How Does JPMorgan's Sanjay Mookim See Markets Shaping Post FOMC Decision?
What is #JPMorgan’s view on Indian markets?
India Strategist and Equity Research Head Sanjay Mookim in conversation with Niraj Shah on the sidelines of the JPMorgan India Investor Summit. #BQLive
India Strategist and Equity Research Head Sanjay Mookim in conversation with Niraj Shah on the sidelines of the JPMorgan India Investor Summit. #BQLive
Transcript
00:00 Coming into this conversation, we are live from the J.P. Morgan India Investor Summit
00:03 and with me is the man of the moment, Sanjay Mukhim.
00:06 Sanjay, thanks for having us here.
00:08 And I'm told that the conference is packed.
00:10 Well, Neeraj, it is an indication of the interest in India, I suspect.
00:15 Of course, we used to do the conference in Delhi every year.
00:18 We've moved to Mumbai this year.
00:20 So I would argue that it's not just a change of location, which has helped in the sentiment
00:24 for Indian markets remains very strong.
00:27 There's a lot of interest from people who want to come to India, explore the market,
00:31 look for opportunities, especially with the midcap rally that we've seen in the last five
00:35 odd months.
00:37 And that is what's showing up.
00:38 In fact, we've had, you know, a 60 percent increase in the number of investor clients
00:43 who are attending our conference, YY, to the extent that we had to close registrations
00:47 at a certain point because we couldn't accommodate any for any more people.
00:50 So, yes, it is hot.
00:52 I hear from a lot of people that investors, global investors, pension funds, sovereign
00:58 wealth funds, who hitherto had not looked at India in the last 12 months, have made
01:04 a serious effort to make an entry into India in some fashion.
01:07 I'm just trying to understand, because your client base would be across the world and
01:11 everybody would want to associate.
01:12 Are you seeing an unprecedented interest of sorts?
01:16 We've seen it before.
01:20 And let me put it in two ways.
01:22 So, yes, that sentiment is true.
01:24 And there are two reasons to my mind for it.
01:26 One, of course, the Indian market has momentum.
01:28 And this is different from, let's say, the North Asian markets, especially in China.
01:32 So if you're an EM fund manager, you can see on your screen every day that your Indian
01:36 stocks are doing well and the China stocks are not doing well, your portfolio is not
01:38 doing well.
01:39 And therefore, you are pulled in the direction of looking at this country additionally.
01:44 The challenge for most fund managers, at least the EM long only fund managers, is that they
01:51 hesitate paying high multiples.
01:52 Because if you can buy a staples company at X in India, you can buy it at 0.4X in another
01:57 EM country.
01:59 And therefore, they have this anchoring issue, saying, look, why should I pay so much for
02:03 an Indian stock?
02:05 And therefore, there is this consternation, a push and a pull in the needless to say,
02:09 look, I must do India because India is doing very well.
02:11 But can I find something in the market that makes sense?
02:15 And that becomes a bit of a challenge.
02:17 And then they have the man who, through the JP Morgan label, is telling them that, hey,
02:21 you know, hang on, because I'm not necessarily all that bullish.
02:24 That was your stance the last time that we spoke, that you don't believe that the valuations
02:28 permit great returns in India in the near term.
02:30 Does that still stay?
02:31 So we were tactically bullish in March, and we turned cautious in July.
02:37 And the reason for that, Neeraj, was not valuation, it was actually liquidity.
02:42 And we've seen for the last 15 years that global equity markets react to injections
02:47 and withdrawals of liquidity by the major central banks.
02:50 In March, the Fed injected liquidity for the bailout of the small banks.
02:54 We saw the market start to rally.
02:55 Growth started to rally.
02:56 Mid-caps in India started to do well.
02:59 Starting July, June, we started to see the liquidity withdrawal happen as well.
03:04 And this is for a shorter-term trade.
03:06 Our research has been very clear.
03:07 Valuations are your second filter.
03:09 The first filter is earnings momentum, which is then amplified and multiples by the liquidity
03:14 phenomenon.
03:15 So will I be positive now?
03:17 The answer is no, because we continue to see liquidity withdrawal by central banks happening
03:22 for the next several months, which should put a lid on equity upside here on.
03:27 Sanjay, does the very recent Fed narrative also come into conversation very actively
03:34 in this conference for you?
03:36 It does.
03:37 But the challenge, Neeraj, is everybody knows it.
03:39 So there's no incremental data point to discuss on what the Fed is saying.
03:44 Because when you're in an India conference, you want more bottom-up ideas.
03:46 You want to talk to companies.
03:48 You want to figure out what's going on.
03:50 Are Diwali sales likely to be strong or not?
03:52 What are the policy implications of higher oil prices or weaker rainfall and so on?
03:58 That's the sort of conversations you'll have at the JPM conference.
04:01 The Fed is something that everybody already understands in the background.
04:04 Got it.
04:05 So you would have designed a set of companies that you wanted to showcase to the investor
04:09 base.
04:10 And the investor base would have presumably given feedback about the kind of companies
04:14 they want to meet.
04:15 Where is the strongest marriage out there at the conference?
04:19 Well, you see a mixed, Neeraj.
04:22 And you're right.
04:23 That's exactly how it works.
04:24 People have requests.
04:25 We tend to make suggestions.
04:27 And then it kind of matches in the middle.
04:29 There is obviously a need for liquidity.
04:32 And therefore, you would imagine that large caps haven't done very well and nobody wants
04:35 to talk to a large cap stock.
04:37 That's not the case.
04:38 Because when you have a whole bunch of people coming to Mumbai, they want to talk to companies
04:43 which they can actually invest the billions in.
04:46 So you will see that the roster of people showing up at our conference is dominated
04:50 by the large cap liquid names.
04:54 Because in many instances, if you wanted to do a channel check and to figure out what
04:57 the next three, four, five months will look like, the industry leader is probably your
05:01 best place to start as well.
05:02 It gives you a more broader spectrum of answers to some questions such as that.
05:06 So it is very large cap dominated.
05:08 There are, of course, some mid caps, most smaller names that people are interested in
05:12 who are also at the conference.
05:13 But again, given capacity constraints like we spoke of, we can't expand that list far
05:17 too much.
05:18 How many investors?
05:19 How many companies?
05:20 We have about 69 listed companies, about 12 unlisted companies.
05:25 Total investor plus, let's say, corporate clients would be north of 400 something.
05:30 So attendance at the conference is hitting 800 to 900 people.
05:34 And that's why I think it's becoming a challenge for us to kind of put them all together.
05:38 You're going to have a busy day, what with the kind of conversations that we will have
05:41 with you and the investors that are having with you.
05:44 So we'll not make this too long.
05:46 But still a few questions now.
05:47 Sanjay, based on your assessment of what market returns are likely to be because of the overarching
05:55 factor of liquidity, where is it that you still find comfort to be able to tell your
06:01 investors at the conference that these are the pockets that you as a team strongly believe
06:06 still have a chance of outperformance in an otherwise sideways to a faltering market?
06:10 So there are two or three answers to that question.
06:13 If you have a longer horizon, let's say you're invested in India, and you have the patience
06:18 to be in here for the next three to five years, then you still may find enough companies which
06:23 are executing well, which have growth visibility remaining very strong.
06:28 And therefore, you may then be willing to say that, OK, maybe the multiple is a bit
06:31 too high, but I'm here for compounding, and this is good for me.
06:35 But the problem is, Neeraj, that most of my investors think of the structural story and
06:39 the demographics, but expect returns in 12 months.
06:42 And that's the challenge.
06:44 So if you're looking for shorter term return, then you have to necessarily worry about the
06:49 market direction, which we think is negative, and we think markets will be flat to down
06:53 for the next several months, in which case the only hope you have is outperformance.
06:58 So even in a down market, there's nothing that's going to sort of go up.
07:03 Very few will go up.
07:05 Within the large gaps, the only space that continues to make sense-- and this has confounded
07:09 all strategists everywhere in India-- is the banks, because the banks have delivered earnings.
07:14 They've delivered earnings upgrades and are properly valued.
07:19 It's like all strategists in the world saying equities will go down.
07:23 Every major strategist in the world thinks equities has a downside, but the market holds
07:28 up.
07:29 Same in India.
07:30 Every strategist, every buy side investor will tell you the banks looks great.
07:33 The banks have struggled to perform.
07:35 But if you were to screen the stocks credibly, that's the one space that makes sense on a
07:40 valuation versus growth trade-off.
07:42 So that's our core portfolio.
07:43 It's been for 2 and 1/2 years now, and we continue to recommend that.
07:46 You reckon that timing couldn't be better for banks simply because if the market is
07:50 not going to be as strong, then a defensive large liquid pocket-- I'm using defensive
07:55 very carefully currently-- makes sense.
07:58 If you look at the history of the Indian markets for the last 15 or 20 years, banks have actually
08:02 never been defensive.
08:03 Unfortunately, they have not.
08:06 The best defensive sector empirically in India is actually consumer staples.
08:11 Then IT, then health care.
08:13 And given what health care stocks have done, YTD, I'm not sure they are defensive anymore.
08:16 Yes, I mean, stocks change styles.
08:21 So will banks hold up in a falling market?
08:26 I am not entirely sure.
08:27 And the other reason of debate, Neeraj, is that we think the operating performance for
08:33 banks is actually rolling down.
08:34 The best financial quarter is over.
08:37 So you're going to see lower loan growth because deposits are tighter, and you will therefore
08:42 see banks competing for deposits, which either crimps their margin, or you see lower lending
08:47 happen.
08:48 And as growth slows down, you will start to see asset quality or slippages come in.
08:53 This is how it works all the time.
08:54 Once the growth slows, you will see some credit costs go up.
08:58 Irrespective of that, the top four, five large cap banks should still give you 14%, 15% EPS
09:04 growth, which at 15 times PE is great.
09:06 So the valuation versus growth argument still makes sense, but there is going to be a sector
09:11 slowdown in the coming six quarters.
09:13 So here's my question.
09:14 In India, the domestic flows are largely coming at the mid end.
09:18 And therefore, the large caps are not getting as much flows relatively on a basis as the
09:23 mid caps and small caps might be.
09:24 And if global money does not come in, where is the liquidity to chase banks in a scenario
09:30 that you are saying where fundamentally there will be deterioration?
09:33 Why should banks outperform?
09:35 So when I take a more bottom up approach to picking stocks, and I then look at a medium
09:41 term view, I ignore flows.
09:43 I ignore flows, I ignore technicals, I ignore ownership.
09:46 Because that's logical, right?
09:47 Am I getting paid for the money I'm investing in the stock?
09:50 You are.
09:51 You will get 15% returns.
09:52 You are not paying too much to buy that stock.
09:55 And therefore, so let's say the EPS for a large private sector bank will grow 40% in
09:59 three years, right?
10:00 Give or take.
10:01 At current valuations, should I make 40% in three years?
10:05 Most likely yes.
10:06 So if I can do that, why should I not then buy the stock?
10:11 So that's the bottom up argument to say, look, high degree of growth, reasonable valuation
10:17 and high assurance of growth.
10:19 I don't care about who else owns it.
10:20 I don't care about the flows.
10:21 I don't care about technicals.
10:22 It makes sense.
10:24 It's the flows and the technicals matter in the very short term, right?
10:28 And the problem is that A, we are not equipped to predict them.
10:32 We keep chasing our tails on it.
10:34 And it's very rare investors who are smart enough to chase this kind of momentum.
10:39 But let's face it, while you're being very modest, you kind of caught the inflection
10:46 point on the upside in March to the T, right?
10:49 So therefore, I'm inclined to ask you that in the very short term, while you're not a
10:55 part of that game, but because you've been catching these inflection points and maybe
10:59 the follow up points where in the markets may come off as well, where is it that you
11:04 believe or which pocket do you believe will see the maximum pressure both on the basis
11:09 of flows, as well as your fundamental view on why this sector may be overvalued?
11:13 We think the growth basket, okay, stocks which promise higher growth or which, another way
11:20 to put it, which have higher duration cash flow, right?
11:23 Those are the ones that come under pressure, and they're coming under pressure all over
11:26 the world.
11:28 If you look at MSCI world growth relative to MSCI world value, it started outperformance
11:33 on the 13th of March, the day the Fed injected liquidity, right?
11:36 And you can see MSCI world growth is rolling down.
11:38 And you can see that in the NASDAQ, in the AI stocks, as the cost of capital, the 10
11:44 year bond yield and liquidity conditions tighten, growth as a style comes under pressure.
11:50 And I have argued again that while India has all this structural promise, in the short
11:53 term, there is no decoupling.
11:55 So even in India, that growth basket will come under pressure as globally growth does
12:02 badly.
12:03 What is growth in India?
12:04 It will be the discretionary stocks, the internet companies, the NBFCs, and the mid caps.
12:10 Now mid caps in India have found this bid on the flow like you highlighted.
12:15 So maybe it lasts a bit longer.
12:17 But conceptually, that basket is what comes under pressure over the next few months.
12:21 Got it.
12:22 Last question or last-- yeah, last couple of questions.
12:26 One, the way to predict how long this lasts is based on what the Fed commentary-- when
12:32 the turn on the Fed commentary happens?
12:34 OK, the market expects the Fed to turn dovish.
12:39 In fact, what I would argue is what everybody is anticipating a turn in the Fed commentary.
12:44 If he did not turn, that is the problem for asset prices.
12:48 If he continues to say that, look, we are higher for longer, and rates will stay this
12:54 way for the foreseeable future-- maybe not higher rates, but at least tighter rates,
12:58 and more importantly, quantitative tapering needed, so you get reduction in balance sheets--
13:03 the equity market will panic if the Fed actually does not turn fast enough.
13:08 Because if you look at equity pricing, it is decoupled completely from bond markets.
13:13 Equity markets are saying this tightness is temporary.
13:16 I'm looking through it.
13:17 So if you were to readjust that view and say, look, maybe it is not temporary, and maybe
13:22 bond yields will stay 5% or 4.5%, that's when equity pricing will come under pressure.
13:27 Yeah, no, so my question is-- because if I was reading a note which said that, I mean,
13:31 if you look at from the '70s onwards, 4.5 is not actually a really dramatically high
13:36 number.
13:37 Maybe it's an average.
13:38 So my question is, so this quote, unquote, bearish narrative-- I'm not calling it bearish,
13:43 but for lack of a better word-- when does that change?
13:46 Is it completely dependent on when Fed actually turns bearish?
13:49 Yes.
13:50 Now, if you take a slightly longer-term view again, it is very difficult conceptually for
13:55 the US economy to sustain these high rates.
13:57 See, the equity market is not stupid.
14:00 You take a longer-term view, you know that 4.5%, 5% bond yields are not sustainable,
14:05 because your economic growth in the US is probably a 2% number sustainably.
14:09 It's not a 4%, 4.5% number.
14:12 The inflation should therefore settle down lower.
14:14 And more importantly, the fiscal cannot afford 5% bond yields, because the deficits are very
14:19 high.
14:20 If you refinance your bond at higher rates, which will start to happen in the next couple
14:23 of years, then the interest cost to tax ratio will deteriorate significantly.
14:28 So everything points to the fact that rates must go down.
14:33 It's in 2027 or '28 or some sort of horizon out there.
14:38 Will they go down the next six months or eight months is the debate that we are having.
14:41 So the equity markets are right in the long term to say that rates cannot stay at 4.5%,
14:46 5%.
14:47 But tactically, Sanjay, you reckon that they'll be under pressure if they start repricing
14:52 this way.
14:53 And when the Fed turns, the commentary is when the meaningful uptick, whenever it happens,
14:59 has to happen.
15:00 The phrase we use at JPMorgan Global is the Fed is boiling the frog.
15:04 It's turning the heat up gradually every day.
15:07 One day, the frog panics.
15:09 That's when the Fed backs off.
15:11 So you will need some sort of a panic or a crisis for the Fed to have the justification
15:16 to dial things down.
15:17 OK.
15:18 My final question.
15:19 There are a bunch of very interesting conversations lined up out here, I'm sure, thematic at that
15:25 too.
15:26 Which are the one or two that you're looking for the most?
15:27 Well, I think all of them.
15:28 It's difficult to ask.
15:29 It is.
15:30 And there's a lot of speakers we have.
15:34 We have macro speakers who will talk about the economic situation in India.
15:39 And globally, we have corporate leaders.
15:42 In fact, people who don't typically go to conferences are coming and are presenting
15:46 their views.
15:47 So I think you have a great mix of both bottom up and top down.
15:50 So I wouldn't pick within any of these.
15:52 I think all of them are worth attending.
15:54 Great.
15:55 I look forward to doing some of those as well.
15:56 But Sanjay, thank you so much for having us at your conference and all the best for a
16:00 good conference.
16:01 Thank you.
16:02 Pleasure to be here.
16:03 Thank you.
16:04 Likewise.
16:05 And viewers, thanks for tuning in.
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