Let us get a sense of whether you are welcoming the New Year with festive cheer?
Navneet Munot: Lots of twist and turns as Nikunj rightly pointed out both on the global and domestic front. Mr (Donald) Trump’s tweets kept everybody busy and now it is a statistically proven that his tweets have impacted markets in a big waym, whether it is trade war, happenings in the Middle East which impacted oil prices, global slowdown now that we are witnessing. On the domestic front, I am sure a year back nobody envisaged that growth would fall to a 5 per cent in the quarter in India so obviously growth surprised on the downside.
On the other side, a year back when we were discussing about the default by one of the largest AAA-rated NBFC, we were thinking that may be in a few months time right steps should be taken and then we would go past that but it has taken a much longer and now we are looking at a scenario where there are a couple of other NBFCs and HFCs have been troubled. In the next few months, if we are able to solve it, if we take concrete steps to get the financial sector out of the challenges, I am pretty sure that next Diwali will be far better.
Growth has surely bottomed, global environment is slightly improving for India in a sense that money is abundant, money is cheap, people are looking for new investment destinations and the steps that the government has taken starting with the corporate tax rate cut and I expect think from that perspective it could be a good year for India.
Everything this Samvat is at its peak, peak of bearishness, peak of market cap destruction, peak of mess in NBFCs, peak of bad news in India; from peaks where do we go?
Nilesh Shah: Suppose you score half a century on very tough bowling pitch on the fifth day against most dangerous bowlers, and you score a triple century on a batting pitch with lousy fielding and lousy bowling and getting dropped 20 times, which score will give you better satisfaction? Numbers wise triple century looks better but in heart we all know that 50 is worth its weight in gold. So, if you look at last year, Sensex delivered roughly 10 per cent return on at 4 per cent inflation, that is 6 per cent real return. In the best of the time also Sensex delivered 6-7 pr cent real return, so we are not way off from the average despite all the twist and turns and you know series of lower growth numbers.
When the news flow is bad, sentiments are bad, valuation obviously is also bad and if you buy at low valuations, if you buy at cheap valuations, probability of making money increases immensely. Of course, it would not increase tomorrow but who knows day after tomorrow so this is the time to put your head together, understand that valuations are cheap and if you buy quality companies run by good managers, I think there are better days ahead.
How confident are you that the worst is now clearly behind us when it comes to NBFCs, the financial mess and that we are headed in the right direction?
Manish Gunwani: For me there is a very definite data which is pointing towards a bottom. So, if you look at global growth, for example, this will be the longest period where global PMI manufacturing kept falling for 15 months. It has fallen successively and September was the first month it stopped falling and came back a bit positive versus the month before.
Similarly if I look at domestic monetary conditions, I think we are definitely seeing that the good NBFCs, the good corporates, the spreads over government yields what they are paying are coming down. We are seeing banks cut deposit rates, banks cut lending rates, very small at this point of time. You are not seeing a typical 2013 or 2015 macro situation where because of coordinated global policy we had a V-shaped recovery, but at the same time if you look at each of these factors there is definite data that shows things are getting better. And, the good part about a slow recovery is, it lasts longer whenever it comes. For example we saw growth from 2003 to 2008 that came after 1997 to 2003 of a gradual economic slowdown.
Consumers are expensive and they were expensive three years ago, quality stocks were expensive and they are expensive right now but that is where all the returns are, so what is wrong in chasing them?
Navneet Munot: So, echoing the views that Nilesh has just mentioned that there are few stocks which have done exceptionally well most of them lie in the mega caps or the large caps but there are few of the mid and smallcaps, which are in that consumer quality space where the return on equity is higher, you still see some growth in a low growth environment and of course where are the perceived governance is far better.
As a growth becomes more broad based, if we are able to tackle the challenges that are there in the financial sector as flows improved last few days, people would start looking at a wider set of universe. Then maybe you can chase quality and pay any price. I think maybe you just need a catalyst as Nilesh just mentioned once we see that catalyst, it will become a lot more broad based than what we have seen in the last one year. This has been one of the very narrow rally and 10-11 per cent growth that has come has come from a very narrow set of stocks, which is not good over a long period.
What is the catalyst that you are hoping for?
Manish Gunwani: I do think big strategic divestment from the government will be a big trigger because it will do two things; one is both bond and equity markets are definitely worried about the fiscal situation and whether in the second half of this year, especially on the state government side, which do not have access to RBI reserves or other non-tax revenues you could see a big squeeze on expenditure because once tax revenues are falling short and you have to meet a committed fiscal deficit number then the only option then is to squeeze the expenditure which pulls down the economy and you go into the vicious loop. A big strategic divestment would address that.
Two is as we all know that PSUs, which are very value centric stocks and they have good dividend yield. Price to book and price to earnings multiple is very attractive but they have been suffering from supply through ETFs. Also the fact that it provides a big catalyst for them right if there is a strategic divestment which happens at 2 to 3 times the current market price for one of the PSU stocks, I think that whole universe would get re-rated and that will kind of pull up the index as well so on both sides from a macro-economic perspective and from a market centric perspective. I think that will be a big thing.
At the current price, fundamentally, how much downside is there?
Nilesh Shah: See, a lot will depend upon how situation evolves if oil prices goes to three digit obviously our markets will suffer, if today there is geopolitical tension in our border or outside obviously there will be impact on market. when you are investing in equity you have to take ups along with the downs and as I mentioned earlier today from a valuation point of view in small and midcap space there is limited downside, it does not mean that what is attractive cannot become cheap or what is cheap cannot become cheaper but then you will have to add more. That is how the disciplined asset allocation works.
So, overall, if I see today you know even last year which was very tough, the largecaps did deliver 6 per cent real returns. This year it looks like corrective actions have been taken. Banking liquidity from May 2019 is positive, interest rates have been cut, PSU banks have been capitalised. In NBFC sector, some steps have been taken like securitisation with first loss so it has not yet become operational but hopefully once you have announced you will make it operational. If you see the currency which was overvalued is now little overvalued around fair value that will push exports. The strategic divestment is now right at the centre stage and hopefully it would not be like Air India. More importantly with China, which is resulted into higher trade deficit with India, there has been discussion about curtailing that. This Chinese trade deficit is converting our manufacturers to traders. Hopefully, if we can curtail that, it will be very positive so there are lots of corrective actions which have been taken and coupled with valuations, I will say there is limited downside in small and midcaps.
If I just put a portfolio of HDFC Bank or Bajaj Finance, Asian Paints.
Navneet Munot: Please add Kotak Bank..
Kotak Bank these stocks have done exceedingly well. But that is history now. Do you think now the names which could do well could be SBI or L&T or Tata Steel, largely cyclicals and deep cyclicals?
Nilesh Shah: It is a tough call.
Why do you say that?
Nilesh Shah: Because just because Rohit Sharma hit three centuries he cannot score fourth century that will be tough to say. In fact in HDFC Bank’s quarterly call, they said with that size they are creating a new bank every year.
HUL has created a Patanjali in last three years in terms of the turnover they are adding…
Nilesh Shah: Absolutely, and Khadi and Village Industries Commission has created two HULs over the years. So there is always nehle pe dehla but from a stock market point of view, over the next 12, 18, 24 months, we see small and midcaps delivering better returns than some of the marquee blue chips names. There are companies which are available below the cash value, there are companies which are available below the fair value at some point of time investors will discover them and they will go back to their fair value so if you are looking at a two to three year horizon, diversified portfolio of small and midcap may outperform the blue chip portfolio.
What about insurance?
Manish Gunwani: It ticks a lot of boxes in terms of long term growth, very little chance of technology disruption. Between the two, I prefer general insurance over life insurance. I think in life insurance, still, some of the products are not very customer friendly, the valuations are quite expensive. Even for general insurance, the valuations are expensive but given the under penetration versus global opportunity, I think is more attractive in general insurance but yes both of them are good themes to play for the long term.
Will you buy autos for a comeback?
Nilesh Shah: So, again auto sector you will have to buy on a bottom up basis not on a top down basis. There are companies which are moving into hybrid in electric side that is probably where the future is. There are companies which are able to launch products which are quite innovative and in this downturn they have their order books full for the next six months. So if you are a company which is investing for the future and which is launching products which are more affordable with innovative features, certainly, this is the time to look at the automobile sector.
The valuations have corrected and automobile sector went through a deep churn–the insurance cost went up, the whole debate about electric vehicles resulted in some curtailment in investments and launch of product, NBFC crisis dried down the flow of capital for buying of two wheelers and four wheelers.
So, there are multiple factors which came together and most important thing we started adding many new features so you had aspiration of a first world car with income of third world, air bags, ABS, central locking, power steering that all kept on adding to the cost of the car which was probably making it unaffordable to the average person. Now over a period of time some corrective actions will be taken in this segment and this is where auto becomes interesting. If they are investing for future, if they are investing for features, if they can cut the cost of creating a first world aspirational car with third world income and we did that with Nano then obviously that is a great time to invest.
Manish, is there anything you would stick your neck out and call this Diwali something that perhaps is not in line with general market mood?
Manish Gunwani: I do think that a lot of the cyclical parts of the market have a very good chance of doing well on a two-three years basis.
The theme for the current administration or the current government is that India is on course to become a $5 trillion economy and the entire policy making what we understand is actually centred around that so if India has to become a $5 trillion economy who will do all the heavy lifting will it be financials, will it be manufacturing, will it be consumers and how can one participate and make money?
Manish Gunwani: At least for the next two-three years, I do expect consumption to be the main driver of the economy and as economies mature then obviously the discrete consumption goes faster so I think retailing, general insurance, auto—everything should do much better than what it is doing today.
Navneet Munot: I think bottom-up stock picking there are opportunities everywhere as we discussed it earlier repeating the same point there are set of stocks that have done well rest of the market has become cheap. I expect a good cyclical recovery and then it is likely to become structural because the kind of reforms we are undertaking or we are likely to undertake in the next few months because of the compulsion will lead to a structural positives over a very long period of time.
Nilesh, what do you think?
Nilesh Shah: So if $5 trillion GDP target is target of government then it will take time to achieve but if it becomes target of yourself, myself, Navneet, Manish, and Nikunj, then it will happen much faster.
I think that is the most bullish I have heard him say today.
Navneet Munot: That is very important understanding that if it has to be a slogan like we have to get independence and then everybody even if you are cleaning the floor, if you are teaching somewhere or you are doing something else cooking food for somebody else everybody was working towards a Swaraj. I think Nilesh right point that everybody has to work towards that $5 trillion.