#ASKHedgeSolutions' Vaibhav Sanghavi talks about the global stagnation on foreign flows and how to hedge your portfolio. #BQLive
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00:00 So much for tuning into Talking Point.
00:01 I'm your host, Neeraj Shah.
00:03 Our guest today is Vaibhav Sanghvi,
00:05 CEO of ASK Head Solutions.
00:07 Vaibhav, great having you.
00:08 Thanks for taking the time out.
00:09 - Thank you very much, Neeraj.
00:12 It's always a pleasure to chat up with you.
00:14 - Thank you so much.
00:15 So the case for the chat today, viewers,
00:18 is of course, heavy FI selling and the market's downtrend,
00:22 whether it will continue further,
00:23 because it looks like the markets
00:25 are in a bit of a downward spiral.
00:26 FPI fears are muted in realty and some other as pockets,
00:31 but private flows are certainly on the rise.
00:34 And monetary tightening and global stagnation
00:36 has spurred foreign outflows.
00:38 So what happens in a scenario like that?
00:40 Can domestic flows come in and help the markets?
00:44 Vaibhav, I would love to,
00:47 in the latter half of the interview,
00:49 try and understand how do experts like you hedge
00:52 in times like these, which are so volatile.
00:54 But let me start off with your basic bareback market view.
00:57 What's the sense that you guys have at ASK
00:59 about what could happen in the near term?
01:01 - Yeah, I think Neeraj,
01:04 before kind of understanding what can happen
01:07 in the near term, and to be very honest,
01:08 at this point in time, it's quite turbulent.
01:11 We need to understand why have we reached at this stage?
01:14 And what are the global factors
01:16 which are kind of impacting the markets,
01:19 not only India, but across emerging markets
01:22 as well as the developed markets as well.
01:24 Now, we in the last 18 to 24 months
01:28 have seen interest rates kind of rise
01:29 from 0% virtually to now at about 5%.
01:33 That's a massive kind of increase of rates.
01:37 At the same time, while the rates have kind of gone up,
01:39 we have not seen any commensurate kind of effect
01:44 in any of those kind of asset class,
01:45 except for the debt side,
01:48 where we have seen yields kind of go up.
01:50 Equities in fact have kind of strengthened.
01:54 Now it is very counterintuitive
01:55 and when people study about correlations
01:59 in going into the history,
02:02 we generally find that whenever interest rates
02:05 kind of rise sharply like these,
02:08 or probably has to remain elevated,
02:11 the natural consequence is basically
02:13 that it kind of has an impact on the economy
02:15 and subsequently the corporate earnings as well.
02:19 Now, as I mentioned till now,
02:20 we've not seen any of those kind of effects
02:22 purely because now the governments
02:25 are kind of leveraged pretty much on a higher level
02:28 versus the corporates.
02:30 But at some point in time,
02:31 it has to kind of come and affect the equity markets
02:35 and the various other asset classes.
02:37 This is what precisely we are kind of starting to see.
02:40 The higher the yields which go from here,
02:43 worse would be the kind of reaction.
02:45 If yields stabilize and probably kind of move southwards,
02:49 I think that would be better for equities.
02:51 - Yeah, that's become difficult to time though,
02:55 even for the central banks, I guess, Pagal.
02:57 - I think it will take a little bit more time
03:01 because the sole focus at this point in time
03:04 from all the central bankers are inflation numbers.
03:07 The moment they start witnessing inflation
03:12 kind of cooling sustainably,
03:14 and please mark my words, sustainably,
03:18 it's not only one print or two prints.
03:20 I think they need to have that comfort
03:22 in terms of the trajectory of inflation
03:24 kind of moving southwards,
03:26 is when we will see the monetary policy
03:31 cooling off coming about.
03:33 First, it may happen into the language
03:35 and then into probably the steps being taken
03:37 in terms of the rates
03:39 and the quantitative tightening programs as well.
03:43 - Got it.
03:44 Okay, now, the common theory we have,
03:49 and there's a chart, which is there as a part of a note,
03:54 which speaks about, I mean,
03:56 which shows this beautiful chart on the index
03:58 and shows how at different points of time
04:01 there have been different crises
04:02 and how the markets by and large have done well.
04:05 So it speaks about all the stuff that there thus far,
04:09 and then also talks about the current one,
04:10 which is the global stagflation concerns
04:12 and the monetary tightening,
04:13 and talks about what's the kind of fall
04:17 that we've seen thus far and what could happen ahead.
04:20 My question to you is,
04:21 assuming that yields coming off is gonna take time,
04:25 assuming that the other factors are fluid
04:27 and we don't quite know what happens,
04:30 is this the extent of the downfall
04:32 that you were expecting if you were,
04:35 or do you reckon that this has the potency
04:38 to become steeper than what it is currently?
04:40 - Do you know what the larger worry
04:45 is basically trying to understand the unknown unknowns,
04:48 right, in the sense that,
04:49 you know, whenever these kind of rates have kind of moved up,
04:54 some other accident kind of happened,
04:56 and whether it happens in any of those geographies,
05:00 because it's a globalized world,
05:01 I think it starts to impact across the global markets.
05:05 Now, where does this accident probably happen?
05:07 Is anybody's guess,
05:09 but my sense is basically the effect of these rising rates
05:14 has to happen, you know, underlying, you know, somewhere.
05:17 Now, if you look at just an example
05:20 and the group on the housing markets, right,
05:22 see the mortgage rates, see the subsequent kind of numbers,
05:25 I think those are starting to kind of get, you know,
05:29 reflected, of course, the latest trend was pretty,
05:32 I would say, heartening,
05:35 or disheartening, you may say,
05:36 because the numbers are pretty strong
05:38 in terms of the housing sales,
05:41 but it has to have some impact.
05:43 When it has an impact,
05:45 and when the subsequent change reaction happens,
05:47 that can have the potency of markets kind of, you know,
05:53 taking away some about 15 to 20%,
05:56 but now it's too, I would say,
06:01 it's preemptive to kind of guess that,
06:03 if the global bankers,
06:05 or if the global central banks are kind of able
06:08 to have it on a very glided path down,
06:12 you know, downwards, you know, towards a soft landing,
06:16 and they're able to manage
06:17 all those kinds of transitory issues,
06:20 it would be a wonderful thing,
06:21 but it hardly happens.
06:24 - It doesn't.
06:25 FI flows, they seem to be,
06:28 there's a bit of an outward spiral from a bunch of EMs,
06:31 and likely because of the higher yields.
06:34 Pabab, any thoughts here?
06:35 I mean, is this, because seasonally,
06:38 the next two months should ideally be good
06:40 for flows and for markets,
06:42 but we're not quite seeing proof of that.
06:43 Yesterday was a big outflow day as well.
06:46 What's your sense?
06:47 - No, I think, FDI flows, right?
06:51 I think the direct correlation between the interest rates
06:55 and to the transiting of the dollar,
06:58 you know, in our dollar index as well.
07:00 Now, both of these accounts are kind of pitted
07:02 against the emerging market flows.
07:05 When we talk about emerging market flows
07:07 in a broader context,
07:08 India forms about 14 to 15% of that kind of basket.
07:11 So if there is redemption in emerging market,
07:14 you know, on an overall basis,
07:15 we will definitely face redemptions as well,
07:18 or outflows as well, by default.
07:21 So it's not about India only,
07:23 and India doing fantastic.
07:25 Of course, India is doing fantastic.
07:26 The economy is very sound.
07:29 We have seen all the macro numbers kind of right up there.
07:33 It's just the sheer fact that the other emerging markets
07:36 are not in a pretty good shape.
07:39 And that is why we are seeing some amount
07:41 of emerging market outflows,
07:42 thereby witnessing outflows here as well.
07:45 Now, just to point one thing is, you know,
07:48 subsequent to when the rates started to increase by Fed,
07:53 we've seen constant FDI kind of outflows
07:58 to a point where our FDI ownership in 200
08:03 was about 21, 21 and a half percent.
08:05 It's now come down to about 17 and a half percent,
08:07 or, you know, on a total basis.
08:09 So this clearly reflects, you know,
08:12 how much selling we've seen, you know,
08:14 over a period of time,
08:15 which has got compensated by the domestic flows,
08:18 but that's a point we need to kind of worry about
08:21 and take into cognizance.
08:23 - Okay.
08:24 So FDI flows may not be only about India.
08:27 What is unique though, and maybe not unique,
08:29 maybe it's happening in other places too,
08:30 but for unique from India's historical perspective
08:34 is the kind of mutual fund inflows.
08:37 Now, do you reckon that that will counterbalance
08:40 to a large extent the FIR flows
08:44 if they continue at the same pace out of India
08:46 or EMs at large?
08:47 - In fact, it has counterbalanced tremendously well
08:52 in the last one, one and a half years.
08:54 Now, if we kind of pull back the same kind of outflow,
08:59 which we have seen in one and a half years,
09:00 last one and a half to two years,
09:02 and if that situation would have occurred,
09:05 you know, 10 years ago,
09:06 then my sense is basically the index
09:09 would have given away by 35, 40% by itself, right?
09:12 That was a kind of outflow we had seen
09:13 from an FDI perspective.
09:15 It's just the sheer fact that the domestic inflow
09:18 has been very resilient, strong,
09:21 and thereby actually helped the overall indices,
09:24 you know, to not give away those kinds of, you know, gains,
09:28 and to also decrease the overall volatility.
09:31 But going forward, there are two aspects to be seen.
09:34 One is basically on the overall valuation basis,
09:37 like while we are seeing the inflows, you know,
09:40 from the domestic investors,
09:43 at some point in time, I think to be very honest,
09:46 the mid-cap and small-cap valuation
09:47 kind of looked pretty rich.
09:50 And if you ask me whether could we make money
09:53 on an immediate term, one year, two years,
09:55 probably from a fundamental basis,
09:57 I'm not very comfortable, you know, in that kind of pocket.
10:00 However, if you are looking for a five, 10-year perspective,
10:03 the whole theory kind of changes.
10:05 So a valuation is not something which is, you know,
10:09 in support at this point in time.
10:11 Of course, the large cap is much better poised
10:13 than the mid-cap, small-cap,
10:16 but the larger flows we are seeing
10:17 is going towards the broader market.
10:20 If we start to witness the flows on the large cap side,
10:23 then I think it may balance out the index kind of selling.
10:27 But at this point in time,
10:28 we may continue to see those kind of pressures from FDI,
10:31 who are generally larger sellers on the large caps.
10:34 - Got it.
10:35 Vibhav, how do you guys employ hedging strategies
10:40 and try and give me some rope
10:44 and not make it too complicated
10:46 because you guys must be doing some fairly esoteric stuff.
10:49 I and my viewers would love to maybe understand
10:52 a simplified version of the same,
10:53 but would love to understand.
10:55 And, you know, it will just probably help a lot of people
10:57 who are listening to this
10:58 to try and see if they can in their own way,
11:00 try and figure it out,
11:01 if they can also deploy in some fashion,
11:03 some of the hedging strategies,
11:04 because hedges would have worked beautifully
11:06 at a time like this,
11:07 when the market has just come off really, really rapidly.
11:10 - Now, first of all, Neeraj,
11:13 a very simple concept to understand is basically
11:16 that if you think about saying that
11:18 if the markets are bad and I go and hedge it,
11:21 to be very honest, it never happens.
11:23 Because one, that you always have to
11:26 keep on timing the market
11:28 and keep on saying that this is the top of the market
11:30 or this is the bottom of the market,
11:31 which to be very honest,
11:32 you may get lucky once or twice and probably,
11:34 but you cannot find that consistency
11:36 at every given point in time.
11:38 So that's one.
11:39 Two, that for effective hedging,
11:42 you always have to be in the market kind of hedging
11:45 rather than at a particular point in time.
11:48 Why do I say this?
11:50 Is basically, now, if I kind of demarket to events
11:55 or probably risks to the market,
11:58 I think there are known risks
11:59 and there are unknown risks.
12:01 Known risks, everybody knows that there is an event coming
12:04 and I can probably hedge effectively,
12:06 but there are unknown risks.
12:08 Something like a COVID or something,
12:11 some kind of event kind of comes about
12:13 or table tantrum or this last recent 5%, 7% fall,
12:17 which out of nowhere, it is kind of coming.
12:19 To kind of capture that,
12:22 you have to be in the market always.
12:24 You cannot pick a point and say that I want to be hedged
12:28 at this point in time and I have kind of completely
12:30 get the advantage of my hedges in these kind of markets.
12:35 However, when we talk about hedges,
12:39 it comes with a cost.
12:41 To kind of mitigate those kinds of costs,
12:43 there are various strategies.
12:44 I don't want to get too complicated about it,
12:46 but one has to understand that a hedging mindset
12:51 cannot be occasional.
12:53 It has to be on a consistent basis.
12:56 How do you decrease the cost of hedges
12:59 is something to be pondered over in a longer debate.
13:04 - Okay, okay, fair call.
13:08 Now, just a question, Vibhav,
13:11 because that is something that will be on top
13:14 of everybody's mind.
13:15 I don't know if it's possible to say that,
13:17 but just still trying it out.
13:19 Since March, 2020, and except for that first fall,
13:25 most large falls have gotten into very, very quickly,
13:30 fairly convincingly.
13:32 You could argue that October, 2021 to March, 2022
13:36 wasn't as quick per se,
13:39 and the market stayed sideways quite a bit,
13:41 but still we've had a bit of a pullback
13:43 happen very, very swiftly.
13:45 Is this time looking slightly different
13:47 because of the geopolitics angle attached
13:50 in a meaningful way?
13:52 - Of course, geopolitics is kind of having its own impact
13:57 on the global economy.
13:58 I would say the higher valuations also is kind of,
14:03 making the problem a little tricky, I would say.
14:08 So it's not only about that.
14:11 And on top of it, it's about the global monetary policies
14:15 as well, in terms of their interest rates.
14:17 So there are a lot of variables kind of moving around
14:19 at this point in time.
14:21 But one point which I would make is basically,
14:23 Neeraj, you mentioned about COVID, right?
14:26 And about the hedges.
14:30 I would come to that point and a behavioral aspect as well
14:34 to point out is, if you go into the history of falls,
14:39 maybe you take 2008, or maybe you take a COVID period,
14:44 you've always seen that during the fall and post the falls,
14:49 while the markets are ready to be invested in,
14:54 we've seen actual outflows happening
14:56 during those period of times.
14:58 So while there's a lot of education going into
15:01 and saying that, you should invest in the cheaper levels
15:05 of the market, in fact, from a behavioral aspect,
15:09 it actually happens on the opposite side.
15:12 People actually delete purely because the amount
15:14 of negative news during that period of time is at so peak,
15:18 that people get too carried away and kind of go
15:21 and exit their portfolios or trim their portfolios.
15:24 So that is where you have your edges kind of come in,
15:29 give you that comfort on the portfolio,
15:31 reduce your correlation and give you an ammunition
15:34 to kind of go and invest during those kinds of times.
15:36 - I agree, okay.
15:38 So Vaibhav, okay, then let me wrap up with this.
15:42 I would love to understand,
15:44 what is it that you're doing right now?
15:46 Are you placing your bets on the downtrend continuing,
15:51 but keeping hedges for a pullback that might come about
15:54 if yields come off or whatever?
15:56 Or are you now playing for a bounce back
15:58 because we are at 18,900, 800 odd
16:02 and the bounce back might be imminent,
16:03 but should it correct further,
16:05 you're keeping the hedges on the other side.
16:06 What is it they're doing?
16:07 And I'm using Nifty as a benchmark here.
16:09 You might be trading on various indices, various pockets,
16:12 various individual companies,
16:13 but I'm just using Nifty as an example.
16:15 - I think there can be a possible bounce back
16:20 because we have fallen from about 20,000 to 18,800 odd levels
16:24 so I would not ignore the possibility of a bounce back,
16:28 but to be very honest, being extra bullish
16:30 or kind of go and aggressively go and buy,
16:34 I would kind of refrain from doing that
16:36 unless the macros kind of start falling into place,
16:41 which I don't see happening kind of very soon.
16:44 So in that respect, I would be a little cautious
16:47 and I do expect the volatility
16:48 to be kind of elevated as well.
16:50 Having said that, one last data point
16:52 which I would mention is,
16:54 which is that typically ahead of elections,
16:57 six months ahead of elections or general elections,
17:00 you generally see a buoyant period.
17:02 You just have to take care of it
17:05 that you don't get carried away with that kind of rally,
17:08 which may probably happen
17:09 because of the whole sentiment around.
17:12 Have your kind of sights fixated on valuations,
17:17 global macros and the kind of risks
17:19 which are kind of emanating.
17:21 So there can be a temporary rally,
17:24 election periods are generally good,
17:25 sentiments and a festival period around are pretty buoyant.
17:28 So you may see those kind of temporary pullbacks,
17:32 but it doesn't matter at this point in time
17:34 to be invested at that high valuations, which we are seeing.
17:39 - Babav, I'm sure we are gonna talk
17:40 at least a couple of times before that
17:44 for us to get their advice from you on that.
17:46 So thank you so much for taking the time out
17:48 and do you and your team a great buildup
17:50 to the festive season.
17:51 - Thank you very much, Nivesh, always a pleasure.
17:54 - Thank you, our pleasure is ours.
17:56 Viewers, thanks for tuning in.
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