Shah: To the extent my vote can make a difference, I am going to vote for Trump also. Since you all are telling us what your heart is saying. One largecap stock for the next 10 years? Shah: We are not allowed to give a stock specific tip as per Sebi regulation but Kotak Bluechip Fund you can take it – it will be diversified largecaps. Gunwani: Sorry, I cannot comment. Okay, give me one sector for the next 5-10 years? Gunwani: I think large corporate banks. Munot: I also think so, also there are a lot of opportunities in the industrial space, it has been a tough time for the last few years but those who have built assets in India over the last few years – think about it a few years back rupee was 50 and now it is at 75 to the dollar, your cost have gone up 50 percent and so are most of the other costs. It is not easy to put up good quality assets and those who have streamlined their operations, have built their balance sheets, I think they will do well. Shah: Supply chain disruption, this is Y2K of India’s IT.