India is a strange market where we don’t usually see a time-wise correction. It (the market) always corrects price-wise and is driven by a lot of volatility. So, assuming there will be a correction in the Sensex and the Nifty, it will only be price-wise. The problem is that only a handful of stocks have been running up and nothing else has contributed much. The question is how long these five-six stocks will continue to push the Sensex and the Nifty higher.
How concerned are you about the shallowness of the rally?
I am very concerned. This performance divergence is worrisome and such things don’t end well. Though the divergence can last quite a while, the ending is usually not happy. In 1998, we had the tech rally and only information technology (IT)-related stocks moved up and propelled the index to new highs. In 2007, it was the financials. While I don't have a problem with narrow rallies, one needs to be extra vigilant in such situations.
Have the markets run ahead of fundamentals?
If you see the broader market, it has not gone anywhere, but down. The Sensex and the Nifty, by any stretch, are not representative of the entire market anymore. As it is, they were a very narrow measure with just 30 and 50 stocks, respectively. Over the past few years, they have become a six-stock measure. These two indices, by no means, indicate the problems in the real economy or the way key economic data is unfolding. The broader market is telling us a very different story, as compared to the Sensex and the Nifty. So, what does one believe — just six stocks that are pushing the indices higher or the 600 scrips that are reflecting the economic pain?
So, will mid- and small-caps grind lower in 2020 as they reflect the rising economic stress?
I don’t think they have room to fall much from here as they have corrected — both time-wise and price-wise. We are now two years into the bear phase for the broader market, which started in January 2018. In essence, we have a broad bear-market and a narrow bull-market. This is a very interesting phenomenon as we have two different market phases co-existing. To expect the broader market to fall further after a 35–40 per cent cut since January 2018 is a bit unfair. It will continue to meander along till something genuinely happens on the corporate earnings front led by the industrial and economic revival.
Where can investors park their money over the next 12–18 months?
It is a tricky market. The data always talks and the rest are all stories. The last 20-year Sensex and the Nifty return have been 11 per cent, compounded in rupee terms. Over its history of 40 years, they have returned 15 per cent. In the last five years, the return is just 5-6 per cent CAGR. What is worrying is that the return spectrum is degrading consistently and has been trending lower. Compare this average return of 11 per cent in equities over 20 years to an average fixed deposit (FD) rate of around 8 per cent in the last 20 years. In the last five years, the return has not even beaten the FD rates. This is worrisome. Even government securities would have returned around 7 per cent during this period. So, the case for equities as an investment class has been weakening over every 5–10-year period, which is a cause for concern. So, the question is whether one should bear the risk and the volatility involved for a 5-7 per cent return. This is reflective of the fund flow we have seen in the mutual fund segment where the flows have thinned.
What’s your view on the economic slowdown debate?
I don’t think there is a debate anymore, as the data itself is speaking loud and clear. Even with the quality of data we are getting, barring the crises years of 1991 or 2008, this is unprecedented. Industrial production has not dived to such levels as seen now. There is a crisis in the real economy. While gross domestic product is a notional figure, the index of industrial production (IIP) is a harder, concrete and a quantitative figure. While a number of people have hypothesised when the growth rate will pick up, one needs to only look at the Reserve Bank of India (RBI), which has been revising the growth forecast downward every single policy meeting since the past few months. If the central bank is missing estimates within the same year, what forecasting one should believe! Everyone is just shooting in the dark about a pick-up in growth. Unless there is concrete action to show why the growth rate will pick up, one should not blindly buy into the logic.
Do you think the government is cognizant of the severity of the economy-related issues?
Any step to revive growth requires only one thing -- money. Mere policies themselves are not enough. Easing business rules is just a palliative measure. They will not turn around a struggling industry. So, where do we get the money from? There are only two sources. One is domestic via boosting debt to say around 75 per cent of the GDP and use the funds to reflate the economy. The second option is to depreciate the currency, in which case, India will get money from abroad.
Do you think the government in its second term has political agenda high up on its priority list when compared to tackling the economic issues?
I view politics as something similar to the asset management business. The goal in both these is to either gather votes or assets. What gathers votes and assets is a very big question. Usually, we see a lot of marketing gets us more votes, than performance. It is the same in the asset management business, where the bigger billboards on the road get you more mindshare of investors, hence more money, and the performance gets forgotten. The government also knows that economic performance doesn’t necessarily get them re-elected. In most countries, economic performance dictates whether the government should be voted back to power or not. In India, this is not very clear.
How are foreign investors analysing these developments?
They are already very worried about India and will soon start worrying more. The recent political developments will add more to their list of worries. All these increase the political risk of doing business in India. Companies want stability and a conducive environment to do business. The mood is very different from what it was a few years ago. There is a feeling that not enough recognition is being done on the problem at hand. There has to be a bouquet of policies that are needed to revive growth, which have to be backed by logic and a vision.
How do you see India Inc perform in this backdrop? Your earnings estimates for FY20 and FY21?
While most are talking about 20 per cent figure since the past few years, we are not even close to this number. If the nominal GDP growth is at 6 per cent, one cannot expect corporate earnings to grow at 20 per cent. I think a more realistic figure is between minus 2 and plus5 for the financial year 2020 - 21 (FY21).
Your views on PSU stocks in the backdrop of government’s divestment agenda?
I am not a supporter of divestment. A government is elected to build assets and not sell them. If the government is elected to run the country -- a country as large and complicated as India -- the same government should be able to run 10–20 companies very well. What is the big deal in running a company -- that too when they are large corporations built over 50–70 years. These public sector companies should be managed well and turned into global giants rather sell them off to private players in India or a foreign buyer. Far from divesting, the government should be increasing the footprint of its business because no private player has the capital anyway. That apart, there will be regulatory stability. The government is the only entity in India that is insulated from all shocks that can hurt its business interests. Brazil, Thailand, China have a thriving public sector -- and here we are selling family silver!
Your overweight and underweight sectors in the Indian context?
It is a very narrow list of stocks, which includes financials. It is very difficult to find investment-worthy stocks in India, barring the top 25–30 names. It is becoming a very crowded trade now.