It is that phase of the market where every conversation, every narrative is centred around the election cycle. In the overall scheme of things in which you invest, you tell your clients to invest, how are you advising your clients to position themselves before this important event?
Rajiv Batra: We anticipated that going into the election, there will be a rise in volatility. We saw VIX was at around 10 mark and we anticipated it will go higher and stay elevated until and unless the election got concluded because that has been the trend since 1990. Only post-election, the volatility declined. So, the answer to them was that whenever any corrections happen, you should buy in the election. Because once elections get concluded, irrespective of the result, the median return you get from the market is 9% to 8% percent dollarized positive over three- to six-month period, hence correction is better bought. Now, if we anticipate a policy continuity, our answer is to keep positioned in a barbell manner, some safe and secured sectors like healthcare on a defensive side, but on the other side continue to hold domestic cyclicals like financial, auto and real estate.
Why are FIIs selling? If the India appeal is so strong, if everyone is of the view that India is now the only big, large economy where growth and visibility is clear, why are FIIs selling?
Rajiv Batra: The answer lies in what they were owning before. Are they owning the right part of India which is rallying or which will rally post-election? Answer clearly looks no. For almost two to three months, I have been trying to understand people’s moves on the western hemisphere.From 1990 to 2015, FIIs were in the consumption, IT side of the economy which has been materially underperforming for the last four to five years. Knowing that policymakers are focusing more on investment away from the consumption side, it really puts them on the spot and their investments of consumption and IT are not working anymore. Hence whenever the rally is happening, they are exiting and trying to get new allocations being done in investment cyclicals or other domestic cyclicals side.But the net number is negative, which means if they are selling, they are not buying anything. If the net number would have been positive or neutral, I would have said that they have sold a tech stock or a bank and they bought into consumption, but that is not the story.
Rajiv Batra: I totally hear you out on this one. What they were owning largely were in ADRs and the GDRs because they do not have the licenses or used to go through the swap routes which are available from France and the other side. Now, on that side, you do not have a depth of stocks available in domestic or investment cyclicals. Now, these people are applying for an FPI entity or NSC ID. Once that gets done for them, they will start taking an exposure. But due to a lack of choice, even they are waiting on the sideline and hence this is the reason why their underweight position is phenomenal right now in India.
What is the assumption on elections right now because the chatter is different on a daily basis. There’s the bull case. If you assume that there is continuity of the current regime with either an inline or higher than expected seat share, what happens to the markets then because we are in any case a little top heavy and what is the bear case? Is it not the continuity? Is the market pricing that in as well? And then what happens then?
Rajiv Batra: When we started the election, the market was pricing in continuity overall. But at this juncture, we have seen great volatility and relative underperformance, because what has happened since the election started from April 19th, is that markets like S&P 500 in the US, HSCI in China, have all gone to a plus 16, plus 10% kind of a year-to-date return. Nifty is still at around plus one or in a minus one kind of a territory.
So, suddenly from a top quartile performer in the first quarter, we have come down to a second quartile performer. That clearly shows that the market was not confident about the continuity. Now, once you get a status quo like the last election kind of a seat share result also, there will be a rally, for sure. But in case if the expected seat share is a little bit plus or minus 10% around the opinion poll which just happened before the election, you need to prepare for a bull case scenario.
You mean a bear case scenario?
Rajiv Batra: No, bull case scenario. If it has gone higher in line with the opinion poll. My FIIs will discount that there is a policy continuity in India, capex was not just a five-year cycle, it is going to continue next five years also, and hence I need to start putting in money. They are not worried about leaving initial 5% to 10%, the opportunity cost on the table, but they are looking at that longer term five-year return. But in terms of a bear case scenario, the bigger worry should not just internally be about any unexpected outcome, but also if there is something on the US recession side or geopolitical side, which right now is not full, zero percent, priced in into the global equity so that can send some trouble even to Indian equities too.
So, how is it that you make a portfolio which is isolated from what is going on? Do you look at the internal India consumption theme? For the last two years, it has been all about capex, manufacturing, infrastructure. Do we need to reduce exposure there because of the unknowns which are flying around, not just domestic, but international as well?
Rajiv Batra: We have done the exercise looking at the country’s exposure towards the global partner side or even the US side. India largely on the revenue terms, has a 9% exposure to the US. It largely comes from the IT sector, a few healthcare names and the metal and mining names. Hence, in terms of our allocation, we are still underweight on IT and metal and mining because we do not prefer global cyclicals at this juncture, not having certainty about the growth outside of India. We are much more positioned on domestic cyclicals, domestic demand, which keeps us overweight on still financials, autos and real estate overall.
You did talk about some of the factors like concerns emerging from across the globe, but what about the overall macroeconomic picture back home, in particular what the RBI could potentially do as well and how that would influence the market?
Rajiv Batra: The macro picture is improving every single day. We just got the IP print as well as PMI prints. The IP print clearly shows that the manufacturing exports are going gangbusters. We also are seeing domestic public investment doing quite well. Hence, even we have upgraded Jan to March, Q1, ‘24 GDP forecast to almost 7% now while NSO is around 5.9%.
This leads us to making FY24’s entire year forecast at 7.9%. So, the macro momentum is still quite great and it is happening at the same point of time, where headline inflation is subdued. Yes, food inflation is a problem right now and hopefully, IMD is forecasting a better monsoon, so even that concern should come down. But the overall domestic macro growth scenario is going great and that will lead your earnings keep on going higher, which we have seen in the recent earning season also.
You are bullish on defence and financial inclusion and waterways, a differentiated theme. When you say waterways, do you mean ports or pipe companies?
Rajiv Batra: This is water as a mode of transportation. When the PM spoke about Gati Shakti, he thought of all three modes – road, rail and water. The first term belongs to roadways, highways and bridges. Second term belongs to the railway. Now under the Sagar Mala, they have e-marked money out of which 10 or 15 odd percent have been spent so far. Waterways is one kind of transportation which is cheaper and can unleash a bigger amount of growth and productivity for the country. We are seeing multiple companies using inland water transport for their shipments and stuff, particularly logistics guys are saying how better and efficient it is becoming.
We believe that in this entire next five-year term, the focus could be on waterways like shipping, ship building, ports and having better logistics for inland waterways.
You do not have anything on what could be called as EV or energy transition. These are the two popular themes which could include power, autos and a variety of auto themes as well. Have you stayed away from them consciously?
Rajiv Batra: No. If you look at the manufacturing renaissance which we have created, India is not something new in manufacturing. We have been exporting auto, two-wheelers, four-wheelers, OEM and even engineering goods in the past. Now, we are expanding our limits towards other segments of the business also. When we look at the entire manufacturing ecosystem, yes, EV is part of the auto side and power, utility, even the corporate financiers are part of the ecosystem. One has to look holistically at manufacturing as a basket which will benefit India overall.
Assuming that the current regime continues, whatever may be the seat share, where do you see the alpha generation in the market because it is a pretty much discovered lot?
Rajiv Batra: Alpha could be generated by addressing the two pending factors of production now. Out of four, capital and commodities are sorted for India. Land and labour reforms are what the government is trying to address. As you start addressing that, it will further unleash a new productivity angle for the government because if you want to be a manufacturing hub globally, then you need overall labour availability.
No doubt within Asia, the lowest labour cost is still in India. But are these people still staying in the agriculture sector or joining the manufacturing work stream? Looking at the statistics, 56% of the population is dependent on agriculture. As we move them away from agriculture to manufacturing, not only the largecap guys, but even the small and midcaps will see the beneficial effect coming and that will also solve land issues also. That will be my most alpha generating idea on the factory production side.
And given that we are seeing a lot of tech companies going very aggressive when it comes to new-age technology, won’t digitalisation be an important theme to watch out for?
Rajiv Batra: We are already seeing that. Coming down in India and seeing currencies no longer being accepted in QR code, even if you buy a Rs 10 tea cup, you have to pay digitally, it shows how effective it is becoming overall and this will help the economy because this will make the country much more efficient when we try to compare with the other Asian countries or European countries. They have gone to a digital trend overall. That is reducing the workload on the workforce over here who were doing this kind of a job of collecting cash payment.You take that out, you raise the efficiency level.
The reason why I am highlighting so much about productivity is because earlier in economies like the US, China, everywhere, the GDP growth was always being talked about, potential was one single factor productivity, which now India is seeing for the past four years and I anticipate it can continue for next five years too.
