Investment Opportunities 2024 & Beyond | Macro Top-Down Perspective Webinar | PMSBazaar | Pace 360
Unlock Strategic Investment insights in our upcoming webinar: "Investment Opportunities in 2024 and Beyond: A Macro Top-Down Perspective" by PMS Bazaar. Explore the 2024 global economic outlook & the optimal portfolio for Indian HNIs with Mr Amit Goel Co-Founder & Chief Global Strategist, Pace 360.
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00:00:00 The US equity valuations are an extreme vis-a-vis the rest of the world.
00:00:05 We have come into 2024 on a very very optimistic note with very high valuations.
00:00:13 Every time the markets are at their peak, that is the time when US would generate or US would have the highest P/E ratio vis-a-vis the rest of the world.
00:00:25 When the beer market hits, this either goes into negative or it comes down sharply from the top.
00:00:31 India is probably the only major market in the world which has a higher beta than even US.
00:00:38 So whenever a downturn comes, US suffers but India actually suffers even more.
00:00:44 If you look at the credit card defaults of the small banks in US, that is at a record high.
00:00:49 So credit card defaults are going up, auto delinquencies are going up, which tells us that the consumer is not in a great shape right now.
00:00:58 Welcome you all for this timely and insightful webinar on topic Investment Opportunities for 2024 and beyond.
00:01:05 A macro top-down perspective.
00:01:07 Navigating the intricacies of Indian market requires both an astute understanding of underlying fundamentals and a key eye for the future trends.
00:01:15 Today we embark the journey to equip you with both.
00:01:19 To guide us through this landscape, we have esteemed speaker for the day, Mr. Amit Goyal.
00:01:24 Mr. Goyal is the co-founder and chief global strategist of Pace Group with over 26 years of experience in the financial services industry.
00:01:33 He has experience in managing and advising on proprietary and client investments across all the asset classes in both developed and emerging markets with Pace 360.
00:01:42 Under his leadership, Pace 360 has manufactured some of the best performing BMS and AI firms.
00:01:51 Mr. Goyal practices a unique investment philosophy blending the expertise from economics, finance, technical analysis, behavioral science and global politics.
00:02:01 This helps us with some understanding of the forces of shaping India's economic future.
00:02:08 His macro top-down approach enables him to arrive at the most viable asset allocations for consistent performance over the past two decades.
00:02:18 To talk on his educational background, he has done his masters in business administration in finance from the Faculty of Management in Delhi.
00:02:27 I would like to welcome you all to the show, sir.
00:02:29 So before giving the podium to you, I would request the audience to put their questions on the Q&A box and not on the chat box and not ask any stock specific questions.
00:02:38 So over to you, sir.
00:02:40 Thank you so much, Akshara.
00:02:42 So a very warm welcome to all our participants from all across the globe.
00:02:47 And thank you so much for giving us this opportunity.
00:02:51 So I'll just give you a very brief introduction beyond what Akshara has already said.
00:02:57 So PACE360 is the asset management arm of the three decades old PACE Group.
00:03:05 PACE Group specializes in algo trading and asset management.
00:03:10 PACE360, which is into asset management, is basically a macro top-down asset management company.
00:03:19 So we are macro top-down, we are multi-asset class, we are multi-geography, and we have some of the best performing PMS and AIF schemes in the country.
00:03:32 We have been able to generate a very significant alpha over the last many, many years.
00:03:38 So basically, we have invested a lot of money, resources on our research endeavors.
00:03:50 We've been doing this for about 28 years and we've got a very large research team which does in-depth research on all asset classes and all geographies, which is what macro top-down is all about.
00:04:05 So let me now start with the presentation.
00:04:10 So macro top-down is about trying to understand where we are in the macro economic cycle for the whole world.
00:04:20 And of course, for India, US, and some of the other most important geographies in the world.
00:04:27 So to begin with, we would want to share with you as to what has happened in 2023.
00:04:34 You might recollect that all of us went into 2023 with relatively pessimistic projections as to how the year is going to unfold.
00:04:45 But it was actually one of the best years in many, many years for risk assets.
00:04:51 MSCI World, which is truly a representative of what the world equities did in the year, went up by about 22 to 23%, as you can see in the chart.
00:05:05 Out of this 22.5 to 23% appreciation, only 5% came from EPS going up over the year.
00:05:17 For the rest of the increase, it was basically the expansion of the P/E ratios.
00:05:22 And when P/E ratios expand, obviously, it is a symptom of the fact that the market is very optimistic about the future earnings.
00:05:31 So we have come into 2024 on a very, very optimistic note with very high valuations and with very, very high projections for the EPS growth over 2024 and 2025.
00:05:50 So obviously, much depends on how the actual EPS unfolds vis-a-vis the expectations.
00:05:58 As you can see on the chart on the right-hand side, the US has had a negative EPS growth in 2023.
00:06:09 And if you look at the projections for 2024, they are extremely rosy with the expectations being that the Q4 of 2024, the earnings are going to go up by 18%.
00:06:20 So this is extremely, extremely optimistic projections as far as the US and as far as the world is concerned.
00:06:29 So if you look at this, the US equity valuations are an extreme vis-a-vis the rest of the world.
00:06:35 So US and India have been the two best performing markets over the last 24-25 years all over the world.
00:06:45 There are two angles to this. One is the secular angle, which is how these two equity markets have done over a period of time.
00:06:55 The CAGR, which has happened, has beaten pretty much the rest of the world, hands down.
00:07:00 But another very important component is the high beta factor because the markets have been bullish broadly over the last 20 years.
00:07:09 So these are two very high beta markets. You would note that every time the markets are at their peak, that is the time when US would generate or US would have the highest P/E ratio vis-a-vis the rest of the world.
00:07:26 And when the beer market hits, this either goes into negative or it comes down sharply from the top.
00:07:33 This has happened time and time again over the last 20 years and even beyond.
00:07:40 And India is probably the only major market in the world which has a higher beta than even US.
00:07:47 So whenever a downturn comes, US suffers, but India actually suffers even more.
00:07:53 So right now, the P/E ratio advantage of US vis-a-vis the rest of the world is 51.5%, which is at an all-time high.
00:08:02 And we expect that this is going to come down sharply over the next few years.
00:08:07 And similarly, India right now has a P/E ratio in excess of 21.5% over US S&P 500.
00:08:16 And this is probably going to come down even more sharply as India is more high beta than even US.
00:08:23 So this basically gives you the story of what has happened over the last 230 odd years.
00:08:31 So you would note that the trend rate of growth has come down from what 4.25%, 230 years back, to less than 2%.
00:08:40 This is basically US, but these findings are also applicable to pretty much the rest of the world, where the trend growth over a period of time has actually come down.
00:08:49 And you would see that the debt levels are extremely, extremely high.
00:08:54 And the debt productivity is pretty low, which means that for every $1 billion of extra debt, which the world economy picks up or the US picks up,
00:09:04 the incremental addition to the GDP is actually much, much lower than what it was.
00:09:11 Last time when the debt levels went up as crazily as they have in the last few years was just before the Great Depression,
00:09:20 when the debt levels went up to 300%. And we all know that did not end well.
00:09:25 So there was a deflationary bust immediately post 1929, and the debt levels came down from 300% of the GDP to less than 150% of the GDP.
00:09:37 So the only way that the debt to GDP ratios can come down are either through a deflationary bust or through a hyperinflationary phase,
00:09:46 which takes up the nominal GDP, but which sort of does not add to the debt levels, thereby bringing down the debt levels as a percentage of GDP.
00:09:57 What we expect from this time is that there is going to be a deflationary period of about two to three years,
00:10:05 which will see a massive fall in the private debt, not so much the government debt, but the private debt is going to come down,
00:10:13 which means the corporate debt, the household debt. But eventually that is going to be followed by a hyperinflationary phase,
00:10:20 which sort of takes up the nominal GDP and brings down the debt to GDP ratio.
00:10:28 But both deflationary as well as hyperinflationary phase are extremely destructive for the real GDP growth,
00:10:35 which is negative during both the phases going by the history.
00:10:42 So the US debt burden, the government debt burden is today increasing at a faster pace than at any time before.
00:10:52 It's going up faster than the Great Depression. It's going up faster than the Second World War in the 1940s.
00:10:59 And if you look at the last couple of years, the fiscal deficit has been higher than at all previous times, except for the COVID time.
00:11:11 This is even higher than the GFC when the fiscal deficits went up a lot.
00:11:17 So this has two implications. On one hand, it adds to the debt levels in the economy.
00:11:22 But on the other hand, what it means is that this extra fiscal spending has contributed a lot to the GDP growth for the US and pretty much the rest of the world.
00:11:31 And now the fiscal impulse is turning negative because the governments have become conscious of the fact that they cannot do pump priming anymore.
00:11:40 So which means that if the governments cut down on their fiscal spending, it will naturally have a negative impact on US as well as the rest of the world's GDP.
00:11:53 So on one hand, US and the rest of the world's governments are probably going to come down on their debt levels.
00:12:02 And on the other hand, if you look at the health of the US consumer, then that is not looking good at all.
00:12:10 So apart from the fact that the COVID era savings have pretty much been wiped out and the education loan servicing began about three months back.
00:12:20 Apart from that, if you look at the interest payment burden of US households that has gone up by a cumulative 550 billion dollars over the last few years,
00:12:31 which is just astronomical. And if you look at the credit card defaults of the small banks in US, that is at a record high.
00:12:39 So credit card defaults are going up. Auto delinquencies are going up.
00:12:43 So which tells us that the consumer is not in a great shape right now.
00:12:48 And the US economy has done well in 2023 only because of two factors.
00:12:54 One, fiscal spending by the government and second, a very, very robust consumer spending.
00:13:01 And that spending was also boosted by the pent up travel demand coming from the COVID years.
00:13:06 And both these elements, fiscal spending and consumer spending, are probably going to look down in 2024,
00:13:13 especially from the high base levels that we have today.
00:13:17 So another very important component of the US and the world economy is housing and real estate.
00:13:24 So we know that that is a significant portion of the world's GDP.
00:13:29 So maybe China is an extreme example where the real estate construction and housing piece is almost 25 percent of the GDP of China.
00:13:41 In the rest of the world, it is much less, but still it is a pretty sizable component of the GDP.
00:13:46 And you can see that on one hand, consumer is overstretched, their finances are overstretched.
00:13:52 And on the other hand, the house prices have gone up so much and the mortgage interest rates have gone up so much
00:13:59 that the US housing has pretty much become unaffordable for a very large percentage of the US population.
00:14:08 This does not augur well for the US GDP.
00:14:11 This does not augur well for the commodities demand all over the world. So on and so forth.
00:14:17 So last but not the least, if you look at the default rate in US and in Europe and even in UK and of course in China,
00:14:28 that the default rates have started going up at a smart clip, at a fast clip over the last one, one and a half years.
00:14:37 And the default rates have gone up more spectacularly on the speculative grade bonds.
00:14:42 As you can see, this has usually been a bad omen for the US and the world economy.
00:14:49 And you can see that before every recession has hit, the default rates have started going up and they usually peak out during the recession or just after the recession.
00:15:00 So we believe that the default rates have started climbing up. They will continue to climb more, which would mean stress for the banks.
00:15:09 It would mean job losses for a good percentage of the corporate sector.
00:15:15 And obviously it would mean lower GDP for US and the rest of the world.
00:15:21 So now we would want to know where is the world economy headed?
00:15:27 So we would look at various indicators which are leading indicators, which help us to understand where we might be headed over the next one year and beyond.
00:15:37 So this is a very important chart which talks about the M2 money supply.
00:15:45 This is basically US, but you can assume that pretty much similar ratios or metrics are applicable for the rest of the developed world, particularly UK and Western Europe.
00:15:57 And you can see that over the last 100 years, M2 money supply has gone negative only three times.
00:16:05 One was at the time of the Great Depression. The other one was 1937.
00:16:11 And the third one is now. And the previous two times that the M2 money supply went into the negative, we know that it did not end well.
00:16:20 So in the Great Depression, US equities went down by 90 percent and the US economy shrunk in double digits.
00:16:29 And similarly, in 1937, the US equities went down by more than 50 percent.
00:16:36 So we believe this is a leading indicator, which means that while M2 money supply has gone negative now,
00:16:43 but the effect of that will probably show up only over a period of time, which also tells us why we are more pessimistic about the US and the world GDP for 2024 and 2025.
00:17:01 So this is a very important leading indicator, which has not gone wrong any time in the last 50 years.
00:17:09 So basically, the US bank credit has gone into negative. The only previous time it has gone into negative was during the GFC.
00:17:18 And we know what happened at that time. Similarly, if you look at the bank credit standards, those standards have been going up,
00:17:27 which means banks have become more choosy and more rigid in their lending to households and corporates.
00:17:35 And if you look at the chart on the right hand side, the current levels of the US tightening standards is commensurate with a slowdown oblique recession.
00:17:48 While the standards have somewhat relaxed over the last few months because of the rise in the equity markets and because of the speculative bond yields,
00:18:02 spreads coming down, but even the current levels, even though they may have come down, they are extremely, extremely high.
00:18:11 And this has usually been a leading indicator for the unemployment rate in the US.
00:18:18 So whenever the lending standards have tightened in the US over the last 33 years, it has been followed with a certain lag by a rise in unemployment rate.
00:18:28 And we expect that to happen this time around as well.
00:18:33 So if you look at the US leading economic indicators that has also not gone wrong in the last 60 to 65 years,
00:18:42 every time US leading index has come down, it has been followed by an acute slowdown or a recession.
00:18:51 And this time around, the leading index has been falling for the last almost two years.
00:18:57 It acts with a bit of a lag, which means that while leading index has come down, but the GDP is expected to slow down and maybe go into negative,
00:19:08 which means a recession probably over the next one year.
00:19:12 And if you look at the chart on the right hand side, the leading versus lagging ratio, this is the worst in the last 60 years, except for the COVID time.
00:19:22 So which means that the current indicators are actually not so bad, which means that the lagging indicators are actually not so, they're not doing so badly.
00:19:33 So if you look at the US unemployment, it's close to the lowest of last 50 to 60 years.
00:19:39 If you look at consumer spending, that has also been robust.
00:19:43 But these two are precisely, they have always been lagging indicators.
00:19:48 The leading indicators are pointing to a slowing down in the US and the world economy while the lagging indicators are holding up.
00:19:56 But as we go along, even the lagging indicators will start coming down.
00:20:01 So this, these two indicators are definitely pointing to a coming slowdown or bleaker recession.
00:20:09 This is another indicator which has usually been a great forecasting tool for an incoming recession, which is trucking sector, because obviously trucking sector is about logistics.
00:20:25 And you know that logistics is a very important part of the consumer spending and the demand for goods.
00:20:33 So what we have seen in the past is that the demand for goods usually leads a slowdown in the economy.
00:20:42 And when this happens, then obviously trucking employees are laid off.
00:20:48 It has started this time around as well.
00:20:50 And you can see that over the last 33, 34 years, whenever that has happened, it has been either accompanied or it has been followed by an eventual recession.
00:21:04 And we expect this to happen this time around as well.
00:21:09 So this has happened over the last 40 years without any fail, which is that whenever the Fed policy rates are at their peak, the economy is still doing pretty well.
00:21:24 And people believe that there is going to be a soft landing.
00:21:28 Every time Fed policy rates have hit their peak, the consensus has been on a soft landing, and which is precisely what has happened this time around as well.
00:21:42 And each one of these times we have seen a slowdown.
00:21:45 Sometimes it has been followed by a soft landing, which is basically, let's say, three out of 10 and seven on 10 or six on 10.
00:21:54 It has been a hard landing.
00:21:57 This time, the market is expecting no landing, which means that the US economy is not going to slow down.
00:22:05 But the indicators suggest that is not what is going to happen.
00:22:09 At the very best, it's going to be a soft landing.
00:22:12 And at the very worst, it's going to be a hard landing.
00:22:16 And our understanding is that we are headed for a hard landing, not for a soft landing.
00:22:25 So now we talk about the leading indicators for global equities.
00:22:30 And while we've discussed the leading indicators for the US and the global economy, now we talk about the leading indicators for global equities.
00:22:40 So this is a very, very important chart.
00:22:43 So the left-hand chart shows the growth trend of S&P 500 over the last 65, 66 years.
00:22:52 So there is a trend line, which is gradually, you can see it's curving up.
00:22:57 And whenever we have gone up significantly above the trend line on S&P 500, we have always, without fail, come back below the trend line.
00:23:08 So it happened during the dot-com bust.
00:23:11 It happened during the GFC.
00:23:14 It happened during the COVID time.
00:23:17 And it's probably going to happen again.
00:23:19 So this time around, the gap between the trend line and the current level is so, so high that if it has to come down the trend line, this definitely means a cut of more than 35% to S&P 500.
00:23:36 This is what this indicator is telling us, that whenever S&P goes into a bear market, it's not going to stop at 20%.
00:23:44 It's going to go down all the way to 35% to 40% fall from the tops.
00:23:49 And we may not have made the top so far.
00:23:51 So we probably will make a higher top over the next few weeks.
00:23:55 But whenever it starts falling, it will go down by more than 35% to 40%.
00:24:00 On the right-hand side, you can see the valuations bit.
00:24:04 And you can see that there is a trend line there as well.
00:24:07 And this one goes back to 150 years.
00:24:10 So whenever the trend line on the valuations has gone significantly higher than the trend line, it has always been followed by a fall below the trend line.
00:24:23 This has happened every time in the last 150 years.
00:24:27 And if it has to happen this time, it's going to be a mighty fall because right now this ratio is at 31.4.
00:24:35 And the current trend line suggests that it should be at 21, which again means that the P/E ratios are probably going to come down by 30-35%.
00:24:49 So both the indicators are suggesting that whenever the S&P 500 goes into a bear market, you can expect a cut of more than 35% from the top.
00:24:58 So contrary to what people believe, rate cuts are not bullish for the stock market.
00:25:06 So we've got this indicator going back to last 60 years.
00:25:09 Every time the Fed has cut rates, the equity markets have come down.
00:25:14 So while the Fed pause is bullish for the market, Fed pivot is bullish for the market.
00:25:21 But when Fed starts to cut rates, it has always been negative for the equity markets.
00:25:26 It has happened before and this time around also we expect this to happen.
00:25:32 If you look at even the earnings picture, the rate cuts do not translate into higher earnings.
00:25:39 So this picture goes back to the last 20 years and whenever the Fed has cut rates, you can be absolutely sure about it that the earnings have actually come down.
00:25:52 The earnings usually do not come down because of the Fed cutting rates, but both the things happen together.
00:26:01 So they have a high correlation, not necessarily causation because both are a result of slowdown.
00:26:08 So the Fed cuts when there is a slowdown and when there is a slowdown, the corporate earnings actually go down.
00:26:16 So this is again a very important indicator and it has often predicted bear markets.
00:26:24 It has often predicted a rise in the unemployment rate. It has predicted a whole lot of things.
00:26:31 And so if you look at what the relationship between the Fed rates and the VIX, you would see that when the Fed rates hit their peak,
00:26:42 it normally acts as a leading indicator and the VIX would go up within the next two years.
00:26:50 It has happened over the last 30 years every time.
00:26:54 So the Fed rates have hit the peak about five months back and we expect that the VIX ratio is also going to move up or start moving up over the next few months.
00:27:08 We are right now close to a multi-year bottom on VIX, but this indicator is going to act with a bit of a lag and you will see this going up over the next six months.
00:27:22 If you look at the chart on the right hand side, it shows how VIX and S&P are inversely correlated.
00:27:29 So when the VIX is at its lowest, that is when the S&P 500 is close to its top and when the VIX starts going up, that is when the S&P starts falling.
00:27:39 So right now you can see S&P is close to its highest and VIX is close to its multi-year low and we expect both of them to reverse over the next six to eight months.
00:27:50 So 2023 was like the narrowest rally ever.
00:27:56 You know that this rally in the US was led almost entirely by the Fangma stocks, which contributed to more than 75-80% of the total rally in the US S&P 500.
00:28:10 And our record, the track record of this indicator over the last 45 years suggests that whenever you have a very, very narrow rally, it has usually been followed by a fall in equities.
00:28:26 Because usually, and it has always happened before, that the market becomes more and more narrow.
00:28:34 The leaders become, it is only the leaders which attract the most investment in the last, at the fag end of the bull run.
00:28:43 And it has happened every time. You can see last five recessions, every recession was preceded by a very, very high percentage of stocks which underperformed the index.
00:28:58 And when the recession hits or when the slowdown comes and the US equity is going to a bear market, that is when you would see the markets coming down.
00:29:09 And this time, this has been the narrowest ever rally in the last 45-50 years, which tells us that the fall is going to be equally spectacular.
00:29:22 So this indicator suggests that the markets are not really that forward-looking after all.
00:29:29 So we all believe, usually the traditional wisdom is that the markets are so wise that they discount everything in advance.
00:29:38 But going back to the last 100 years, what we have observed is that the biggest chunk of the bear market correction or bear market reversal happens after the recession hits and not before the recession hits.
00:29:55 So 81% of the losses happened during the recession. At the time of the Great Depression, almost 86% of the losses happened during the depression.
00:30:08 But on an average, you can see that 81% of the losses have happened during the recession, which tells us that if the US were to go into a recession in the second half of this year,
00:30:21 going into that recession, you can probably on an average expect US equities to fall by maybe 15% to 20%. But bulk of the losses are actually going to happen during the recession.
00:30:33 So now we come to the next chapter, which is about the India story. So India is talk of the town. India is the blue-eyed boy of the global economy and the global markets.
00:30:47 And we haven't seen this kind of positive noises, positive feedback on India at any time before in the past.
00:30:59 But we will present you some indicators which give you a slightly different picture using some macro indicators which are actually very, very effective in predicting or analyzing what's going on.
00:31:17 So if you look at the 2019 estimates of where the economies would go over the next five to six years and where they have actually gone, you can see that India has actually underperformed the most out of emerging Asia, ASEAN, China, and advanced Asia.
00:31:39 So the best has obviously been advanced Asia, which means basically Japan and South Korea. But if you look at India, we have really underperformed the expectations that the IMF and the world agencies had from us in 2019.
00:31:55 We are down like 11% from that trend. So our GDP at the moment is 11% below where it should have been if we had performed as per the projections.
00:32:07 So what that effectively means is that while India's GDP growth has been extremely robust over the last four to six quarters, but this is not our trend growth.
00:32:21 This is basically a bounce back from the suppressed demand levels of the COVID time. But we have now pretty much filled up that demand. So the trend growth of the Indian economy as per this metric is not 7, 7.5%.
00:32:39 The trend growth in the current context with a population which is growing by only about one or lesser percent per annum. So we believe the trend growth for India is about 5%.
00:32:52 And the last six quarters are not representative of what you can expect from the Indian economy over the next few years. A, the world is slowing down, which is almost always accompanied by an Indian slowdown as well.
00:33:06 And secondly, the pent up COVID demand has more or less played out. And so we believe that over the next eight quarters, we'll come back to our trend growth, which is about 5 to 5.5% per annum.
00:33:20 So we all know that China plus one is much talked about in the world today. And almost every economist is suggesting that all economies of the world, which should benefit as an alternate manufacturing hub of the world, are going to benefit from the fact that the supply chains are being shifted away from China.
00:33:46 So this is what is called China plus one. But the question that we ask is, is India going to be that one? So far, the performance suggests that India is not probably the number one candidate.
00:34:01 Even a small economy like Vietnam has done much better in actually taking the share away from China in terms of manufacturing. And the reasons are not far to seek. So while the Chinese manufacturing labor cost has skyrocketed over the last 15 years, but you would see that even the Indian costs have gone up.
00:34:24 So if China and China and we are in fact higher than Thailand and Philippines, we are definitely lower than Vietnam and Malaysia. But then their manufacturing infrastructure is much better than India.
00:34:41 So China is a much more competitive hub than India is. And Thailand and Philippines, they have a lower cost. And plus, we must not forget that all these economies are part of Southeast Asia and East Asia, which means that they are highly, highly connected with one another.
00:35:02 And they've got very low tariffs when parts move from one economy to the other. So they have a significant advantage. So any company of the world would prefer to be part of that ecosystem when it is thinking of relocating from China rather than India, which is far from that ecosystem.
00:35:22 And plus, of course, there are tariff barriers and plus, of course, there are other issues as well. So we believe that while India is going to gain from China plus one, but it is not going to be the principal gainer.
00:35:36 So this is something which may come across as a startling revelation for some of us. But fact of the matter is that GDP of an economy and the stock index of that economy are not necessarily linearly correlated.
00:35:54 While they are correlated, but there are times and there are long periods of time when they disjoin or disconnect from each other. So if you look at the chart on the left hand side, you can see that coming from 1980s, China has multiplied its GDP by 43 times.
00:36:15 And one would have thought that over the last 35, 40 years, the Chinese stock market would have been the best performing market in the world. But that is not what has happened.
00:36:27 Chinese index, the MSCI index is actually down significantly compared to where it was 35 years back. So it has actually given you negative returns, even though the GDP has gone up by 43 times.
00:36:41 And this is MSCI China. So this is in dollar terms. If you look at the chart on the right hand side, you will see that the best performing stock market of the world, the MSCI India is the number one, which has gone up by 25 times over the last 30 years.
00:36:59 Even though India's GDP has gone up in dollar terms by only 12 times, but India is number one and not China and China, which is the number one economy of the world in terms of how much the GDP has gone up by is actually the worst performing market of the world.
00:37:17 And even in India, we have seen phases when the GDP has continued to go up, but the markets have not gone up or in fact, the markets may have actually come down. So there was this period of 93 to 97, which saw robust economic growth in India, but the markets were down.
00:37:35 And similarly, there have been many, many other periods like that. If you look at Brazil, sometime between 2008 and 2009, MSCI Brazil came down by 75% while the GDP was flat. So all your advisors who tell you that just because India's GDP in dollar terms is going to go up from 3.6 trillion to 5 trillion, that is why your stock market is going to go up by 50% or 40%, you need to think again.
00:38:03 This chart does not tell you that the stock market will move exactly in tandem with the GDP. So this chart tells us that GDP growth is not also very highly correlated with corporate profits.
00:38:23 We just saw that GDP growth and stock market are not necessarily correlated, but even GDP growth and corporate profits are not correlated. And here I use India's example, between 2008 and 2018, as you can see from this table, our nominal GDP went up from 53 lakh crores to 189 lakh crores.
00:38:47 We went up by more than three and a half times. But in that entire period, our EPS for Nifty 500 was essentially a flat line, which means that on a real basis, the EPS went down because on a nominal basis, the EPS was essentially flat.
00:39:05 So, and this happened over a 10 year period. So this tells you how it is possible that the GDP of the economy may go up, but the corporate profits or the EPS does not go up. So this chart tells us that over the last 20 years, which has been a golden period for the Indian stock market and also for the Indian economy, we were a non-existent player in the world in the global scheme of things,
00:39:33 in 2003. And look at where we are today. We are today more than a 4 trillion stock market. We are a 3.6 trillion economy and we are darling of the world when it comes to stock market and it comes to the economy.
00:39:49 But here is what you see over the last 20 years, while our GDP in dollar terms has gone up by 9.26%, our EPS of Nifty 500 in rupee terms has gone up by only 7.59%, which means that our EPS in dollar terms has actually significantly underperformed our GDP growth rate in dollar terms.
00:40:17 The best phase for the Indian corporate sector was between 2003 and 2008, which was also the best phase for all the emerging markets of the world. So here is what you see. The GDP of India in dollar terms went up by 14.5% CAGR over this 5 year period and the EPS in rupee terms went up by 23.96%.
00:40:43 This is the best any 5 years for the Indian corporate sector going back to many, many decades. Between 2008 to 2018, this is a startling picture, our GDP in dollar terms went up by 8.5% per annum, while our EPS in rupee terms went up by only 1.83%.
00:41:07 And between 2018 to 2023, the GDP in dollar terms has gone up by 5.7% and the EPS has gone up by 19.4%. So what it tells you is that today we have extremely high P/E ratios and the only way that those P/E ratios can be justified, anybody buying Indian equities today, when the P/E ratios are close to 25,
00:41:34 if you expect a 15% return on your money on a CAGR basis over the next 10 years, the EPS of Nifty 500 should go up by more than 25% per annum. But it has never happened before. In fact, the expected GDP growth rate in dollar terms is only about 8% and that's the most bullish projections for the next 10 years,
00:42:01 which means that the EPS growth in rupee terms for Nifty 500 going by the history is not going to be more than 6-7%, which means that anybody who's buying equities today is going to be, in our opinion, they are going to be shortchanged in the future because they will get 15% return only if the EPS goes up by 25%.
00:42:30 Over the next 10 years and more than 20% over the next 20 years. But the expected, the most optimistic projection for the GDP suggests that the bottom line, the EPS is not going to go up by more than 6-7%. And in fact, the only way to beat this phenomenon is that you buy equities when the P/E ratios are low.
00:42:54 So in 2008 at the bottom, the P/E ratio of Nifty 500 was 10. Today it is about 25. Anybody who bought it at 10 made a lot of money over the next few years, even though the EPS did not go up. But because you bought the market so cheap and the P/E ratios expanded over a period of time, the investors made a lot of money.
00:43:16 But that's not the case today. It's exactly the other way around where the P/E ratios are so high that the chances of disappointment are so much higher than chances of an upward surprise. So this, you know, we've talked about this point a little while back as well, that during the beer markets, much as we would want to believe that India is a secular story and we are immune to the world beer markets, but this is not what the history suggests.
00:43:45 In this century so far, most of the US beer markets have been exceeded by the quantum of the Indian beer market. So in the dot-com bubble, the US went down by 51%, we went down by 69%. In GFC, the US was the epicenter of the crisis, the subprime crisis, but the US went down by 58%, we went down by 68%.
00:44:08 In COVID time, the US went down by 35%, we went down by 40%. The only time there was an exception was 21 to 22, but then that was not really a beer market as such. So what this indicator tells you is that India is a high beta market. And next time when the world goes into a slowdown, next time when the world goes into a beer market, if the US goes down by 35-40%, don't expect a 20% cut from the Indian market.
00:44:35 History suggests that India is going to fall by more than what the US is going to fall by. So the current indicator, so the greed and fear indicator tells us that the greed on the Indian stocks is at a 10-year high. And this indicator suggests that whenever the greed factor, and there are a whole lot of indicators which go into calculating this greed, but whenever the greed goes up to very high levels
00:45:04 and then it starts to come down, it has almost always been followed, as you can see from the red arrows, it has almost always been followed by a beer market. It has happened 6-7 times before in the last 15 years and we are very very sure that it's going to happen this time around as well.
00:45:26 So, commodities and precious metals, we would want to see what opportunities this particular sector presents to the investors. And we are a macro top-down fund which invests across asset classes, so obviously commodities and precious metals is an important venue for us to invest, but obviously we would do it only when the risk return is favourable.
00:45:54 So what we see here is that in the last 100 years there have been basically 4 commodity super cycles. The last one ended in about, let's say 2007-08. And this happened at a time when China had joined the WTO. There was this massive construction boom all over the world. There was this massive real estate boom which resulted in huge growth and demand for commodities.
00:46:22 So there was a short super cycle between 2015 to about 2022, but it was nipped in the bud. It did not go all the way and various global factors suggest to us that we are right now not in a commodity bullish super cycle, rather we are looking at a period of deflation in the world which means commodities are going to go down.
00:46:51 Which means commodities are going to come down over the next few years, but eventually we believe there is going to be another commodity super cycle and that will probably happen, that will probably begin when the deflationary phase comes to an end and we enter a hyperinflationary phase and we expect that to happen probably after about 3 years.
00:47:14 So on one hand commodities are probably not in a super cycle and probably they are looking bearish, but the trajectory of gold is exactly the reverse. So we have seen 2 gold super cycles in the last 50 years. One was in the 1970s which was led by Nixon when he took dollar off the gold standard.
00:47:37 And the second one was between 2001 till 2011 and we believe we are on the cusp of yet another super cycle on gold. Right now gold is about $2030 and we believe this price is going to go up by 3-4 times over the next 5-6 years.
00:47:57 And there are a whole lot of factors behind this. You can see we have some 10-12 different indicators which tells us that we are headed for a super cycle and some of those indicators are of course falling gold production, central bankers are accumulating gold, then the government debt is at historical levels which has usually been great for gold.
00:48:19 Gold to S&P 500 is near all time lows and we believe that we are headed for a deflationary phase and just like in 2019-2020 gold did extremely well when we were in a sort of a mini deflationary phase, we believe it's going to do extremely well this time around as well.
00:48:39 So as mentioned before gold prices versus S&P 500, they are practically at the lowest of last 25 years and we believe that's a great omen for the gold prices. And gold miners actually, they have underperformed gold by a huge margin over the last 7 years.
00:49:01 As you can see from 2015 till now gold prices have gone up by almost 80% but in this while gold miners have actually gone nowhere, rather they have actually gone down. This is because of the fact that the costs of gold mining have gone up over a period of time but what we believe is that there is going to be a quantum rise in gold prices over the next few years which means that the profits of gold mining companies are going to go up by like 5 times or 10 times because of the opportunity.
00:49:29 So they are going to go up a lot more than the gold prices. So now we come to the financial mega trends of 2024 and beyond. So we believe that the world is headed for a deep deflationary recession and we've talked about a host of different indicators which tells us that this is going to be a deep recession.
00:49:55 In fact, we find echoes of pre-great depression US in today's world. We see that there have been so many bubbles across asset classes and parts of the economy. So the stock market itself looks like a bubble, there is a bubble in technology, there is a bubble in private equity, there was a bubble in SPACs, there has been a bubble in real estate in many parts of the world,
00:50:23 there has been a bubble in debt. So there have been so many bubbles across asset classes, across geographies. So we find echoes of the great depression in today's world. So we believe that China is heading for an economic Armageddon and we know that their residential real estate is absolutely in a horrendous shape, their commercial real estate is going down the tube,
00:50:51 their youth unemployment rate is at its highest, provincial governments are so overstretched and so over indebted that they cannot be the engine of their growth anymore. Consumer spending is suffering, consumer confidence is down, their stock markets are down and China is into a deflationary phase.
00:51:13 So a whole lot of indicators, their laundry list of troubles is pretty much endless and we believe that China is now inching closer to an eventual economic Armageddon which is going to happen over the next two years. We also believe that there is Japanification of China happening, there is Japanification of Europe happening. So we are into a whole lot of troubles when it comes to the whole world economy.
00:51:39 We see echoes of 1966 to 1982 US in the Indian context. So between 1966 to 1982, 16 years the US stock market went nowhere. It was a secular stagnation for the US stock market while the nominal GDP went up by 9% CAGR over the 16 year period.
00:52:07 So this was a period when Dow Jones Industrials went up to a 1000 level. Over the next few years it did fall down to 50 but that was not the end of the story. The story was much longer than that. It went down to 50% of where it was in 1966, then it recovered but overall for 16 years Dow Jones was pretty much in the same range.
00:52:31 So, Dow Jones was down by 1000 in 1966 and in 1982 it was 800 something which means on a nominal basis US equities were down 10% and on a real basis they were down more than 70%. And this was the beginning of the super phase for the US economy and the best part of the US economic history over the last 100 years started in 1980s.
00:52:57 So, we are in a secular stagnation period and we see echoes in the Indian story of that period. As mentioned we are on the cusp of a bullish super cycle on gold which will take the gold price up maybe 3-4 times over the next few years and we believe that long term US treasuries will go up again just like they went up between 19 and 20 because we are headed for a deep deflationary recession which is extremely good for treasuries and we believe that treasuries will go up again.
00:53:25 And we believe that treasuries will generate double digit returns in fact very very handsome maybe even 20-25% CAGR returns for the next 2-2.5 years.
00:53:37 So, pretty much the end of the presentation. Now we just want to give you a very brief picture as to how we are doing in our PMS. So, we have this macro top down PMS. We are pioneers in the macro top down in India and we have got the broadest bouquet of PMS strategies in India.
00:53:59 We have got products from fixed income right up to the most aggressive products which do aggressive investments in equities and whole lot of other asset classes. So, we have got products across the entire spectrum and we have outperformed our benchmark by a huge distance.
00:54:23 So, you can see that the flagship scheme that we have, Trezor Privy, that has gone up by 19% CAGR since its inception while the benchmark has gone up by 13.8% and we expect our alpha to be much much higher than what it has been over the last few years.
00:54:43 This is because we expect that the benchmark is going to go down now because the Indian equities are looking bearish to us over the next few years. We believe that the Indian equities will fall more than US and US is probably not headed for a less than 35-40% fall as we have just explained before.
00:55:03 So, the benchmark is going to be negative and we hope to deliver a double digit team return to our investors even in a bear market. So, our alphas are probably going to be in the region of 20-25% CAGR over the next few years.
00:55:19 So, this brings us to the end of the presentation. Thank you so much for your attention and now we are open to questions.
00:55:27 Thank you sir. Thank you for this one brief presentation and I must say as the topic suggests, it was a typical macro top-down approach. You have already explained to us today. Thank you for that.
00:55:41 And let me ask my very first question. What are your long-term views on Indian economy and Indian markets?
00:55:47 Right. So, see if we really talk about the long-term, we are actually bullish on both Indian economy and the Indian markets. And when I am saying long-term, I mean the next 20 years.
00:55:59 But the problem is that we are probably headed for a secular stagnation in the stock market. So, we believe that we are probably going to enter a bear market in Indian equities because we are in bubble territory right now in terms of valuation and in terms of levels.
00:56:16 So, we are going to go down from here and even post that we may be in some sort of a secular stagnation for many more years apart from this bear market.
00:56:28 But over the long term, we still believe that we are still the best house in an ugly neighbourhood. Our economy is going to outperform. This is probably going to be India's century.
00:56:41 But we believe that the time to buy, time for this story to play out is not now. So, the idea should be that you should continue to make inflation plus 10% returns on your portfolio as we go into a bear market in the world and in India.
00:56:57 And then when the real India bull run starts, like for example, it did in US case, the real bull run started in 1982 in US. But before that, we had a secular stagnation for 16 years when the real S&P 500 went down by 70%.
00:57:14 So, my assumption is that we are in for a bear market, then a secular stagnation, but eventually we are going to outperform both in terms of the stock market and in terms of the economy.
00:57:27 So, just before the real India bull run starts, we should then, till that point, we should be probably in a macro top-down kind of strategy which can help you to make inflation plus 10% return even in equities bear market.
00:57:41 And then you start with a great advantage compared to the rest of the crowd when it comes to playing the real India bull run, which is probably going to start in probably not before the next five to six years from now.
00:57:57 Thank you, sir. Thank you for that. And then the next question, because of time constraint, I'm quite fast in taking questions. Don't mind me that.
00:58:04 How has your view changed on global economy and financial markets evolved from Jan 2023 and Jan 2024, sir?
00:58:14 Perfect. So, coming into 2023, we were actually less pessimistic than the rest of the economists.
00:58:21 We did not think that the first half there is going to be a disaster in the markets or in the economy, just like they thought.
00:58:28 We were expecting a slowdown only in the last one quarter, but we were not pessimistic on the equities coming into 2023 only because there was too much of pessimism that time around.
00:58:42 But we are exactly on the other side right now. Most of the economists and market thinkers are extremely bullish and extremely positive right now.
00:58:52 None of them is expecting any landing. They are expecting the US economy to remain robust. They are expecting the stock markets to do well.
00:58:59 While we are clearly very, very pessimistic when it comes to the prospects for the US economy, the world economy, the US equities, the Indian equities and the world equities.
00:59:11 And particularly, we believe that after this quarter, this quarter, maybe the markets, I mean, till February, maybe the markets do not go down so much and we remain kind of sideways.
00:59:21 But from March until October this year, we see sizable corrections and reversals in the equity markets.
00:59:28 And we definitely expect the US recession in the second half of this year.
00:59:32 So we are we have come into this year much, much more pessimistic than any one of our peers the world over.
00:59:41 OK, so a lot of money has come into the Indian equity markets from the DII because of the SIPs and other inflows from mutual fund insurance products.
00:59:50 So will the flow of the money to Indian markets be bullish over the medium and long term?
00:59:55 Yeah, I know that a lot of people think that just because there is about 16 to 17 thousand crores of SIP money coming into the coming into Indian equities every month,
01:00:09 money going into insurance, pension funds, provident funds, all that lot of money is coming into India, mostly from domestic sources,
01:00:17 but also from the FIIs in the recent past. But fact of the matter is that no asset class in the world can sustain for a long period of time above its real value just because there is flow of money.
01:00:35 Believe you me, if there is flow of money coming from one side, there are going to be outflows as well.
01:00:42 There are going to be IPOs which will take away some of the money, OFS, there are going to be QIPs.
01:00:50 Then a lot of promoters may want to cash out, a lot of insiders are going to cash out, a lot of smart money is going to cash out.
01:00:59 So eventually the market can be sustained only by its reasonable valuations and not because of the inflows of the money.
01:01:07 So we believe that these inflows will not really affect the long-term trajectory of the market.
01:01:14 We expect the next few years to be bearish. In fact, these SIP flows may eventually, these domestic mutual fund flows,
01:01:23 they may eventually become a headwind rather than a tailwind for the markets because when, if there is a secular stagnation in India,
01:01:31 in the Indian markets, which is what we expect, then a lot of these people are actually going to lose faith
01:01:39 and a lot of these SIPs may eventually be discontinued or people may even redeem their mutual funds.
01:01:45 So I think these tailwinds could become headwinds. But I would want to reiterate at this point that we are not expecting the Indian economy to stagnate.
01:01:55 The Indian economy will probably chug along at a lower rate than what it is doing right now. It is the stock market of India,
01:02:01 which is going to be in a bear market and then into a secular stagnation phase because of the high valuations.
01:02:08 And eventually these tailwinds will become headwinds and these inflows may eventually pave way to either no flows and eventually maybe even outflows.
01:02:18 Okay, thank you. So thank you for that. And I could see a lot of questions falling onto the podium. I might not take everything. I'm sorry.
01:02:24 So this is my last question for the day. How do you expect to make mid-teens returns if the Indian market is headed for a bear market, as you said?
01:02:33 So what will be your input on that? Sorry, can you repeat the question, Akshay?
01:02:38 How do you expect to make the mid-teens return if the Indian market had headed for a bear market?
01:02:45 I'm so glad that you asked that question. So basically, being top, back row top down and being a multi-asset fund management company,
01:02:55 there are enough avenues for us at any point of time. You know that at any point of time, in one part of the market or in some parts of the market,
01:03:05 there may be a bear market, but in other parts of the market, there is a bull market going on. And we are multi-asset, multi-geography.
01:03:12 So we are extremely bullish on precious metals. We are extremely bullish on long duration Indian government bonds.
01:03:20 And then from time to time, equity markets are going to get oversold. For example, they did in October and we were actually big buyers of Indian equities in October.
01:03:30 So every time the Indian equities, the pendulum swings and the Indian equities, they become oversold and they become reasonably priced.
01:03:39 We would sort of get into or buy the Indian markets or we could even buy the equity indices from the rest of the world,
01:03:49 which are represented in the form of ETFs in India. So every time any one of these markets goes into a bear market or goes into a deep correction
01:03:59 and we see an opportunity, we'll buy them. And when the sentiment normalizes, we will sell them.
01:04:04 So this is more like guerrilla warfare rather than a perennial, you know, rather than fighting a perennial war.
01:04:11 So we will take, we will get money from our, from equities in 2001 when the world was down 50 percent, we made about 15 percent return that year.
01:04:20 In 2008, the world equities were down 60 percent and we made about 20 percent return that year.
01:04:27 And again, a lot of that money came from precious metals, from long duration fixed income, from buying these extremely oversold levels in the stock market
01:04:39 and then selling them when normalization happens. So there are enough levers.
01:04:44 And then, of course, there could be at some stage a super cycle in commodities that may begin.
01:04:49 So at any point of time, we have enough levers to hopefully be able to deliver mid-teens or high-teens kind of return to our investors, irrespective of the bull or bear market in equities.
01:05:02 Thank you. That was a very elaborate answer, I must say. Thank you for that. Of course, a lot of questions falling to the podium.
01:05:07 So I would request the participants to put the questions that appear, even the PM has, whether I could help them get it answered from Amit Goyal, sir.
01:05:16 So thank you for your time and giving us a wonderful presentation, a very insightful one, and giving us a full view on the macro and top-down approach of this market, sir.
01:05:25 Thank you for that. Thank you again to all the participants for your time and attention.
01:05:31 Thank you so much for giving us the opportunity.
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