Agencies“Our dependence on foreign capital flows has demonstrably reduced over time and I think if it remains like this, then Indian markets should become less volatile compared to what we have experienced in the past. And that lower volatility could actually encourage even higher allocation towards equities from household savings and that I think will be a win-win for everyone,” says Prashant Jain, CIO, HDFC AMC.
Given the positioning of your portfolio, are you tilted towards value, utilities and corporate banks? Are you happy to have this kind of positioning for 3-5 years?
Directionally things have clearly improved while a few things have changed. One is of course that the rising commodity prices are directly supportive of this space. The second is it hurts the consumer oriented companies which are relatively expensive in India. Two, the profit growth has become fairly broad-based and that was not the case until two years back. Banks were struggling, commodity was struggling, capex was struggling and so consumer companies could still deliver profit growth and therefore there was a scarcity value of that profit growth. I think that is clearly disappearing because profit growth has become fairly broad-based.
So, there should be a natural regression. Accesses at both ends – high PEs and low PEs – should experience some moderation. Finally, the cost of capital is going up. That impacts the high PE companies a lot more and of course, it is common knowledge that this space has been out of favour for years. It is under invested, under owned and that also should help.
As far as how long this will outperform, that is hard to say because we do not know how long these stocks take to reach fair value. It could happen in six months, it may take a few years; I would be more guided by valuation and it is very tough to put a timeline to this. But we are meaningfully away from fair values yet.
Read Also: Prashant Jain explains why poor macros can't pull down market
Is it time to start looking at the classic compounders because if inflation comes down and the base effect kicks in, consumer demand can also come back?
Over time, the stock markets experience cycles and I have experienced four cycles and one cycle typically has lasted between 6 and 10 years. But that is still too early. What you are saying is a very logical way to think and eventually that will play out.
But that probably is quite some time away. We must also not forget that as time goes by, the penetration levels of consumer staple companies continues to improve and as penetration level continues to improve, it should lead to lower volume growth at least in the future. So higher increasing levels of penetration mean budgets are under pressure because these are mass market products and the energy cost of a low income household will be between 10% and 2% of the monthly budget.
So that will have a meaningful impact on consumption at those income groups. 70% of India earns below Rs 40,000 a month. That is a significant issue. Profit growth is broad-based and cost of capital is going up. Let us not forget that these companies, between 2000 and 2007-2008, have traded at around 12 to 20 PE multiples and that was the time when penetration levels were lower than where they are today. I would feel there is still some way to go before what you suggested plays out.
They said the best of Warren Buffett came after he turned 60. Can I say the best of Prashant Jain’s wisdom is yet to unfold?
We all continue to learn as we go by and the longer you have stayed in this business, the more mistakes you have made and wiser you are probably. I do hope that I make lesser mistakes in the future.
So for FY23 what should be the broad asset allocation call for not the SIP investor, but for a tactical investor, an HNI for ultra HNI?
These are reasonable markets and the market cap to GDP in India is reasonable and growth outlook is decent both for the economy and profit growth and cost of capital should go up moderately in India.
It may go up more outside India because clearly the Indian cost of capital has not fallen as much as it has fallen in the west. So while there is an issue there, I do not think it is a very serious issue and Indian markets have done well, held on well even when 10-year yields were 8% or thereabouts. So I think the outlook for equities is reasonable; but valuations are also fair. That means that if you hold equities for three-five years, you should get around nominal GDP returns and that is what I said earlier as well.
Now the challenge is that if you go outside India, the cost of capital could go up more. The fiscal stimulus in the western world has been far more and so the unwinding should also have a greater impact and whenever that happens, we have seen one very large round of FII selling – almost $30 odd billion. It is large but more could come if US interest rates surprises on the upside.
One should be prepared for volatility. Equities are always volatile but you could have more volatility here induced by outside India factors. If oil spikes up sharply from where we are, it is reasonable to expect some impact of that. I would say the answer to your question would vary from individual to individual but the guiding principle is that whatever a person can hold for three-five years, whatever you can or whatever volatility you can tolerate emotionally and financially, that is what we should keep in equities. Of course, we should expect near nominal GDP kind of compounding returns.
It should be in double digit, if I add the GDP projection and, inflation projections we are still looking at early teens so if your view is that that nominal GDP plus, minus 2% return is what we should expect so that means next two, three, four years early teen returns is a strong probability?
Yes, I mean, I see no reason why we should not expect that. If you look at the trailing 10-15 year returns in India too, it is in line with nominal GDP growth rates around 12% odd. There is no reason why that relationship should break down.
The headline, which in a sense captured global markets last week, was the inversion in bond yields. This may be easy for a sophisticated investor to understand but for an average viewer and investor to understand a headline which says that historically when bond yields have happened, it has led to recession in the world raises concerns. How does one apply that in India?
I think what inversion means is that the long-term yields are below the medium term yields and therefore if you expect economic growth to slow down sharply after some time, investors will take a view that after some time the long bonds could even trade lower and so the yield curve inverts.
I am not an economist and two, I am not an expert on what happens outside India but my view is that inflation in the West could probably surprise us on the upside. In the last 20 years, the US inflation has been low because consumer durables, the manufactured goods that were going from China were deflating and the US manufactured goods, the consumer durable index experienced a deflation of 1.5-1.6% CAGR for a fairly long period of time.
That has kept inflation low in the US. That phase has clearly come to an end and the manufactured goods are not becoming cheaper anymore. I think the US inflation should move up. On top of that, you have the under-investment in the energy space for the last five, seven, 10 years and energy is a large component of any economy. Energy impacts inflation in multiple ways; one of course is that the energy prices will go up, two, wages will have to go up; three, logistics costs go up and four the cost of plastics goes up. This inflation would probably surprise us on the upside and therefore yields could surprise on the upside as well.
Let us not forget that 15-16 years back, the US 10-year was between 4% and 5%. If that happens and these income transfers that have taken place in the last two years to households in the US is discontinued, as taxes go up – because fiscal deficits clearly need to be brought down – it is logical to expect that US growth will experience moderation over time.
That is probably what the yield curve inversion is hinting at. I do not think in India we should worry about this because in the last 40 years, our growth does not depend to a meaningful extent on US GDP growth. We are still driven by local consumption, by local business climate, investment climate and by local interest rates, by local reforms and local policies. Oil definitely impacts us a lot more. I think that is what we should really worry about and the yield curve inversion should be less of a worry in India.
FIIs have been selling but looking at the lay of the land – Russia not being investible, the inflation in Turkey at 60%, problems in China in terms of growth and regulatory action – do you think now foreigners who have sold could be coming back? Is there a strong probability for FII flows to reverse?
It is indeed very difficult because you do not know how US yields will behave. Since India has sharply outperformed the markets in China, Brazil, Turkey and Russia, India could have a much larger part of portfolios. Someone may rebalance, someone may get outflows in EM funds, US interest rates may go up. Or the converse plays out that Indian markets, Indian economy outlook is extremely good. Foreigners have sold quite a bit already and maybe they will bring in some money. I really do not know. Medium term, I see no reason why India should not have a higher weight in EM indices. Why should it not have a bigger portion of global portfolios?
All that will happen but what is also interesting is that we have seen $30-35 billion of selling and still our markets are holding on extremely well. I think a silent transition has taken place in India and equities which were a peripheral or seasonal trading asset class two decades back, today have become more core, more long term, more centre of the plate kind of an asset class – be it through direct investments or through mutual funds or insurance companies.
And I think that is what gives us the reason to celebrate that our dependence on foreign capital flows has demonstrably reduced over time and this I think if it remains like this then Indian markets should become less volatile compared to what we have experienced in the past. And that lower volatility could actually encourage even higher allocation towards equities from household savings and that I think will be a win-win for everyone, for the country, for the households, for the wealth of this country and I think that is what is really important to me.
Given the positioning of your portfolio, are you tilted towards value, utilities and corporate banks? Are you happy to have this kind of positioning for 3-5 years?
Directionally things have clearly improved while a few things have changed. One is of course that the rising commodity prices are directly supportive of this space. The second is it hurts the consumer oriented companies which are relatively expensive in India. Two, the profit growth has become fairly broad-based and that was not the case until two years back. Banks were struggling, commodity was struggling, capex was struggling and so consumer companies could still deliver profit growth and therefore there was a scarcity value of that profit growth. I think that is clearly disappearing because profit growth has become fairly broad-based.
So, there should be a natural regression. Accesses at both ends – high PEs and low PEs – should experience some moderation. Finally, the cost of capital is going up. That impacts the high PE companies a lot more and of course, it is common knowledge that this space has been out of favour for years. It is under invested, under owned and that also should help.
As far as how long this will outperform, that is hard to say because we do not know how long these stocks take to reach fair value. It could happen in six months, it may take a few years; I would be more guided by valuation and it is very tough to put a timeline to this. But we are meaningfully away from fair values yet.
Read Also: Prashant Jain explains why poor macros can't pull down market
Is it time to start looking at the classic compounders because if inflation comes down and the base effect kicks in, consumer demand can also come back?
Over time, the stock markets experience cycles and I have experienced four cycles and one cycle typically has lasted between 6 and 10 years. But that is still too early. What you are saying is a very logical way to think and eventually that will play out.
But that probably is quite some time away. We must also not forget that as time goes by, the penetration levels of consumer staple companies continues to improve and as penetration level continues to improve, it should lead to lower volume growth at least in the future. So higher increasing levels of penetration mean budgets are under pressure because these are mass market products and the energy cost of a low income household will be between 10% and 2% of the monthly budget.
So that will have a meaningful impact on consumption at those income groups. 70% of India earns below Rs 40,000 a month. That is a significant issue. Profit growth is broad-based and cost of capital is going up. Let us not forget that these companies, between 2000 and 2007-2008, have traded at around 12 to 20 PE multiples and that was the time when penetration levels were lower than where they are today. I would feel there is still some way to go before what you suggested plays out.
They said the best of Warren Buffett came after he turned 60. Can I say the best of Prashant Jain’s wisdom is yet to unfold?
We all continue to learn as we go by and the longer you have stayed in this business, the more mistakes you have made and wiser you are probably. I do hope that I make lesser mistakes in the future.
So for FY23 what should be the broad asset allocation call for not the SIP investor, but for a tactical investor, an HNI for ultra HNI?
These are reasonable markets and the market cap to GDP in India is reasonable and growth outlook is decent both for the economy and profit growth and cost of capital should go up moderately in India.
It may go up more outside India because clearly the Indian cost of capital has not fallen as much as it has fallen in the west. So while there is an issue there, I do not think it is a very serious issue and Indian markets have done well, held on well even when 10-year yields were 8% or thereabouts. So I think the outlook for equities is reasonable; but valuations are also fair. That means that if you hold equities for three-five years, you should get around nominal GDP returns and that is what I said earlier as well.
Now the challenge is that if you go outside India, the cost of capital could go up more. The fiscal stimulus in the western world has been far more and so the unwinding should also have a greater impact and whenever that happens, we have seen one very large round of FII selling – almost $30 odd billion. It is large but more could come if US interest rates surprises on the upside.
One should be prepared for volatility. Equities are always volatile but you could have more volatility here induced by outside India factors. If oil spikes up sharply from where we are, it is reasonable to expect some impact of that. I would say the answer to your question would vary from individual to individual but the guiding principle is that whatever a person can hold for three-five years, whatever you can or whatever volatility you can tolerate emotionally and financially, that is what we should keep in equities. Of course, we should expect near nominal GDP kind of compounding returns.
It should be in double digit, if I add the GDP projection and, inflation projections we are still looking at early teens so if your view is that that nominal GDP plus, minus 2% return is what we should expect so that means next two, three, four years early teen returns is a strong probability?
Yes, I mean, I see no reason why we should not expect that. If you look at the trailing 10-15 year returns in India too, it is in line with nominal GDP growth rates around 12% odd. There is no reason why that relationship should break down.
The headline, which in a sense captured global markets last week, was the inversion in bond yields. This may be easy for a sophisticated investor to understand but for an average viewer and investor to understand a headline which says that historically when bond yields have happened, it has led to recession in the world raises concerns. How does one apply that in India?
I think what inversion means is that the long-term yields are below the medium term yields and therefore if you expect economic growth to slow down sharply after some time, investors will take a view that after some time the long bonds could even trade lower and so the yield curve inverts.
I am not an economist and two, I am not an expert on what happens outside India but my view is that inflation in the West could probably surprise us on the upside. In the last 20 years, the US inflation has been low because consumer durables, the manufactured goods that were going from China were deflating and the US manufactured goods, the consumer durable index experienced a deflation of 1.5-1.6% CAGR for a fairly long period of time.
That has kept inflation low in the US. That phase has clearly come to an end and the manufactured goods are not becoming cheaper anymore. I think the US inflation should move up. On top of that, you have the under-investment in the energy space for the last five, seven, 10 years and energy is a large component of any economy. Energy impacts inflation in multiple ways; one of course is that the energy prices will go up, two, wages will have to go up; three, logistics costs go up and four the cost of plastics goes up. This inflation would probably surprise us on the upside and therefore yields could surprise on the upside as well.
Let us not forget that 15-16 years back, the US 10-year was between 4% and 5%. If that happens and these income transfers that have taken place in the last two years to households in the US is discontinued, as taxes go up – because fiscal deficits clearly need to be brought down – it is logical to expect that US growth will experience moderation over time.
That is probably what the yield curve inversion is hinting at. I do not think in India we should worry about this because in the last 40 years, our growth does not depend to a meaningful extent on US GDP growth. We are still driven by local consumption, by local business climate, investment climate and by local interest rates, by local reforms and local policies. Oil definitely impacts us a lot more. I think that is what we should really worry about and the yield curve inversion should be less of a worry in India.
FIIs have been selling but looking at the lay of the land – Russia not being investible, the inflation in Turkey at 60%, problems in China in terms of growth and regulatory action – do you think now foreigners who have sold could be coming back? Is there a strong probability for FII flows to reverse?
It is indeed very difficult because you do not know how US yields will behave. Since India has sharply outperformed the markets in China, Brazil, Turkey and Russia, India could have a much larger part of portfolios. Someone may rebalance, someone may get outflows in EM funds, US interest rates may go up. Or the converse plays out that Indian markets, Indian economy outlook is extremely good. Foreigners have sold quite a bit already and maybe they will bring in some money. I really do not know. Medium term, I see no reason why India should not have a higher weight in EM indices. Why should it not have a bigger portion of global portfolios?
All that will happen but what is also interesting is that we have seen $30-35 billion of selling and still our markets are holding on extremely well. I think a silent transition has taken place in India and equities which were a peripheral or seasonal trading asset class two decades back, today have become more core, more long term, more centre of the plate kind of an asset class – be it through direct investments or through mutual funds or insurance companies.
And I think that is what gives us the reason to celebrate that our dependence on foreign capital flows has demonstrably reduced over time and this I think if it remains like this then Indian markets should become less volatile compared to what we have experienced in the past. And that lower volatility could actually encourage even higher allocation towards equities from household savings and that I think will be a win-win for everyone, for the country, for the households, for the wealth of this country and I think that is what is really important to me.
(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
Read More News on
(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
Get Unlimited Access to The Economic Times
