Talking Point | #MiraeAsset’s Rahul Chadha talks about pockets of growth amidst global growth slowdown, high yields and geopolitical worries. #BQLive
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00:00 much for tuning into Talking Point. I'm your host, Neeraj Shah. Good to get a mix of global
00:04 perspective as well as somebody who while perched abroad has a very keen eye out for what's
00:10 happening locally. Rahul Chaddha, Property IOP, as said Johnson right now. Rahul, great
00:14 having you. Thanks for taking the time out.
00:16 Thanks Neeraj for having me on your show.
00:19 The pleasure is ours. Rahul, we will divide this into two, some dash of macro, some dash of
00:25 global macro and some dash of local micro. Global macro now well discovered, well known
00:32 geopolitics, higher yields, maybe higher food prices, what have you. How much of an impact
00:40 on risk assets? Because we've seen some already, both in India, as well as the rest of
00:44 the world.
00:45 I think this is this is kind of a perfect storm for risk assets. And why I say that is
00:50 historically, whenever we used to have a crisis situation like the way it's happened in the
00:55 Middle East, one used to see the 10-year yields going down and did not spike. So this is
01:02 kind of an alerting of near stack inflation scenario where your yields are spiking up,
01:09 inflation is high because of the food, etc. So I think those remain concerns from the
01:15 market. We've been cautious on markets last six months. Our view was there was this fair
01:19 bit of an exuberance on inflation coming down sharply and rates getting cut very quickly.
01:26 Our sense was market was going to be disappointed in that rates were going to be sticky
01:31 for a while. And that is going to work through in terms of slowing the growth rates
01:35 everywhere. So that is actually happening on ground. I'm here in New York. Clearly, you
01:41 get evidence of things going and US is one of the most resilient amongst all countries.
01:46 And a similar trend is coming out from India in the quarterly numbers which have come so far.
01:51 Yes, indeed. And I'll come to that. But that's interesting observation that you have
01:56 because about six months ago, everybody said or three months ago, everybody said that
02:00 there is no way that we're seeing any kind of recession in the US because everything was up
02:05 and about, including things like Progolf or cab drivers, fares, so on, so forth. Do you
02:11 foresee Rahul, therefore, something that a few people are saying that there might be a
02:17 change in different central banks, I mean, the US predominantly, but others as well as
02:21 slowdown hits? And could that actually be as contrasting as it is a net positive for
02:27 risk assets that we might finally see rates coming over at least stop of that happening
02:32 in six months time? And could that be positive for risk assets?
02:37 Absolutely. If you ask us six months from now, we will be positive risk assets, because
02:42 the slowdown is going to play out over the next six months. And what happens is, as
02:46 Kharafan, these remain rates remain sticky for a while, it is likely that something is
02:51 will break somewhere in the world, there are inductive parts in different parts of the
02:55 world, which are not so visible at this point of time. But it's really a question of
02:59 reaching that pain threshold. And as those things break, we will see policymakers again
03:04 come to support markets, what we're seeing is demand slowing inflation kind of easing
03:09 do not at the pace Fed would like, but the thought processes in next three to six months,
03:16 inflation comes to a more palatable range of two and a half 3% for Fed. And I think
03:21 with with the slowdown, they would see at that point of time, it's likely that we will
03:25 get first signs of rate easing for the market. And that's where markets will move ahead of
03:30 economic recovery, like the way it always happens. So market typically move six months
03:34 ahead of economic recovery, but you get number of false starts, that market thinks that this
03:39 is the time recovery happens. And that's where it gets disappointed, then eventually the
03:43 recovery would happen. So our sense is, what you will see in six months from now, would
03:49 be a true rally. And that will be followed by falling rates, etc. And then real economic
03:54 recovery.
03:55 So until then, is the pain? Is it possible to predict that the pain is done and over?
04:02 Or do you actually forecast much more pain for equities currently?
04:06 See, again, pain is going to be relative across different economies, places where we've
04:12 seen significant excesses happen, in terms of misallocation of capital overbilled over
04:17 investment, etc. A good example is China, where the pain is going to be a bit longer
04:23 in terms of time to come out of time to clear out those excesses. Price correction we've
04:29 seen in those markets. India, US in our mind are one of the most resilient economies in
04:34 the world. These economies are going to benefit from all that's happening on near
04:39 shoring some of these investment cycle picking up, but still high rates are negative for
04:43 both these economies, things are going to slow down, we may see signs of mini recession,
04:48 but it's going to be a shallow downturn. It's not going to be kind of a deep downturn
04:53 because unlike what happened in 2004 to 2008, where there were significant overbills,
05:00 there were significant excesses, let's say in consumer credit in the US, in India, also,
05:05 we had a huge infrastructure binge. That's not visible. That's not visible, which is
05:10 why the downturns are going to be more of a short term downturns.
05:16 Got it. Now, I heard you make this point about how some of the impact of this slowdown
05:24 was visible. I mean, we've seen that happening in mixed ways for the for the Nasdaq, big
05:30 seven, big eight as the case may be though, Amazon, I thought was okay. But the reportage
05:35 from Meta or Google as well, while strong, led to a correction out there. So that market
05:40 is reeling in some bit of pressure recently. And I heard you say that back home in India
05:45 as well. You've seen the signs of that in corporate earnings. Can you elaborate a bit?
05:49 So we see typically, the way the slowdown hits is the best companies get impacted the
05:57 last. So it's the domino effect, which we say the weak dominoes fall first and eventually
06:01 it reaches the rest of the breed also. So if you look at what's happening in India,
06:05 you look at what came out through Asian Pains number, if you look at the QSR space, what
06:09 came through Westlife, and these were the companies which were the most resilient of
06:13 the lot until the quarter mark. So there is a slowdown, which is reached here also. And
06:17 I think that's where, but for banks, you look at the tech services, I think it is visible
06:24 in large part of the economies. And it's going to come through in the CapEx cycle also. So
06:28 the last part of the CapEx cycle, which one is seeing is government and kind of prioritizing
06:33 spends ahead of the elections. But that as we go closer to, let's say, Jan, Feb, and
06:39 these projects get completed, is going to roll over some of the corporate's may hold
06:42 back these investments or do in bits and pieces. So you will see those soundbites coming through.
06:50 And probably this downturn may last for the whole of 24. But markets are forward looking.
06:58 So our sense is markets will get a sense that look, six months later, somewhere mid of 24,
07:04 that the downturn is ending by end of 24. And then they start anticipating the recovery
07:09 basically.
07:10 Got it. So the pain could actually be, I mean, difficult to forecast all, but the pain could
07:16 deepen from a risk assets perspective from now until maybe March 2024, because we've
07:23 fallen about circa 7% from the tops, and we still not exactly achieved.
07:27 Absolutely. See, what you're going to also see is, look, the large capital didn't go
07:32 up much also. See, what we saw from Feb of this year was this almost manding rally in
07:38 the small mid caps. That's where retail is active. That's where a lot of these local
07:44 funds have got inflows. All that can reverse change, you know, and people who've been in
07:50 around in markets have seen when these mid caps correct, they kind of give away their
07:55 gains of six months in weeks. So it happens very quickly. So I think that's where some
08:01 bit of an experience helps. But I mean, I won't be surprised. And look, what worries
08:06 us is what is happening in the derivative market, the options market where retail is
08:11 taking a big liking to it. It's been an easy money. And time and again, what markets told
08:16 us is there's nothing such as easy money. It just gives you a nice lesson for future.
08:21 Got it. Now, just wondering from a tactical perspective, would you keep a keen eye out
08:26 for the kind of inflows that come into mid caps, small cap funds as a tactical play?
08:34 Because, you know, much, much like the term that this time is different is used and abused
08:41 massively this time around the last six to 12 months that inflows into that bucket, indeed
08:48 makes it slightly different because we never had this ball of money coming in every single
08:52 month at that end of the market.
08:55 So what I'm saying is go back to the last kind of cycle 2007-08. Look at the money which
09:00 was coming in the infra funds. We have the Reliance Power IPO, which happened. Everybody's
09:05 in it. But look, the market caps become big, then it's hard. And somewhere, not everybody
09:11 is momentum driven. There is smart money which starts booking profits early. And what market
09:16 or what the stocks are left with is weak hand. So I will not really look at only the flow
09:22 of money. And typically, the exuberance at the top is the highest. But then everybody
09:28 wants stocks to go up. And that's a very impatient pool of money. The moment the stocks don't
09:33 go up or start falling, they panic, they panic and then they cause their own downfall.
09:38 Got it. Now, okay, here's my question to you. There are some pockets which are very richly
09:44 valued relative to their historical valuations, in absolute terms as well, you could say railways,
09:51 certain infra names and so forth, maybe even defense to an extent, but where the book to
09:56 build ratios are very, very strong. And companies are adding capacities in each of these as
10:02 well. Now, my question is, how do you approach things like these, wherein the past valuations
10:07 make them look egregiously expensive, maybe to an extent, even after the falls that we've
10:13 seen, but there is potential earnings growth capacity addition, and corn call conversations,
10:19 which make you know or believe that earnings are stated to move higher over the next 12,
10:24 24, 36 months. So these will be names which are buy on depth. See, in any market, you
10:30 have names which are selling on rise and buy on depth. So if you look at the medium term
10:34 story, which is where countries like India, US or would benefit from manufacturing moving
10:40 away from China, they've got to build their own domestic capacities. I think these names
10:45 are the best proxies for that. And for India defense spend is going to be a significant
10:50 revenue driver for some of these companies. Now the way to play that is and a lot of froths
10:54 build up in these names. And one doesn't know typically when the excitement comes, people
10:59 lever up and buy these names. So the way to approach this is be patient over the next
11:04 three, six months, wait for the names to correct, wait for some of these excesses to kind of
11:09 clear out. And I'm pretty sure these names will be available 30 40% down and it's always
11:15 hard to time but after they've corrected 30% etc, maybe time to nibble and come with the
11:21 15-20% of the initial quantity, do that in four, five tranches. That's the way. If you
11:28 look at these stocks, also, we've seen number of names which go up 5x in markets and then
11:33 they're down 30-40%. And then they resume the next uplink. But there comes an opportunity
11:40 to accumulate these good names.
11:43 Yeah, well, I guess experience helps. The other end Rahul is the point that you've made
11:48 that big caps had rallied but large caps hadn't. Now, the two heaviest pillars or weightages
11:56 are kind of in a state of a different flux. I mean, banks are showing decent earnings,
12:03 but maybe nimb contraction predictions ahead. But valuations at any or all of these private
12:09 banks at least are the lowest that we've seen in the last 10 year history of sorts. So let's
12:13 start with banks. What's your sense there? Are they value currently and even if they
12:19 are, is it a good time to accumulate that value or could there be a better time ahead?
12:25 Yeah, I think banks will prove out to be resilient in this correctional downturn. Why? Because
12:31 look, as we discussed before, there are no significant excesses. What worries us at time
12:37 is what has happened on the consumer loans. But that's been largely done by NBFCs. Most
12:41 of the large banks have been proven. They're kind of a well provisioned for that. So unlike
12:46 what we saw in previous cycles, there are no large corporate loans which can go back.
12:51 So that's where the risk from delinquencies should a downturn happen is lower. The Ni
12:57 growth's been fairly resilient, anywhere between 15 to 22% for these guys. NIM looks stable,
13:03 but these names have become attractive. So anywhere between one and a half to two and
13:07 a half times book, these names clearly look attractive. I think where these names have
13:09 suffered this year is a lot of EMs fund got redemptions. And as those redemptions happened,
13:14 money moved out of banks because for any EM manager, his India exposure, one third is
13:19 banks. So that's where they got impacted. And as mid caps were moving locally, everybody
13:24 was interested to be part of that. But I think time and again, we've seen that when the correction
13:29 happens, mid caps kind of suffer more and you will see the reverse of that happening.
13:33 Some of that money moving away from mid caps and that would move to large caps. And that's
13:38 where the underperformance which we've seen of large cap banks versus mid caps is going
13:44 to reverse in the coming quarters.
13:46 Got it. Before I talk about the other pillar, which is IT, which will be the final question
13:51 that I have for you today, a word on consumption as well. You referred to the chinks in the
13:57 armor, if you will, of the numbers that Asian or Westlife gave out, Jubilant was another
14:02 example, Colgate Volume Growth, another example. These stocks are perennial favorites, largely
14:10 expensive most of the times, if not all, and are starting to show this. Do you believe
14:17 a corrective move is in the offing until things stabilize 6, 1 cents or thereabouts?
14:25 These names have a good kind of history, which is where market will get the benefit of doubt.
14:30 They'll go through a period of time correction, somewhat price correction. And the way we
14:35 look at the adoption is look at the big spike in inflation, which happened, obviously had
14:41 a pressure on consumers' wallet. The consumer was prioritizing his travel eating out because
14:47 that was something which was not done for last two years. And they were outside spends.
14:52 But once you've done with your foreign trip, or once you're done with your holidays, you
14:56 want to normalize those spends, basically. So I think give it about 12, 18 months with
15:02 no job losses, strong wage growth, etc. The consumer should feel confident again to spend.
15:08 And I think that's where we believe that that recovery in these consumer names in terms
15:12 of end volume growth should improve or pick up from it.
15:15 But even if the market discounts things six months in advance, if you're looking at a
15:20 slightly longer period for consumer confidence recovery, we're talking about a sideways move
15:25 or a corrective move or both for the next 6 to 12 months at the very least.
15:29 Absolutely. See what is going to happen is I think, and this is very similar to what
15:33 happened in the 2003-2008 cycle, that consumer did well, but it lagged the other sectors,
15:40 which was banks and industries. See, markets trade the rate of change. And within market,
15:46 the money flows between sectors which are growing faster. So if you take a three-year
15:50 view, we've got outside spends, which are going to happen on your cap goods, etc., or
15:54 building up capacity infrastructure in the country. So industrial benefit gain, you'll
16:00 have banks kind of your compounders coming in benefit. And the consumer sector growth,
16:05 leave aside one or two companies here and there, but it's going to broadly lag the other
16:09 sectors, which is where you will see the valuations kind of move more in favor of industrials
16:15 or financials over consumer.
16:17 Got it. Rahul, my final question is on tech services. And I was observing this, I was
16:26 doing some number crunching yesterday or the day before, and somewhere around September
16:33 2020 is when the numbers started coming in, or December 2020, the numbers growth started
16:39 coming in big time for IT companies, six months in advance, June 2020 is when we saw the re-rating.
16:45 And we've seen the de-rating as well. And from the looks of things, Q2 FY25 is where
16:50 possibly the Bayes effect starts coming into play for IT companies. Now, my question, if
16:55 we assume that discretionary spend comes back at some point of time in 2024, my question
16:59 is, one, is there a theory that maybe discretionary spends come back and therefore valuations are
17:07 looking okay, and therefore the next six months might be good times to buy into tech? Or are
17:11 you avoiding it because the state is, or there's a lot of flux out there and fluidity when
17:16 it comes to what happens to tech spends per se?
17:20 Okay, so there are two angles with. One is basically that, look, with this whole generative
17:26 AI coming through, you will not need as many coders. But there's, again, an equally strong
17:31 school of thought that says that as companies truly commercialize these pilots on AI, they
17:36 need the Indian IT services company to provide the spokesman of services around it. So that's
17:42 something that I think what's happened in the tech space over the last three, four years
17:46 is coming out of COVID as they were outside spends on technology, everybody thought it
17:54 to be a structure. The companies didn't call it out as one of, maybe they themselves were
18:01 not aware of that. And corporates themselves made outside spends. And then as things slowed
18:06 down, they realized that look, the tech spending went up significantly. So now they're below
18:10 that trend line. And like the way you said, give it six, nine months and it's going to
18:15 come back to the trend line. And suddenly things would seem like getting better again.
18:19 So this is a normal cycle which goes through. Look, tech spends are very similar to any
18:24 other business spends. When businesses feel confident, they do a bit more of it. And when
18:30 they are a bit worried about future, they hold it back. And Indian companies are very
18:35 much linked to these discretionary spends in terms of their revenue growth, et cetera.
18:39 A lot of these last deals take a while to ramp up where the size is also getting bigger
18:47 basically. So which is why we are not too negative on these companies. See, these companies
18:53 are at the forefront of what is happening in US. Digitalization is going to be core for
18:58 strategy for any good company globally. And they've shown time and again, this ability
19:04 to morph and catch the next wave. So whether it was post Y2K what happened, then you had
19:10 the cloud. And now the digitization and the generative AI, I think these companies would
19:16 emerge stronger after that.
19:18 So a good time to look at them or is the market going to give you a long period to be able
19:23 to look at them?
19:24 I think we'll get better opportunity in first quarter of next year. See what happens is
19:28 right now, still this is not digested by the market that US goes into recession. So once
19:33 you see US goes into recession, those spends get cut and the companies come and say everything
19:38 is back. That is the time when the corporate community turns negative. That is where you
19:45 will see resolutions attractive. And that's a good time as we've seen over the years for
19:52 long term investors to come in and make their as well.
19:56 Rahul, brilliant talking to you today, macro tactical calls, sectoral conversations. This
20:03 was just lovely to get this whole buffet from you. So thank you so much for taking the time
20:08 out and talking to us today.
20:09 Yeah, thanks for having me as always.
20:11 The pleasure was ours and viewers, thanks for tuning in.
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