- What will drive markets higher: valuations or momentum?
- Emerging trends to create long-term wealth
- More steam left in PSUs?
Niraj Shah in conversation with Bajaj Finserv Asset Management's Nimesh Chandan on 'Talking Point'. #NDTVProfitLive
- Emerging trends to create long-term wealth
- More steam left in PSUs?
Niraj Shah in conversation with Bajaj Finserv Asset Management's Nimesh Chandan on 'Talking Point'. #NDTVProfitLive
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TVTranscript
00:00 Niraj Shah and our guest today is Nimesh Chandan, CIO of Bajaj FinServ Asset Management.
00:07 The case for a chat today with him, well, the most obvious question that comes to mind
00:13 for almost everybody that what will drive the markets higher, valuations or momentum?
00:17 We will talk about the mega trends for long-term wealth creation and of course dwell on a topic
00:22 that has been top most for everybody, PSUs and it is great to talk to somebody like Nimesh
00:29 about PSUs because I do not have a barometer of how he thinks about it, so it is a thought
00:34 afresh from our perspective in understanding from him.
00:38 Nimesh, great having you, thanks for taking the time out, lovely having you on Talking
00:41 Point.
00:42 Good morning, Niraj, pleasure to be here.
00:45 The pleasure is entirely ours, I must say that.
00:47 So Nimesh, at the outset, the first question is about whether you are constructive on risk
00:55 assets including Indian equities for 2024 and maybe slightly longer after what is arguably
01:01 been a banner year at least for the broader end of the spectrum.
01:07 So let me divide it into two parts.
01:09 We track markets based on fundamentals what we see and we also follow certain behavioral
01:15 indicators which kind of tell us where the pendulum is leaning or moving toward whether
01:21 it is bullish sentiment or bearish sentiment.
01:25 On a fundamental level, we believe we are very close to fair value levels as far as
01:30 the Nifty levels are concerned.
01:33 The small cap universe would be trading slightly above average of what they have historically
01:38 traded.
01:39 They are not into a bubble zone yet but they are above average valuations.
01:43 Nifty is close to fair value and here then we have to be very, very specific on what
01:48 we are selecting as stocks to invest in to actually create better returns.
01:54 2024, by every year is the Avinami stock picker's year but it becomes more so in 2024 because
02:03 we are stepping into 2024 with reasonable to slightly higher valuations for many sectors.
02:10 Now on the other side, on the behavioral side, the pendulum is still bullish.
02:13 So the indicators we track from different markets on different periods of time, we see
02:19 the momentum to sustain, the bullish sentiment to sustain, it is probably fueled more by
02:24 seeing the interest rates peaking and more flows expected to come into India.
02:30 But those indicators, almost all of them are still on the bullish side.
02:37 Let's talk about the behavioral pattern in slight detail because market-wide that has
02:44 an impact.
02:45 A lovely book to read is The Crowd by Gustave Le Bon, way ahead of its time when the book
02:51 came out and gives us a great insight into how crowds think.
02:53 But for all of you who cannot read, let us ask Nimesh, how would the behavior of the
03:01 public at large or the crowd at large impact what's happening to the already skewed mid-cap,
03:11 small-cap end, even the primary market end if you will, because clearly what's happening
03:16 out there is indicative of some bit of fraud.
03:19 If not at the mid-caps and the small-caps, then certainly what's happening in the primary
03:23 markets, Nimesh?
03:24 As you know, Neeraj, that even when markets go into overvaluation territory, they don't
03:32 fall immediately.
03:33 The opposite is also true.
03:34 When they are completely undervalued also, they don't start moving up immediately.
03:38 There are always triggers and that impacts the sentiment of the crowd and that leads
03:43 to buying or selling based on the information that comes out.
03:47 So we tried various markets and see how each market expresses its bullishness and bearishness.
03:54 And we tried global markets and different markets like commodities, currencies, bond
03:59 markets as well as equity markets.
04:01 Now let's take an example.
04:03 How do say metal markets tell you that they are bullish?
04:08 So typically when metal markets are bullish on economies and business cycles, they would
04:13 buy industrial metals and they would sell precious metals like gold.
04:16 So that ratio changing gives you an indication of what the metals market is thinking.
04:21 Say the bond markets.
04:23 Bond markets typically see the spreads going down between corporate bonds and government
04:27 bonds when they are bullish on the economy, when they expect the corporate sector to move
04:31 well and obviously the opposite when they are bearish.
04:34 Look at equities.
04:36 Equities are typically a little late to react, but the momentum on say small-caps versus
04:42 large-caps, defensive sectors versus cyclical or say high beta sectors.
04:47 These are the indicators that tell you what the crowd is thinking, whether they are looking
04:52 to turn.
04:53 So for example, last few days we are seeing a good rally in pharmaceuticals.
04:57 Now that can be an alert that are people looking to more defensive positioning because valuations
05:02 have reached a certain level.
05:05 We look at not, we don't expect all the indicators to give us a bullish or bearish trend, but
05:11 what the majority are pointing to.
05:12 And as I said, they are still pointing towards more bullishness and I think that will push
05:19 the momentum and will continue to move higher.
05:24 You know, that's an interesting point you raise because when we were looking at, when
05:30 I was looking at the list of equity funds that have done the best in 2023 and I know
05:37 one year is not a good time frame to look at fund performances, but humor me if you
05:42 will, value funds came to the fore in a big way in 2023.
05:47 Now just using that as a barometer that fund managers have moved towards buying some bit
05:53 of value, right?
05:54 I am trying to understand if that pattern, Nimesh, continues well into 2024 when the
06:01 markets are looking expensive.
06:03 Would you as a fund house also largely stick to that kind of philosophy across your fund
06:10 offerings?
06:11 It's an excellent point, Neeraj.
06:13 So what we see is typically cycles of three to five years between even styles that outperform
06:20 for a certain period of time.
06:22 This may not be an exact math in terms of exactly three and a half or four years and
06:29 change or so, but it does give you an indication that what is the high probability from year
06:35 one.
06:36 Now you are absolutely right.
06:37 From 2020 onwards, there was a hunt for value and we have seen now at least in 2023 it being
06:43 expressed more strongly, but we've seen more like a three year rally in terms of value
06:50 stocks and value companies.
06:52 So I think a lot of that juice is already priced in.
06:55 On the other side, what we see is the quality stocks, I would say so-called companies which
07:01 have steady growth, good return on capital, good cash flows and were considered to be
07:07 say in 2018 the safest bets to be in.
07:10 Those for five years have kind of underperformed, like three to five years they've underperformed
07:15 and going into 2024, I think that becomes a better positioning than value.
07:21 Not that the momentum in value will immediately go down, but the positioning for an investor
07:28 who's looking for where the next wave coming, I think positioning should be on the quality
07:33 side.
07:34 Okay.
07:35 But that's interesting because I think the underperformance, I mean, they went through
07:39 this bout and I'm glad you mentioned cycles because I think they went through this bout
07:43 of severe outperformance wherein it was quality at any price until maybe COVID hit or even
07:50 maybe for six months, 12 months after that.
07:53 You think the hibernation ends because of globally linked factors as well?
07:58 Because a lot of talk around how if rates come off, then what happens to growth stocks
08:03 and quality stocks versus what comes to value?
08:05 Is that a factor as well?
08:08 So what we look for is which is a style or which is a sector or companies which are underappreciated
08:15 or underpriced.
08:17 Now this is slightly different from value.
08:20 So let's think of it this way, when market is focused on one side of say a team with
08:27 the sector or certain set of stocks, those become overpriced and what market is ignoring
08:33 on the other side become quite attractively placed or underpriced.
08:38 Sometimes value as a style becomes underpriced.
08:41 Nobody is looking at value, say if you brought a value fund in 2018 or 19, people will really
08:47 like wonder why you are bringing such a fund.
08:50 Now think about it this way that quality stocks are underpriced compared to what the premium
08:56 they used to have over other growth styles or value styles in the past.
09:01 And that becomes underpriced or underappreciated.
09:04 If I am paying say a 40 or a 50 price to earning ratio for all the companies, I better pick
09:11 up something where I know there is a mode, the business has a certain scalability and
09:17 return ratios are good because that deserves a higher valuation compared to just a cyclical
09:22 say a sector or a company that gets the same valuation.
09:26 Got it.
09:27 Nimesh, but can't that last for a lot longer than what sanity might suggest as a change
09:33 of style?
09:34 We have seen FMCG counters back in 2010 go through that period of severe flatline performance
09:42 despite the fact that they were high quality stocks and didn't do anything for such a long
09:46 time.
09:47 I mean, sorry to use this name as an example, but Avenue Supermarts high quality stock the
09:50 last two years has done nothing.
09:52 So can't that last for a bit longer?
09:54 How are you so confident about taking this pivot if you will?
09:58 So we look at areas which are underpriced and we also look at some triggers that can
10:05 really come in.
10:06 Now many of these companies if you see which have underperformed for the last three to
10:12 five years are typically in the consumer sector, in consumer discretionary say.
10:18 We've also seen many of them say the private banking side where like you know valuations
10:23 are at a five year or a three year kind of a low or sometimes even a decade low in some
10:28 cases.
10:29 Now we look at the trigger whether there are any business triggers for them.
10:32 We see on the consumption areas triggers coming in.
10:35 Typically when the economy does well per capita income is growing, discretionary spend starts
10:40 coming in.
10:41 Also when the capex cycle of a country starts, right, you know, it has a follow through effect
10:46 into consumption because of higher employment, higher salaries, recruitment, you see then
10:51 a follow up coming in terms of consumption side also.
10:55 You've seen certain areas where there was a kind of a revenge spending or post-COVID
11:02 kind of surge in travel, in hotels, USRs and so on.
11:08 I think a lot of areas where say bottom of the pyramid was not doing very well, say on
11:14 the rural consumption side also.
11:16 Now these areas are showing some green shoots or positive vibes and I think that those can
11:22 be the theme for the coming year.
11:24 Now you are absolutely right, markets can continue to be valuing only say certain defense
11:30 sectors, BSE sectors which they have done very well in 2023.
11:35 But a smart investor would know that this is where the fair valuations are coming in.
11:40 So with the visibility of these cyclicals versus the structural ways, it is time to
11:46 start considering the structural side of the business.
11:49 Okay, we'll talk more about this on the other side of this.
11:52 Very quick break.
11:53 You may stay on, lots more to talk about.
11:54 Be back in just a bit, viewers.
11:56 Thanks.
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16:05 Back with Talking Point in conversation with Nimesh Chandan, CIO of Bajaj
16:09 FinCerv Asset Management. Nimesh, I heard you speak about triggers, I hear you
16:14 speak about undervalued stocks, I would love to understand about pharmaceuticals
16:18 because I heard you mention that space as well, if I'm not wrong. Now tell us
16:21 because that pocket has been in flavor now for the last few days, is this the
16:25 market turning towards an underperforming sector likely having triggers and
16:32 valuations in its favor or are there other reasons? So pharmaceuticals had
16:38 many years of underperformance and frankly when some of the IPOs came in I
16:43 was worried that why are they pricing it so high but then the market started
16:47 turning favorable towards the domestic oriented stories first, that domestic oriented
16:51 story is the better to play pharma side and then this few listings and then the
16:57 whole sector which starts getting re-rated upward. Then there's some positive
17:01 news that came from say the generic side or the US generic side where you saw
17:06 pricing kind of action bottoming out, there was aggressive discounts of facts
17:13 earlier now the generic pricing starts bottoming out so that comes as a fresh
17:16 trigger for re-rating in pharma. However, in my experience whenever the pharma sector
17:23 overall moves together, I think it shows something about investors rather than
17:27 the investment that people are looking for ideas where they have some say a
17:31 defensive kind of a growth and I think this is what has moved pharma as a club
17:36 otherwise each company has very different kind of markets that they cater to
17:43 different geographies, different therapeutic segments, different molecules,
17:47 different R&D pipelines. So overall I think the move in pharma is because it
17:53 has underperformed for quite some time, they got re-rated upward now, from here on we
17:57 have to be more selective. We are bullish, we continue to be bullish on the
18:01 domestic pharma space because we see that as a structural story. We continue to be
18:07 bullish on the other healthcare space where say hospitals or diagnostics
18:12 labs are concerned. So those offer according to us also good opportunities
18:19 for a long-term investor. So pharma pack and possibly keep continuing on the
18:26 upward journey but we will see separation of men from the boys where
18:31 people are more confident about long-term prospects, those getting higher
18:36 valuation rather than the entire pack. The other question and we wrap up this
18:44 conversation with that but is on information technology Nimish. Again
18:47 anybody's guess a bit of an uptick in the prices and the valuations
18:54 recently but the commentary suggests that it's still caught in a quagmire of
18:59 sorts. Are you constructive, are you negative? I'm a bit cautious of that and
19:06 especially after the move that we have seen, maybe expectations have moved up quite a bit.
19:11 We've seen guidance this year by some of the major IT services companies and in
19:20 the US all the indications are there will be a soft landing but a landing. It's not
19:25 going to be a resurgence or growth or anything that is expected and which is
19:30 why Federal Reserve is looking to cut rates. Typically these are good businesses but
19:36 when the clients are not doing so well because their economic growth is slow, it doesn't mean
19:43 that there will be a surge in spending or a good pickup in IT services business. So
19:50 overall great companies in terms of cash flows and ROEs but I believe expectations have moved up significantly in this side of the market. Maybe we see some downgrades coming if the economy globally slows down further.
20:05 Okay, sorry I'm squeezing in one more because you'd mentioned that you look at
20:09 both ends of the crowd behavior or the popular/unpopular thing. What was popular,
20:14 ranked popular in 2023 was PSUs. I'm trying to understand, you can't brush, I mean we can't brush
20:21 the whole pack with the same brush, I know, or the same color but everything moved up.
20:27 Now is there merit in select pockets in the PSU basket or are you cautious because typically the
20:32 basket moves as a pack? No, definitely there is merit. Again here we see separation of men from the boys.
20:41 Where we've seen certain companies having good order books, good execution capabilities,
20:48 better margins and working capital especially with them. Those can continue to do well. However, I
20:55 think there is some bit of exuberance there, there is in the space overall that people are excited
21:02 to hear about stories on PSUs and they'll start pricing them in very quickly. So maybe a correction
21:09 is due but it's not an end of say the bull market for PSUs. Some of them can continue to do well,
21:17 some of the stories that we are seeing in terms of defense, in terms of renewable energies,
21:22 in terms of overall power capacity in the country, those are pockets which will continue. So there is,
21:27 it's about how much has already been priced and how many years of order books and quote have
21:32 been priced. And you're right, we can't paint them with the same brush. So here we will see
21:39 some kind of correction and then probably separation of men from the boys. We'll try
21:43 and talk about this in detail in the other conversations that we do in a minute but
21:46 lovely talking to you. Thanks for taking the time out and being with us today.
21:49 Pleasure being here. Thank you. That's a wrap on Talking Point viewers. Thanks so much for tuning in.
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