How To Build Your Portfolio In Samvat 2079 — Alpha Moguls

Ved: I definitely think so. The current context is very interesting because you have a slightly challenging global macro. But what you have in India is a much stronger macro and micro. Typically that gives you a great opportunity where global investors are still trying to figure out because of what's happening at their end. 

But our markets are only being held back by the narrative that we are seeing what's happening outside with the war, and energy prices, and so on and so forth. 

But if you look at the Indian macro, I think we are very solid. We are starting a new economic growth cycle. We have already started a new earnings growth cycle after many, many years and you haven't seen balance sheets which are as strong and as robust as we have seen. 

People forget that in the run-up to Covid, we had a pretty challenging macro with a lot of disruptions like demonetisation and GST and the real estate industry going through a tough time, and then the credit markets freezing because of an IL&FS. 

So, if you have survived the last five years, including Covid, and the war then I think the set-up for the next year and the next couple of years looks to be very, very bright. You can't have a better context as we have today and then you also have a large opportunity set that is opening up. 

What will be different in this market cycle versus the previous market cycle is that the breadth of the market is going to be far better as compared to between let's say 2018 and 2021, when the market was very narrow at the top, That's likely to change, which is going to make investing over the next couple of years very interesting.

Singhania: At the outset, please accept my heartiest wishes to you and your team and all the viewers. Have a great Diwali and a very prosperous New Year. 

Obviously, things are challenging, but that is the genesis of the markets. Things always cannot be hunky dory, there will always be challenges. But if you look at the last Samvat compared to this Samvat, Indian markets have been more or less flat. 

Look what has happened between the  last Samvat and this Samvat. You had major issues in China. You have had the first major war, maybe post-World War of this scale where so many countries are involved. You have had a record rise in inflation as well as interest rates. 

In the U.S., normally it takes two years to increase interest rate by 200 or 250 basis points. This time, we have had it in four months. Despite all this, we are flat. That says something about the greatness that this country has achieved in terms of resilience to all kinds of macro factors and also the global factors. 

Global factors continue to be challenging, inflation is a cause of worry. However, if you just go ahead a little bit, I think by May 2023, inflation should logically come off very sharply and it's nothing which is extraordinary, just by way of base effect.

If you take say April-May 2021 and base it at 100, April-May 2022 was at 120 because of the sharp jump in all the commodity prices post the Russia-Ukraine issue, and if you just take today's prices, then April-May 2023 should be like 110 for the same index. 

So, inflation in the U.S. and all should come off very sharply if these commodity prices continue. The other thing is that …information nowadays travels faster than light, and we are all grappling with the same concerns. 

As far as India is concerned, we have done very well. We are a domestic-focused economy, the 80-82% domestic economy is thriving. You have to go on the streets in this festive season, weddings are there in full force and balance sheets for corporate India have never been better. 

The other thing is we also have had inflation and we also had interest rates hike. …In the U.S. on a base of 1.25%, you have a 250 basis point hike, which is 200% from the base. So, I think relatively India definitely stands out. 

Having said that, if there is a six-sigma or an eight-sigma event in the world, then India is also going to be impacted. But at this point of time, the likelihood of that also is pretty low. So, all said and done, if the world stabilises, India should do very well. 

At the same time, again reiterating, the return expectation has to be moderate. We are not cheap. We are one of the most expensive markets in the world on a PE basis. So, we will make returns, but we will make reasonable returns as we move forward. 

On oil, our view is one of softness. In fact, we have already seen oil react to $85, $90 from the peak and OPEC is now having to cut production to maintain oil price, which I think is a positive, because they also are seeing supply coming in and demand reducing.

If you have just been tracking a few things, the rig counts in the U.S. are at an all-time high in the last two-three years of 60- 70%. The U.K. has initiated massive development of gas fields. After five-six years, they're trying to do it and they want to fast-track it so that gas comes out maybe in the next 12-18 months. 

All this initiative should ensure that supply is pretty decent and demand has not been all that great. So, our base case is of oil also coming down further from here and that also should help India.

Khemani: Let me wish you and your viewers a Happy New Year and a Happy Diwali. 

…If you look at the last Samvat, when the environment was very positive, it started with that backdrop and from this Samvat we are flat. But a lot has happened in this period. Globally, markets are down 20-30% where India kind of held on and is still looking very positive.

India, according to me, is one of the most promising markets across the globe, a beacon of hope from a global perspective, from a sustainability perspective. 

From a global perspective, by and large, the expectation of inflation peaking out and interest rates peaking out is there in the market.

From a real data perspective, in the next three-four months, partly because of the base effect, partly commodity prices coming out would play out. So, I don't think there are more shocks possible on interest rate and as well as on inflation.

Secondly, when the whole world is expecting a crisis, I don't think a crisis happens. 

Right now, the sense of risk is very heightened, according to me. I am not saying that it's unreasonable but that's how the world is set up. But when the sense of risk is heightened, risk generally doesn't come, from my experience. 

But coming back to the Indian macro environment, we are in a reasonably good cycle. Our domestic demand is very strong, additional drivers of export-led manufacturing is looking very promising. Markets are expecting IT demand will slow down. We have not seen that slowdown, orders continue to remain, which back home is a very big creator of jobs.

From an Indian environment perspective, I don't see any sort of challenges happening. We are in the middle of the earning cycle recovery. We are focusing on GDP, which typically bottoms at 2% and peaks at 8%. Somewhere, we are in the middle of the earning cycle. Also, one of the interesting parts of our Indian market is that we are very balanced, it's not tilted. 

We are benefiting from consumption, from the Investment cycle, capex cycle has picked up after a long period. 

Also, currently, we don't have a very large share in global trade, but at the same time our market share is growing because of China plus one. So, even if the global demand were to slow down, India will not lose but only tend to benefit… I am not worried even on that front. There are a lot of worries about what if the global demand slows down, because India is hardly a partner in that…

So, if I look at all these factors put together, the balance sheet is well-placed–government as well as household as well as corporates. So, you have a lot more levers of growth ahead of you. 

Markets don't tend to sort of go down too much. Every level, there's a buying possibility.

We have seen massive amounts of FPI flows in the last 12-18 months. FPI flows start going from the emerging market when Fed starts raising the rates. Typically, it reverses post its peaking out. My view is that next three months or four months Fed rates … will peak out and that is where the emerging market flows will come back. 

I do see from now to next Samvat, FPI flows returning in a big way. So, you can imagine we are in a positive earning cycle and also supported by strong liquidity, both domestic as well as international. It could create a very interesting scenario from now to next Samvat.

Singhania: The last six to nine months have been tough. As far as managing money is concerned, I am sure it is true for even professional investors and other funds because movement in the market has been very sharp and very brisk. 

Sector rotation has been very sharp largely because the short-term news flows have dominated the market movements more than taking a call from a two or three-year perspective. 

However, we have always been very clear that market returns are all about earnings and earnings. Therefore, our portfolios always have been focused on companies where there are earnings, where there is visible growth in earnings, and what we paid today will be more than made up by way of future profitability. 

That is what we stick with. Having said that, the next couple of quarters are going to be tricky for a few sectors. 

The full impact of higher commodity prices, at least for a few sectors will be felt in the September quarter because post Russia and Ukraine issue, the price rise happened in April, May, and June. But that quarter quite a few companies had the old inventory, so they did not get impacted. This quarter, you have had the major impact of raw material prices move up and then also move down. 

So, there will be some inventory losses and also for a few companies, this quarter is going to be a little bit tricky, but it would be more than made up because the next couple of quarters, because of the whole tailwind following the great festive and wedding season which we are seeing going forward. 

I think we will continue to focus on sectors and companies where there is visible profit growth from a three-four-years perspective. I think that would be the stance as far as our portfolio is concerned. Obviously, sectors are always there. 

We follow a very balanced strategy. We are not looking at something from a three-six month perspective. Therefore, our view on financials, on IT, pharma continues to be as strong as ever, a little bit of tilt towards the domestic side of the portfolio. 

So, maybe companies which will benefit from the huge capex boom, which we are seeing from the growth on the consumption side, particularly the tier-II, tier-III cities, a little bit of tilt there at the margin. We are tracking the steel sector a little bit more closely, though we don't go too overboard there.

But our view is that if the world has to stabilise there’s going to be a fresh liquidity surge. China is opening up. China also needs to grow and we have heard what the Chinese premiere had to say over the last few days. So, that is the dark horse which we should keep track of.

Khemani: So, …we are in a reasonably good uptick of banking and financial growth trajectory, so we are significantly overweight in banking. We think credit and banking per se will do very well over the next two-three years. 

Likewise, automobiles, we just began after five years… post IL&FS, pandemic and chip shortage crisis… We are also reasonably well-placed on the exports market, which is betting on manufacturing-led growth where market share shifting away from China.

Also, this kind of portfolio provides you stability in this kind of global uncertain environment where currency helps you. Of course, there's a bit of consumption as well.

Lastly, capital goods we are overweight. We think that the investment cycle is here to stay for a long period of time. So that's one segment doing very well. So, across four-five sectors, we have a reasonably well-balanced portfolio, which we think will outperform over the next three-four years.

Khemani: Absolutely. We had cut down a bit on IT earlier part of this year and now I think we are equal weighted. We will be waiting for one or two quarters to go overweight on that. 

We think that IT pessimism is overdone. The biggest barometer is the order book of the company. Order wins have been very strong. 

If somebody gives you a large order, when they are also able to see that the U.S. might go into recession. So, CEO of the company knows this and is still giving a contract. It means that this is more of a non-discretionary kind of nature of demand. Hence, you will see IT sector continue to remain robust. Whether it will be 15% growth or 12% growth, that will depend on the quarter-to-quarter, year-to-year, but generally it is a very solid sector to bet on.

Ved: You always see broad themes. We all have bets across sectors and typically, you don't tend to change your bets like how the narrative in the market changes.

But yes, if you were to ask me what's the one or two big defining things that will change over the next couple of years and where we have kind of infused those ideas in our portfolio, I do genuinely believe that we had the lost decade of manufacturing post the global financial crisis right in the run-up to Covid and that is likely to change for several reasons. 

There are at least two or three very large sectors globally, which are changing. One is that there is a massive energy transition, which is likely to happen globally from old fossil fuels to renewable energy. 

There could be an interim period because of the challenge of the Russia-Ukraine war where some countries are going back to coal, which is understandable. 

But if we look at the broad direction, the very fact that large groups in India have announced large capex plans towards cleaner energy tells you that’s where the world is moving to. It's not just India, it's a global shift. 

Whenever such large global shifts happen, it creates an ecosystem of lots of companies that participate in the value chain. 

So, there are opportunities in manufacturing that will come through. The second change at a global scale is the electrification of the transportation industry, where we are moving from fossil fuels to hybrid and electrification. That is happening. 

Then, there are two or three other very domestic-focused trends that we are seeing a lot of. One is that defence manufacturing is now becoming a reality in this country. Second is that many Indian companies across sectors are becoming part of the global supply chain because of the challenges that we see–whether you call it China plus one, Europe plus one.

Third is that electronic manufacturing in India is likely to boom because we now have to start manufacturing a lot of the stuff. As you know, India now from being a net importer is a net exporter of mobile phones. But it's going to happen across the value chain. 

Two other large groups in this country have also realised that you need to start manufacturing semiconductors if you want to become leaders in the next technology revolution. 

So much of change across these few large sectors is likely to reinvigorate the manufacturing sector in India–whether for domestic import substitution, atmanirbhar,  PLI or whether for exports as part of the global supply chain. 

Finally after many years, you are going to see a huge renaissance in manufacturing in this country. Therefore, we have across the chain because there are very interesting opportunities whether you buy an auto company or an auto ancillary. Today, auto ancillaries are not just servicing auto components. They are also doing stuff for renewable energy, and they are also plugging into the EV supply chain and some of them are also doing stuff for defence and space. 

So, there is an opportunity in my view in manufacturing, which needs to be captured. 

We are adequately positioned apart from the fact that we are also excited about the fact that consumption in India is likely to grow manifold as India crosses the $1,800- $2,000 per capita income, which is likely to see a hockey stick over the next few years in several consumer end industries. It could be housing, it could be entertainment, it could be luxury goods, it could be cars, SUVs. 

So, there is a big shift in manufacturing and there is a surge in discretionary consumption coming into this country and we are well-poised to take advantage of that. 

Khemani: Before the pandemic, it caught the fancy and there was pent-up demand partly because of the supply chain constraints. Companies saw accelerated growth and most of the capacity was utilised. 

…Two things have happened. One is that most of the companies have had slowdown in demand because of the pile up of the inventory at the customer level and softening of prices. 

Secondly, most companies are going on massive capex programmes. So, capex will go for the next one or two years. So, you might see a period of consolidation in the field. 

Companies are going through 3-4-5 times of their historical gross capital. So, whenever companies go through this, equity shareholders don’t tend to do well because EV expands but Ebitda remains the same. 

These two issues hit the sector at the same time. But having said that, the structural drivers of growth remains. It may remain so for the next six to 12 months because as inventory clears up and capex will start in most cases only post March 2023, so next year. So, probably this year it will remain out of favour. 

As earnings start coming back, as margin stability comes, we will see the sector again coming back into flavour. Every sector goes through this. IT went through a period of correction. So, every sector goes through this phase. 

A bit of euphoria gets built and everybody thinks that this is going to sustain. Then, you will see a bit of correction. So, I will say this is a passing phase of a year, year and a half or two in this sector, but it is here to stay.

Ved: No, it's not a cakewalk for sure. The fact of the matter is that there is a single buyer. But I think the way to play this is as I said not to get too excited about any narrative. 

In the total manufacturing opportunity set, defence is definitely going to be one of the areas that is likely to be a real opportunity. 

We are seeing that if you look at the order books of some of the defence PSUs, whether in shipbuilding, whether in aircraft, whether in ammunitions, it's becoming a reality. 

Iin India, the interesting part is that you can bet on high quality engineering companies or auto components or capital goods companies which straddle three or four opportunities. 

So, defence is probably one of the growth vectors. It's not necessarily the only growth vector because there are challenges. In India today, a lot of the defence spending is actually revenue spending. The capex spending is not very significant. 

So, it's  a very long-term theme. Let's not get very excited, but the way to play this is to play it through a bunch of auto components and capital goods and engineering companies, which also supply a part of it into the defence revenue stream. 

But it's a reality for sure now. The time has come and given the geopolitics that we are seeing around us, I don't think that we can now afford to keep importing defence equipment in India.

Singhania: IT is a very broad kind of a term. I think in India, we have IT services companies, globally, IT also means all these new-age companies.

What we saw globally is a lot of these new-age companies go through the roof earlier and then fall 70-80-90%.  

Indian IT services companies also suffered to some extent because of that, because generally IT is everything which has got to do with IT. 

The other thing is that you have had waves of underoptimism and overoptimism. So, they started the period pre-Covid where valuations were very reasonable and then you had Covid where obviously profits went up higher than expected and valuations also went up significantly higher than earlier. 

Therefore, you had stocks multiply 3-4-5 times particularly on the smallcap side. 

Then, you had a realisation that the normal growth is not what was being done by the company in 2020, 2021 and therefore, the valuation is also to some extent corrected and then when correction happens they always correct a little bit more. 

If you see the banking space, for example, May and June were the worst month for banking. From there, even the large caps have moved up 50% and some of the smaller banking companies have doubled. It's not that fundamentals have changed. It is a perception or the way that investors have started looking at it that has changed. 

…PE will be changing 5-10% more up and down depending on your expectations and what the companies actually declare but perception keeps on changing. 

IT services as a sector, as far as India is concerned, India has global competitiveness. This is one sector where India is globally competitive. 

The currency, particularly the dollar, is at a tailwind. Yes, there might be a little bit of slowdown in volume terms, but that will be more than compensated for by one less pressure on the margins because the headwinds of cost have now receded…

So, if you are content with 15% profit growth for the next three, four or five years, I think it's a great sector. If you start with that kind of visibility, it is also possible that the PE might expand a little bit more. This is one sector where almost 80-90% of what the company makes is distributed.

No other sector does that and we forget that, even if the stock price goes up 10%, these companies have over 4-5% yield in terms of dividends and buybacks. 

So, ultimately, you end up making 15% plus which is not bad. So, we continue to be quite optimistic there. 

Singhania: Health, we have all realised (is important). We have so many near and dear ones who have unfortunately not been part of this year. 

We have also seen health issues despite all the wealth you have can create (problems). Health has always been a key focus. To the best of what one can do, we'll continue to do.

…I think we all end up in life running because of peer pressure and because of relative wealth. That is very difficult to overcome, but at least I have taken a resolution to be happy with what you have. …there has to be a limit to what you run after.

Khemani: I am on my spiritual journey. So, I have been doing and I hope that I can continue doing three days of yoga and three days of vipassana and one day of running. …Sometimes in life you end up compromising and not follow consistently. But I hope that I continue to do that. 

It allows to have balance of mind and peace of mind. There is always a lot you can do but you have to be happy and content with what you have.

As far as investing is concerned, I remain very bullish on India. A lot of times, the kind of clutter or noise that just comes around, it tends to impact you. So, I just want to stay away from all the noise and constant effort is to stay away from noise and stick to the focus on the objective and not worry about outcomes.

Ved: Covid made everybody realise the premium on health. Covid put a big cost if you were unfit.

I keep myself healthy by doing a combination of running and yoga and a little bit of weight training. I am planning to add swimming to the equation this year, hoping to do that much more religiously than I used to do earlier.

As far as wealth is concerned, it's a byproduct. I think for us investing and creating wealth is a passion. The concomitant wealth that comes through is a byproduct. Don't be too anxious to try and achieve something because it doesn't work.

You have to just keep doing the right things and eventually it will happen. You can't time it; you can't browbeat it. You can't extend it; you can't prepone it. Wealth has its own journey, and that journey cannot be tampered with. Keep doing what you're doing and the markets and situations will give you enough opportunities. So, when the right opportunity comes, you should be awake and alert. That's when you can make the best out of it. But otherwise, the least activity, the least noise, the better it is for wealth creation.