Talking Point | #FirstGlobal's Devina Mehra shares view on market performances, as key indices take a backstep after reaching all-time highs. #BQLive
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00:00 Welcome, this is BQ Prime.
00:01 I am Agam Vakil.
00:02 We are taking stock of the markets and where they have been and where they are headed going
00:07 forward.
00:08 Well, the truth is that while we do take a step back from life highs, as far as valuations
00:13 on the benchmark indices are concerned, while they're still trading at a little bit of a
00:17 discount when you consider the historical valuations.
00:21 That said, there are still certain pockets which continue to move ahead.
00:26 And on the other hand, we're also starting to see just a little bit of fatigue in certain
00:30 other sectors in the markets.
00:33 But let's try and understand this better.
00:36 And well, let's bring in a guest who actually has been around for much longer than many
00:43 of us have been around for.
00:45 And pardon me.
00:47 Well, let's bring in Devina Mehra.
00:50 She is the founder, chairperson and MD at First Global.
00:54 Devina, good morning and thank you so much for joining in.
00:56 Devina, I'll start with the first question.
01:01 The last time you spoke to BQ Prime, you said that we are still closer to the beginning
01:05 of the move rather than the end of the move.
01:09 And even before that in March, we were at a lot lower levels.
01:13 Since then, of course, we've hit new life highs.
01:16 The question really is that how much has factors in the underlying markets changed over the
01:22 last three months and where do we go from here?
01:27 Good morning, Abhay and good morning to the viewers as well.
01:31 Thanks for making me feel old.
01:34 Yeah, you're right.
01:37 It's almost exactly 30 years since I started as an entrepreneur, since I started First
01:41 Global.
01:42 So I resigned end of August and after the notice period started on 1st October.
01:48 So it's almost exactly 30 years.
01:51 Well, that certainly wasn't the intention, Devina.
01:53 I was joking because I was telling somebody, I mean, I was always used to being the youngest
02:04 in class, right from class one to my MBA, which I joined when I was 19.
02:13 So that's a role I'm more used to.
02:15 OK, so coming back to the question on the markets, there is, I mean, you mentioned March.
02:22 Actually, I tweeted in March that this is the time to get in.
02:27 And I'd also said that if you're asking me, is this the bottom?
02:30 I don't know.
02:31 But I mean, it is certainly in the range.
02:32 So that played out, of course.
02:35 So where we're sitting today, as you mentioned, the valuations are not particularly stretched.
02:42 That's one part.
02:43 Also, if you look at the market itself, again, you step back to take the long view.
02:48 If you think of the Indian markets, most people think that equities give you 15-16% return.
02:53 Those are the returns from the time, let's say, the SENSIC started.
02:58 So but what people don't realize is that how much of a variation there is.
03:03 And I'm not talking just to variation on a year-to-year basis, but also on a decade basis.
03:08 So if you invested in the Indian indices at, let's say, 1980, in a decade's time, let's
03:16 say you invested 100 rupees, that would have become 700 rupees.
03:20 But if you had invested in 2010, in that decade, that 100 rupees would have become only 230
03:27 rupees, which was not much, given where inflation was and given fixed deposit rates used to
03:34 be 7%, 7.5%.
03:36 But the equity market gave you 8.8%.
03:39 So it didn't certainly compensate for the risk of investing in equities.
03:44 So once it came out of that kind of underperformance in the early part of this decade, I was quite
03:50 clear that that would continue.
03:53 Also relative to the globe, in that 2010 to '20, we were underperformers almost every
03:58 year.
03:59 So that again changed.
04:00 And last year also, which was a very bad year for global markets, while we were not up in
04:04 dollar terms, we were certainly in the outperforming market.
04:08 So that's the background.
04:09 So normally what happens is that the big crashes or the risk of a big crash is when you are
04:15 far above the trend line.
04:16 You're not even at the trend line.
04:18 Because this year, this decade also, more because of global factors, you have only compounded
04:23 about 12.5%.
04:24 So you're not at the historical average, even let alone make up for that huge underperformance
04:32 of a decade.
04:33 And that's when we are talking the mainstream indices, the large cap indices like Sensex
04:37 and Nifty.
04:38 Now, of course, as you know, the big, I mean, from the March lows, when I had tweeted that,
04:46 it was not even 17,000.
04:48 So it's obviously had a reasonably good run since then.
04:54 But the part that has had an even better run has been the small cap and mid cap.
05:01 And there people again do not look at history.
05:04 So I was doing this exercise.
05:06 And if you look at that 2008 high of small caps, from there, they fell 78% over the next
05:16 year or two.
05:19 And even the recovery took a long time.
05:22 So that 2008 high of the index was hit next in 2016.
05:29 And I'll come back to that, what that means.
05:31 But even that bull run in 2016-17 didn't last long.
05:36 So 2018, you had onwards 2018 to 20, you had another crash taking the market down, I think
05:45 65%.
05:46 So now this is the background for the small caps.
05:49 And people have these very quaint notions that the index might not do well, but I'm
05:55 picking my stocks carefully and my stocks will do well.
05:59 So I looked at the statistics for that as well.
06:01 So in that 2008 onwards crash, only 1% of the small caps were up by the end of that
06:09 fall.
06:10 And in this, even in the 2018 onwards fall, the only 8% of the stocks were up.
06:18 So I mean, it would be, I would put it mildly foolish to think that you will have only those
06:23 stocks in your portfolio.
06:24 So if you know that the market crashes to that extent, you will get it.
06:28 I mean, long and short of it.
06:29 And also, and now this I was talking the small cap index, but actually the other interesting
06:34 thing is this, that the small cap index itself churns 18 to 20% every year.
06:41 So for all practical purposes, in five, six years, it is a completely new index.
06:47 So now this means that the stocks that made, I mean, that crossed that high in 2016 were
06:53 not the same stocks that were in the index in 2008, most of which disappeared, became
06:59 penny stocks, became worthless basically.
07:01 So point is, this is a risky end of the market.
07:04 So you should limit your exposure to the small caps, even though I remain positive on the
07:11 larger caps.
07:12 I mean, I think the time to be cautious because again, from the March lows, those rallied
07:17 40 plus percent.
07:18 I was looking at mutual fund flows.
07:21 They have also all been coming in small caps.
07:24 In fact, the large cap flows have actually reduced.
07:26 So that is, they haven't even gone up in the last couple of months where the small cap,
07:32 everybody's coming in.
07:33 Oh, and then you will have new schemes being launched.
07:37 And I see social media people saying that I called up the, this AMC service personnel
07:42 for some service staff and they started to push their small cap fund.
07:45 So I mean, these are all signs of fraud in a science of being closer to the top here.
07:51 But the same is not the case for the large caps.
07:54 I mean, broadly, that's the picture.
07:56 Right.
07:57 Devina, I do want to take the point of the mid caps and small caps forward.
08:00 But before that, a macro question on crude.
08:03 It's now at a near one year high.
08:07 And that's always going to be a little bit of a pain point when it comes to the economy,
08:10 especially when the markets are looking forward to a rate cuts somewhere down the line next
08:16 year, maybe the year following that.
08:18 What's your assessment here?
08:19 So you're talking rate cuts in India or the US?
08:24 In India.
08:25 Okay.
08:26 So crude, yeah, I mean, crude has been, I mean, our assessment of crude is that it will
08:34 be in a band, maybe 90 to 110 kind of thing, but more with an upward bias rather than a
08:42 downward bias.
08:43 So putting all the factors together, that would be our base case right now.
08:51 And yes, you are right that the crude coming down earlier in the year, I had said, somebody
08:57 asked me that, what do you think will be the one team?
08:59 And I said, the crude is down significantly from last year.
09:03 And that's a driver on many things for India, from current account deficit to inflation
09:08 to even corporate earnings, because so many of the inputs are petrol based.
09:13 So this is definitely a negative.
09:15 So for India and for even for some of the corporate earnings, but it's not like a way
09:21 out number still.
09:22 So I mean, it's at a manageable stage.
09:25 As far as the rates are concerned, the inflation has been very high, mainly driven by food,
09:32 of course, in India.
09:34 And while food inflation, you say, I mean, arguably has nothing much to do with interest
09:40 rates and therefore you should not be using interest rates to control food driven inflation.
09:46 But the fact is that central bank also has to manage the inflation expectations.
09:53 And while RBI has had a growth rather than an inflation control bias in this cycle, so
09:59 they have been reluctant to raise rates.
10:02 They have done it only when they absolutely had to.
10:07 But I don't see rate cuts either.
10:09 And if inflation continues to remain high, which I think should moderate, but I mean,
10:13 if it continues to remain high, then of course, you can't rule out a minor hike also.
10:20 So I have seen, I have anyway, whether it was India or US, I have never been of the
10:25 view that you would start, you would see the rate cutting very quickly, simply because
10:33 inflation doesn't come down that quickly if you look at history.
10:36 So I even if in the US, when everybody was expecting a rate cut in 2024, if you see my
10:42 interviews for the last year and a half, I never said that because I was quite clear
10:45 that historically inflation is that high, it doesn't come down in two quarters or three
10:55 quarters.
10:56 So it's only visual thinking to think that it could come down very rapidly.
11:01 Only places where rate cuts have started are the countries where the rate hikes happened
11:07 much earlier.
11:08 So in 2020, see, we watch only US and India, we forget about the rest of the world.
11:14 And in 2021, a lot of emerging markets, central banks had raised rates, not just once, but
11:20 two, three, four, even the outliers of five, six times.
11:24 So a couple of those countries like Brazil and Chile have started to cut rates.
11:28 But then as I said, their cycle started much earlier.
11:31 Right.
11:32 So, Devina, I'm going to shift focus back to Indian markets.
11:35 Well, I'm assuming that the markets here on will be less secular.
11:40 The question here is to do with mid caps and small caps.
11:45 You have in the past tended to say that you have an allocation of around 25 to 30 percent
11:50 towards some of these smaller names.
11:53 And please do correct me if I'm wrong.
11:55 Are your systems starting to take money off the table at these levels?
12:01 And what would the allocation be at the moment when it comes to some of these mid cap and
12:05 small cap counters?
12:06 Okay, so first of all, our systems, I mean, the way we run the money is very, very focused
12:14 on risk management.
12:15 So we always say that more of your fees go for risk management rather than return management.
12:21 That's been the cornerstone of our philosophy that avoid the big drawdown because investing
12:27 is a loser's game.
12:28 You win only if you don't lose.
12:30 So you have to make sure you don't lose a significant part of your capital at any point.
12:36 And those risk management systems have worked very well, even in real life stress situation.
12:41 So I mean, not only did we sidestep the COVID crash with Indian global oil products down
12:47 only 8 to 10 percent as against 30 to 40 percent for most fund managers.
12:52 But even last year in the Russia-Ukraine war, the day the war broke out, the market was
12:56 down 5 percent.
12:57 We were down 1.6.
12:58 So we have about seven, eight steps in that.
13:01 And one of them, of course, also is that we limit our small cap exposure, not just in
13:07 our PML, but even in our small case.
13:09 So when there is great momentum, we might go from 15 percent small cap to 20 percent
13:15 small cap, but we're not going to put 40 percent small cap because mid cap is another category
13:20 and we don't invest in micro caps, nothing beyond a thousand crore market cap.
13:24 We also, market cap is one thing, but we also have a lot of liquidity filters because the
13:29 problem with small caps also is not just, you know, when the crash comes, it's not just
13:33 that the price goes down, but really there is no exit.
13:37 So all those things which will look very liquid on the way up are no longer liquid.
13:41 So we put all those things together.
13:43 So we would be a little over 50 percent in large caps, probably less than 20 percent
13:48 now on small cap, maybe 18 or something, and maybe about 30 percent in mid cap.
13:56 So that would be our, of course, I mean, our systems really, the bottom up system really
14:05 comes up with the stocks.
14:06 So we really go with that.
14:09 So those are, you can say a little more, there of course it's a bottom up engine, but we
14:14 also keep a handle on how much the sector allocation is.
14:17 So again, as a risk management measure, we will never have 40 percent in a single sector
14:22 or anything close to that.
14:24 So our sectorally also, we are fairly well diversified.
14:28 So that's, and it's served us well, I mean, the three and a half years since we started,
14:32 not only are we number one in terms of returns in the large cap, multi-cap space, but in
14:40 risk adjusted returns, whether you adjust for volatility or drawdown, you know, there's
14:45 barely anybody at even half hour levels.
14:48 So that's the way, you know, and therefore individually also, if you're managing your
14:54 money, I always say that, you know, limit all these things, have strict stop losses.
14:59 That's another leg of the risk management.
15:02 So you have to manage the risk.
15:05 Right.
15:06 Devina, just a question out of curiosity.
15:09 Do you guys use the factor of cross-sectional momentum?
15:13 And for the benefit of viewers, this is relative strength, that is a one stock being stronger
15:18 as compared to the rest of the market.
15:19 Do you guys use this factor?
15:21 And if you do use this factor, to what extent do you have weightage towards this?
15:27 And well, how and what are those stocks or sectors for that matter, which is starting
15:33 to pop up at the moment?
15:34 Okay, so the way we manage money is what we call a human plus machine system.
15:41 I see some people copying the title now, but the substance of it is a lot more difficult
15:49 to copy.
15:50 So you know, it's almost now almost 2 million lines of code that we have on an artificial
15:56 intelligence machine learning system, which way you try to codify all your expertise and
16:01 then also then you know, then test it out and keep refining it.
16:05 So we actually look at, you know, we start with literally hundreds of factors, but all
16:09 the factors must be logical.
16:10 So then that's another story altogether.
16:13 So we have primarily fundamental driven factors, but we do have some momentum factors, but
16:21 you know, the kind of crude thing you were talking about, just relative strength and
16:25 all that, that is not good enough to give you a good signal to do anything.
16:33 Because you know, and this I'm talking not just like never having tried it, we have fairly
16:39 elaborate momentum and technical factors driven systems, which we've been refining for a good
16:47 20 years plus.
16:48 So this is the AI ML system I'm talking about a separate, these are other systems which
16:54 we do use, you know, for example, to catch a commodity turn or even for other things.
17:03 But what over the years I have learned is that looking at momentum or especially the
17:08 kind of crude stuff you see on television every day or trades for the day and all that,
17:12 that's all fairly pretty much nonsense.
17:15 And I'm talking, as I said, with systems which are more elaborate than what most of these
17:19 people are using.
17:20 In fact, many of them are ex FG who are stuck where we were 15 years ago, but that's not
17:26 a matter.
17:27 Where these things help you at the most is at timing a trade that you have identified
17:34 fundamentally.
17:35 So that's where I found that, you know, some of these market timing things help you there
17:39 that you think you should be buying the stock.
17:42 And so you can tie, you know, you can watch it for a while.
17:44 I'll give you an example like Japan, we had identified early in the year and then we were
17:49 watching for the turn, which came around April.
17:52 So you know, that's when we went over with Japan.
17:56 And now for the last couple of months, we've been watching China for a similar turn.
18:01 So that's, but I mean, if you're talking sectorally, we actually rerun all our systems, we have
18:08 a quarterly rebalance.
18:09 So the September end is still to happen.
18:11 But so where we rank all stocks from, let's say in India, there are about roughly 750
18:18 stocks that are about the thousandth road market cap.
18:20 So we rank everything from one to 750 on all factors together.
18:25 And the machine combines it in much more sophisticated ways than you and I do.
18:30 So it's like the combination that how the combination, what is the optimal combination
18:34 of factors?
18:35 It's, that's another type of whole system.
18:41 But what we have found, I mean, if you want to talk sectors, the sector that our systems
18:50 identified almost two years ago, so it was in October 2021, rebalance was capital goods
18:56 and industrial machinery.
18:58 So we've been over with that sector for almost two years now.
19:02 I mean, people have started talking about it in the last few months.
19:06 But the question actually we've been asking every quarter is, is the run over?
19:10 And till now, the systems have not signaled that the run is over.
19:13 Of course, you know, some stocks went up two times, four times, we book profits, we change
19:17 the allocation within the sector, all of that.
19:20 But I mean, broadly, that sector still remains our most overweight sector.
19:26 These calendar year places where our systems have liked and we've added is in auto, auto
19:32 components, pharmaceuticals, a few construction companies.
19:37 Off late we have cut banks.
19:43 And of course, I mean, this is as somebody was telling me, I am a nervous investor in
19:49 banks and lenders in general, because you don't know where the negative surprises are
19:53 hiding.
19:54 So I'm always very careful on that.
19:58 So that would be broadly the things I mean, off late, for example, last couple of times,
20:03 a few of the FMCG names have started to pop up, which was not the case for the prior year
20:08 or two.
20:09 Of course, I mean, I'm one of our big winners last year was ITC.
20:13 So I mean, that apart, but most of the other FMCG names are not coming up in our system.
20:17 They've just about started to.
20:20 So that's another area that we are watching.
20:22 But that's the overweight, it is what I told you.
20:26 IT also it is marginally overweight, not by a great deal, but a little bit.
20:31 Right.
20:32 Devina, I'm just going to conclude with one question.
20:35 And this is to do with financials.
20:36 I know you briefly touched up on that.
20:38 But the question really is that while the market is still very positive on financials,
20:44 maybe for the lack of better ideas, perhaps, well, at least consensus suggests that there
20:50 could be no re-rating on the cards going further.
20:54 Your view on this particular sector?
20:56 As I told you, we have cut, see, I mean, throughout 2020 and 2021, we had very little weight to
21:06 financials, which is just quite extraordinary given that, you know, the index rate is very
21:10 high for banks and BFCs.
21:15 Middle of 2022 is when we thought, you know, things were changing fundamentally also in
21:19 terms of credit growth, in terms of the NPA cycle.
21:23 And also when interest rates go up in the beginning, at least the lenders margins go
21:28 up.
21:29 So all those factors.
21:30 And so in 2020, I mean, I don't know that you know this, that Nifty Bank was the only
21:35 sectoral index in the negative.
21:37 In 2021 also, it went up only half as much as the market.
21:41 I think market was up 22% and Nifty Bank was up only 11%.
21:47 So when again that trend was changing, so we thought like this is the time to get in.
21:52 So middle of calendar 2022 is when we went market weight on banks, still not on the non-bank
21:57 lenders.
21:58 And, but we've started to cut down a bit.
22:03 And we've also moved, I think, a little more to the PSU banks.
22:07 But overall now we are underweight, even on banks alone, I mean, let alone financials
22:11 alone, we were always underweight.
22:14 But so that's, I mean, as I said, I mean, I am a nervous investor in banks because I
22:19 know that there are negative surprises.
22:23 And an outsider, you don't know where the negative surprises are hiding.
22:28 So unless it is a compelling story, I would like to avoid that.
22:33 So that's been my philosophy.
22:37 And now of course, there is increased competition, all of that as an additional factor for many
22:43 of the lenders.
22:44 And as I always say that I laugh when lenders say that, you know, we are growing faster
22:49 than we anticipated.
22:50 And I say that like, how hard is it to hand out money, collect the money that the problem
22:57 comes.
22:58 And maybe having a long memory, which you said like all these decades of experience,
23:03 you remember that all the other times there was a boom in lenders, you know, it comes
23:07 in different forms.
23:08 Sometimes there's leasing companies, sometimes it's something else.
23:09 It's time for fintech.
23:13 So I mean, you always have a skeptic's hat on as well.
23:19 Well, fair enough, fair enough.
23:22 Well, Devina, we're out of time.
23:25 It was an absolute pleasure chatting with you.
23:27 Thank you so much for giving us your insights on the markets.
23:31 And well, signing out for now.
23:33 This is BQ Prime.
23:35 And don't go anywhere.
23:37 There's lots more lined up.
23:38 So we will keep bringing you more.
23:39 Thank you.
23:40 Thank you.
23:41 Thank you.
23:41 Thank you.