We are a couple of days away from the Budget but the bulk of the heavy lifting on the policy front has actually been done outside of the Budget. How have you been managing your model portfolio?
The government has announced a series of initiatives post Covid crisis in terms of pump priming the economy and getting it back on the growth path. The government and RBI have done a great job in terms of getting the liquidity right and creating some catalysts which can put Indian economic growth back.
Many initiatives taken by the government will accelerate growth and one of the biggest initiatives is Atmanirbhar Bharat (self-reliant India) where government is focussing on reducing import substitutions and exporting several items which essentially means that we will have a solid growth on the manufacturing sector, which historically has been missing in India.
We are quite optimistic and positive about the government-led catalyst in many sectors and this will not only bring manufacturing growth but also start the investment cycle which the Indian economy has been waiting for. It has a multiplier effect on the entire economic cycle. So you will see the investment cycle picking up and accelerated growth in the manufacturing side.
Apart from that, liquidity management, initiatives on the real estate side especially by some state governments have been seen. Low interest rates and reduced stamp duty created a very good buoyancy in the sector. That is another big positive by the government and like this you can find a lot of reforms done on a stealth mode though it is not a big announcement on the labour side.
All those things are going to put the Indian economy back on track and two things one should definitely play is a)manufacturing; and b) those not driven by the government of India but by the environment which is on the technology side.
Indian IT services are going to get into a super accelerated mode. As the demand across the globe has opened up big time due to its non-discretionary nature, that sector will also have to play out well. We have been positioning ourselves in these two or three big catalysts over the last six to eight months and we think this is a very big structural growth story for Indian economy. All those things will have a multiplier impact in terms of creating demand and thereby kicking off the entire virtuous cycle,
Your call on IT was quite ahead of the times. How are you playing manufacturing in your portfolios? Is it by electronics or capital goods or by autos or any other space?
We are in both largecap and midcap stocks and in sectors or segments where India benefits from having a natural sort of capability. These are auto ancillaries, pharmaceuticals, APIs, chemicals and some of the segments like defence and even manufacturing within the consumption segment which we have been historically importing like consumers electronics.All these segments have started picking up and a lots of players have announced capex programmes so that the benefits will also accrue to capital goods companies.
One can play across these segments and we believe that these segments will become far bigger than what they are today. Many of these companies can become 4x, 5x and we have seen this happening in the 2003-2007 cycle as well. We have seen this trend in the IT sector earlier. This time around, government drive and lots of global factors are helping a lot in terms of accelerating the trend.
Where do you see risk reward in favour right now among the top 200 and 500 companies? Do you see more juice in the top 200 because of the FII flows?
No cycle is same but we are in a similar-ish cycle to what we saw in the 2003-2007 period when global liquidity was reasonably good and a huge amount of local growth picked up across various segments. This time around, the India story has many legs or catalysts. We have IT services in accelerated drive mode. There is manufacturing in accelerated drive mode. Banking sector is by and large cleaned up and would show growth.
The real estate sector has been coming out of a 10-year consolidation phase and on the top of it, interest rates are likely to remain in a very narrow range. The combination of all these things put together, we believe we are in the beginning of a very big economic cycle. As and when the economic cycle picks up, all these factors put together contribute to the growth. This is the virtuous cycle we are talking about and over the next four to five years, India can get to $5-trillion GDP. If our market cap gets $3-6 trillion, we can imagine what kind of wealth will be created in this period and this will be across the large caps and midcaps because it will be driven by the earnings profile.
Of course, in a bull market, the mid and smallcap stocks end up doing well because they get re-rated, they have a little higher growth but we must not forget that it comes with a slightly higher risk. So it is more about risk management and one has to look at risk reward. Keep your portfolio balanced, but participate in this bull market, don’t be a sceptic.
How do money allocators actually consume these important data points like economic survey on the macro side? How does it fit in with your overall investing style?
As far as that macro data is concerned, there is no one single data, you consume plethora of data and it is not only local data but also international data and you have to see how that will intertwine with the local data, how the government is thinking etc,
Right now, we are focusing on whether there is going to be enough liquidity both globally and locally to support the growth and the answer to that is yes. Is the fiscal deficit going to be reasonably liberal to support the funding? The answer we are getting to that is right. Is private sector risk appetite opening up in a calibrated manner? Are banks ready to feed into the growth of credit which is very essential? We think we are about to see the turn of the corner. Real conviction comes when you connect the dots looking at various data and on the top of it you also have to do your channel checks.
