Alpha Strategist: Motilal Oswal On Indian Economy & ‘Albatross Gliding’
Alpha Strategist | ‘India’s economy & equity market are demonstrating similar characteristics to an Albatross Gliding.’
In conversation with #MotilalOswal Private Wealth’s Ashish Shanker & Nitin Shanbhag. #BQLive
In conversation with #MotilalOswal Private Wealth’s Ashish Shanker & Nitin Shanbhag. #BQLive
Transcript
00:00 Thanks for tuning in to yet another conversation of Alpha Strategist.
00:03 It's a note that the Moti Lahoswal team writes.
00:06 And moving in from multi-asset portfolios three months back to showing confidence around
00:15 earnings to now talking about a topic which they title as albatross gliding.
00:23 And until I read albatross gliding, my opinion was always that an albatross around your neck
00:29 is the only way I've used that term and that's a bad one.
00:33 Now we know that it can be used positively as well.
00:35 So on that positive note, let me welcome in both our guests to try and talk about this
00:40 note.
00:41 Gentlemen, thanks for taking the time out.
00:42 Ashish, I'll start off with you.
00:44 What prompted this title?
00:46 I'm intrigued to know that.
00:48 Well, I think it's a continuation of our earlier notes.
00:54 We've been, last couple of sessions, if you remember, we've been clearly bullish on equities
01:01 and we've been saying that the earnings are coming through, the fundamentals are looking
01:05 extremely good.
01:07 And now we are in a situation where we are gliding or cruising and albatross is a bird
01:12 which has a very elegant way of gliding.
01:16 And I mean, India as an economy and as a market is standing out, which is what we thought
01:21 it should do early on in the year.
01:25 So really good times and it's being acknowledged by flows as well.
01:30 I mean, one big change, Neeraj, is the flows, liquidity, which is coming in from foreign
01:35 investors and we've seen a gush of liquidity.
01:38 The numbers look extremely healthy.
01:41 So yeah, so I think it goes with the current mood, sentiment and what's happening all around
01:48 us.
01:49 And that's a telling part too, right?
01:51 So Nitin, 10 odd days left for the month, let's say six, seven odd sessions, but we
01:57 are already circa 40,000 crores, third month on a trot wherein we are over that number,
02:03 so to say, assuming that this kind of continues despite Friday's move.
02:08 What's your sense about that particular aspect?
02:10 Because something that goes on, goes on for a while until it turns, right?
02:14 At some point of time, we'll see this turning.
02:18 So look, the way we have often advised our investors is that market corrections are part
02:23 and parcel of any market, right?
02:26 And you can expect at any point of time, a 10 odd percent correction just to come and
02:32 go.
02:33 But that's the nature of markets, right?
02:36 That one has to live with.
02:38 And that's why equities is such a brilliant asset class to own from a long term perspective.
02:44 But here, what we are also saying is, in addition to whatever Ashish mentioned, is that it is
02:50 being led by fundamentals, right?
02:52 So there is no euphoria of the lot that just takes the market into a bubble kind of zone.
02:59 It is backed by solid earnings growth, backed by fundamentals and companies getting efficient
03:05 at cash flow generation as well, which is why we believe that any opportunity, if we
03:11 get on a downtrend, will only be a buying opportunity from here on in, as long as your
03:16 investments go into quality oriented strategies.
03:20 The problem, Ashish, that is now happening, and it's a good problem to have, is that corrections
03:25 are becoming shallower because earlier FI flows dominated.
03:29 And yes, even now they do because they are large in number, but the DI numbers are very,
03:33 very strong.
03:34 So my question to you is, I heard Nitin say that corrections, if any, could be a part
03:41 and will it get bought into?
03:45 How meaty could things become if Indian markets, maybe due to global factors or otherwise,
03:52 would correct, let's say, between 5 to 10 percent?
03:56 Yeah, so that's a good question.
03:59 See, I mean, obviously, it's very difficult to predict levels, but I'm just trying to
04:03 correlate fundamentals with the kind of levels that we have seen in the past and what is
04:08 possible in the likely future.
04:12 Look, what was 16,000 earlier for the Nifty, right, and we had a floor at 16 during the
04:18 last correction, is now, according to me, 18.
04:21 So, you're at 20.
04:23 So my sense is that the floor is at 10 percent from here, max.
04:29 In terms of upside, I mean, that's where it gets a little interesting.
04:33 I mean, I believe that 21,000 is par for the course for the Nifty.
04:38 But if I just correlate what happened in September, October 2021 to where we are today, purely
04:45 on fundamentals, for the markets to become really expensive, the Nifty has to go to 27,000.
04:52 So that's how I see the market.
04:55 I mean, typically, just based on fundamentals, the range is somewhere between 18,000 to maybe
05:02 on the upside if the market just goes crazy and the flows continue the way they are, you
05:07 could probably get to 27,000 on the Nifty.
05:12 So from a risk return trade-off point of view, equities are still in your favour in spite
05:17 of the kind of rise that we have seen in the recent past.
05:21 And remember, this FII flows that we are seeing, this bunched up flows in the last three, four
05:26 months are also a function of what happened in the previous 12 months.
05:31 FIIs have been shot on, I mean, net shot on India in terms of flows.
05:36 So I think there is a little bit of catch up also happening.
05:39 And the fact that India is one of the few economies where you're seeing economic growth
05:45 and that translating into corporate profits.
05:47 Last time, if you remember, we spoke about ATTRIC, right, three financial years of double
05:51 digit growth.
05:53 And even this year looks like a double digit growth possibility.
05:56 Yeah, in fact, I read your note and I realized that it could actually be six years.
06:01 Because I think one of your notes spoke about how 25 and 26 could also have something like
06:05 that.
06:06 I think that's what I remember, but maybe I'm wrong.
06:08 But nevertheless, the point is, and to either of you can kind of take this, is what the
06:19 flows do is one thing, and what is it that you hear from the ground, both on the domestic
06:24 side as well as from global investors, is something else.
06:28 I would love to understand what is it you guys understand when you talk to people around.
06:33 Because some people that we've interviewed in the last few days have said that we are
06:38 still not in the euphoria zone, because throughout this rally, people have been saying that,
06:42 you know, at some point of time we'll correct, let me keep some cash on the sides.
06:46 Just every 200, 300 points on the Nifty, people have been talking about, okay, there could
06:51 be a corrective move coming up.
06:52 So everybody's not fully in, and therefore it is not a euphoria stage as yet.
06:56 I'm just trying to understand how is it that you guys gauge investor sentiment, both local
07:01 and global?
07:02 Yeah, so I'll just take that since I speak to a lot of investors and clients.
07:08 See, what has happened, Neeraj, is A, yes, equities, we've had a correction for almost
07:15 about 18 months, if you remember from 2021 September to about March of this calendar
07:21 year.
07:22 So, as a result, as an asset class somewhere, you know, it was put on the back burner.
07:27 The other force was also the fact that fixed income yields went up.
07:31 So a lot of HNI clients were actually busy allocating more and more money in fixed income.
07:39 And I think this rise in markets also came about very suddenly and led by FIIs and liquidity.
07:48 And then, you know, typically how it works is everybody then joins the party.
07:52 So you're right that there is a bit of a missed out feeling in this rally.
07:57 And there is a lot of money still waiting on the sidelines.
08:00 So I don't see a euphoria really.
08:03 So today the conversations are more about, hey, you know, we want to allocate more, but
08:09 you know, in front of us, the markets have like moved up close to 8 to 10 percent.
08:15 And you know, even the mid and small cap stocks have started buzzing.
08:19 So how do we really go about allocating this capital?
08:22 Should we do it immediately or should we do it in a staggered manner?
08:26 So that is the kind of conversation we are having.
08:28 So that's why I do believe that it's not really a euphoric kind of a rally or a situation
08:36 where, you know, everybody is allocated and everybody is really waiting to jump in.
08:40 There is a bit of a missed out feeling already, but there is still, you know, a lot of capital
08:45 sitting on the sidelines, especially from ultra-hedge and ISE family offices.
08:48 Nitin, if you want to.
08:49 Yeah, yeah, pretty much, pretty much the same.
08:51 And I think in a market like this, it always makes sense to adopt a more staggered way
08:56 of the plan.
08:58 Got it.
08:59 Nitin, slide number 18 talks about private capex on the rise.
09:04 Two questions to that.
09:06 One, thus far, except for select pockets wherein there is government spending, we haven't heard
09:12 about a full-blown private capex piece per se.
09:16 So it's not like the telltale signs are there.
09:19 Conversations with government, we were talking to an economist yesterday who spoke about
09:23 how traditionally in periods of global uncertainty, large private capital, except for select pockets,
09:28 never comes in.
09:29 It only happens when the global economy is stable.
09:31 The global economy is anything but stable right now.
09:34 So is it really on the rise or is it very selective currently?
09:39 You're right, Neeraj.
09:40 As of now, it is fairly selective.
09:42 But I would say it is predominantly driven by PLI.
09:45 Now what PLI has basically done is, it has, you know, so the government has already, you
09:50 know, given that check out, right, for corporates to invest.
09:55 So corporates have no option but to have already put in that deployment into capex.
10:00 A lot of it you would have seen has already happened in the electronic space, in the auto
10:04 space, so on and so forth.
10:06 And that, to my mind, is the biggest driver of capex right now.
10:10 But to our minds, if I had to just put a broader view on this, think about it this way, that,
10:16 you know, it was only way back in 2003 to 2007 that you had a full-blown capex cycle.
10:22 Obviously at that point of time, there was a host of greenfield projects that came on
10:26 board.
10:27 But this time, what is happening is that you're seeing not just public capex, a little bit
10:31 of private capex, maybe selective, but also household capex in terms of real estate.
10:35 Now, real estate sector as a whole has certainly turned around over the last, let's say, year
10:40 and a half.
10:41 And you're seeing a lot of velocity and also a lot of inventory, unsold inventory levels
10:46 have seriously come off.
10:48 So I think if you look at a slightly broader measure to the capex that we otherwise associate
10:53 to private, I think you would find that India is certainly coming of age now in that entire
10:58 cycle.
10:59 Okay, let's hope it becomes even more prominent in the times to come.
11:04 And thanks for the clarification.
11:05 It's good to understand the nuance within that private capex piece as well.
11:09 Now, you guys look at data, look at the, you know, there's this temperature gauge or the
11:14 sensitivity gauge that you bring about in all the notes.
11:16 I haven't had a chance to look at it this time around, but the market's having rallied
11:20 the way it has.
11:21 Where does it stand now?
11:22 What does it tell about the near term?
11:26 So as of now, the temperature gauge index is still in the fair zone.
11:30 Although I would say that it's inching upwards towards expensive, it's still a decent way
11:35 to go.
11:36 But what the temperature gauge index does take into account is where interest rates
11:40 also stand in the system.
11:42 And today we are standing, if you look at it from a 10-year G-Sec perspective, we are,
11:46 let's say about 7.07, 7.08 kind of levels.
11:51 So going forward, if I take a trajectory over the next year or year and a half, we certainly
11:57 are of the view that interest rates may remain stable and may come off eventually over a
12:02 period of time, in which case valuations have the potential to re-rate themselves as long
12:08 as earnings plays catch up.
12:11 And we do believe that fundamentally speaking, we are on that trajectory where at least for
12:16 FY24, banking will certainly lead that view along with auto and oil and gas.
12:22 I mean, these sectors are expected to contribute almost 82% to the Nifty's profitability for
12:27 the coming year.
12:29 So healthy earnings growth should provide a cushion to valuations going forward.
12:34 And as and when interest rates actually trend lower over the next, let's say 18 months to
12:39 24 months, we should be in a much better spot from a valuations perspective as well.
12:45 Just to reiterate, Neeraj, we use the temperature gauge for allocations.
12:48 So typically in the zone where we are, we are recommending for any incremental allocations,
12:53 people put in 50% right now and 50% they could stagger it over the next 6 months to 12 months.
12:59 Okay, so just a follow up on there and then the follow up on the other piece.
13:01 But Ashish, I remember, I think, pardon me for not remembering the exact one, maybe it
13:06 was April, but at that point of time, the call was to be allocated in multiple assets.
13:14 And are the proportions of allocation to equity versus the other assets different than what
13:20 they were maybe in April?
13:25 So in our multi-asset portfolios, yes, the allocation to equities would have gone up
13:29 purely because of the mark to market.
13:34 But today we are in a zone of valuation in equities and where the other asset classes
13:40 stand.
13:41 If I were to build a fresh portfolio, I would allocate as per plan.
13:44 I mean, I wouldn't go, let's say overweight or underweight on any asset class.
13:49 So we are in that mid zone right now.
13:52 Okay, okay, get the drift.
13:55 Last couple of questions.
13:56 So I'm just going to get back to the spirit of the note.
14:00 A lot of people get phased out by the market having moved higher.
14:06 So the way you said, Ashish, that a lot of people wanted to allocate and couldn't allocate
14:10 because aankh ke saamne markets went up, for a lot of people, because they were allocated
14:15 and the market has inched up, they get this jitters of, should I book out?
14:19 But I'm just trying to get back to the theme that when you're trying to say there's an
14:23 albatross gliding, which means that it is on a safe, steady path, assuming everything
14:28 stays constant, it might be a better idea to stay invested as opposed to try and tinker
14:32 too much with a portfolio?
14:35 Either of you?
14:36 Yeah, absolutely.
14:37 Absolutely.
14:38 So that's what I was indicating that you're in that mid zone where even if you want to
14:43 deploy additional amounts, you could do it gradually.
14:48 But whatever you have, you should stay put because the risk return trade-off is skewed
14:53 towards the upside on equities at the moment.
14:55 Got it.
14:56 I may have missed out on something because this is an exhaustive note.
14:59 Nitin, is there something else?
15:00 There's fixed income gold.
15:01 I just thought equities sounded so sexy.
15:04 Let me not try and tinker out too much with something else.
15:06 But is there something that I missed out?
15:07 Yeah, one important aspect that I'd like to add is from a valuations perspective, we often
15:15 look at the price to earnings.
15:17 By itself, we believe that's not the only measure that one needs to take into cognizance.
15:22 So we put an interesting study into this month's note, which talks about enterprise value to
15:27 cash flow from operations.
15:29 And what we have found is that this ratio, EV to CFO, has pretty much remained the same
15:35 vis-a-vis the previous peak of August, September 2021.
15:40 Now why this is interesting is on two counts.
15:43 Is let's say from that level to today, the nifty might be up, let's say about 6 to 7%
15:48 or slightly higher than that.
15:50 This universe that we've taken talks about the top 500 companies, ex-off financials.
15:55 Now what we've realized that cash flow from operations has more than kept up pace with
16:00 the index movement.
16:01 That's point number one.
16:02 Secondly, you should remember that cost of capital at that point of time was about 6.2%,
16:08 as measured by the 10-year GSEC, which today is almost 90 bps to 100 bps higher.
16:13 Despite the fact that cost of capital has actually gone up, this ratio of enterprise
16:17 value to cash flow from operations has remained the same, which tells you that companies have
16:21 gotten far more efficient.
16:23 Earnings is the fundamental reason why equity markets are doing well.
16:28 And in relation to what I mentioned earlier, if cost of capital is likely to trend lower
16:32 over the next 18 to 24 months, we'll only see this ratio getting better and getting
16:37 healthier as far as Indian corporates are concerned.
16:41 If that were not to happen, would this be a peak for the ratio or can it still get a
16:46 bit more skewed on the upside?
16:51 Unlikely to get too skewed because we still see a good drift of earnings growth happening.
16:58 So yes, even if that number inches up, we do believe that it is far away from any kind
17:03 of expensive zone at this point of time.
17:07 So that statistic plus Ashish saying that if the market were to go crazy, then the number,
17:12 I don't even want to mention it right now, but could be substantially higher.
17:16 I'm so enthused to see this because I wrote a column 20 days back saying, "Ab Ki Baar
17:21 Nifty 50,000" and a lot of people kind of trolled me on Twitter.
17:27 I'm happy to see that I'm actually far conservative when I'm talking about the next decade compared
17:33 to what the other experts are saying.
17:35 So thank you gentlemen for sharing this wonderful note, giving me one more term in my vocabulary
17:41 and for sharing these insights with us.
17:44 Thanks Neeraj.
17:45 Always a pleasure.
17:47 The pleasure is entirely ours, gentlemen and viewers.
17:49 Thanks for tuning in.
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17:58 [END]