- DII flows to continue to drive markets?
- Key investment strategies
Niraj Shah in conversation with #HDFCSecurities' Unmesh Sharma on 'Talking Point'.
- Key investment strategies
Niraj Shah in conversation with #HDFCSecurities' Unmesh Sharma on 'Talking Point'.
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:12 I'm your host, Neeraj Shah.
00:14 The case for a chat today on the day following a really
00:19 strong move in the market.
00:21 Would the DII flows, which have effectively
00:23 absorbed all of the FI selling for April,
00:26 albeit for the last so many months,
00:27 will they continue to drive the markets higher?
00:31 We've seen some strength in the recent releases
00:35 of some of the real estate ancillaries,
00:37 particularly cement.
00:38 Is that a bucket that you want to look at more actively?
00:42 And is there some dichotomy between what
00:46 select band of IT companies are saying
00:48 versus what IT service companies are saying in terms of minutiae?
00:51 We'll try and get into that as well.
00:53 But a lot of macro and micro conversations
00:55 with Unmesh Sharma, Executive Vice President and Head
00:58 of Institutional Equities at HDFC,
00:59 joins us right now on the show.
01:01 Unmesh, so good having you.
01:01 Thanks for taking the time out.
01:02 Thank you, Neeraj.
01:03 Thanks for having me.
01:05 Constructive or skittish about prospects of risk assets,
01:11 both global and local in nature?
01:13 Yeah, so that's, I think, the trillion dollar question
01:16 right now.
01:17 The cross-current-- there is too much crosswind going on
01:21 right now, OK?
01:22 So let's start from the top.
01:23 If you look at the way in which the fight against inflation
01:28 has happened globally--
01:29 and I'll try to put it into an Indian context,
01:32 because not all of it is what happens in the US
01:34 is really 100% relevant for us.
01:37 The biggest issue that we are facing right now
01:39 is the fact that the fight against inflation,
01:43 quite expectedly, has been longer than you think.
01:47 If you go back to the 1970s, this
01:50 is exactly what happened at that time as well.
01:51 You keep thinking that you are winning the victory.
01:54 So if you remember, even in this round,
01:57 there was this whole phase about it being transitory.
01:59 And then there was a pivot backwards.
02:02 And I think this word "pivot" has been used since--
02:04 if I remember correctly--
02:05 since August 22.
02:07 I remember there was an article I had written
02:09 where we had talked about the fact-- is there a pivot?
02:11 And they said-- so that didn't happen.
02:13 And then there was one earlier this year, maybe December
02:17 last year.
02:18 So what happened was that at that point in time,
02:19 the market thought that there are going to be seven rate
02:22 cuts, while the Fed said it was three.
02:24 And the data this morning is that the bond market
02:27 believes that there will be zero or one rate cut this year.
02:30 And I don't know if you know this, but in the data,
02:33 if you really go deep, you will find
02:35 that there is a set of investors who is actually
02:38 hedging for even a rate hike.
02:40 Now, that is a huge move.
02:43 But the market's not fallen, because I
02:45 think the liquidity has been sloshing around.
02:47 And we can go into specifically in India what is happening.
02:49 But at the same point in time, the risk reward
02:52 on risk assets globally-- and within that,
02:54 I would say emerging markets and then India being a part of that--
02:58 definitely, the risk reward is not in favor of a very big up
03:01 move from here.
03:04 So yeah, that answers the first part.
03:05 Yeah.
03:06 The second part, therefore, is the market behavior
03:11 over the last nine months, being able to climb
03:14 almost every wall of worry.
03:18 And in some part, as you said, maybe, due to domestic flows,
03:22 because FIs have been rank net sellers,
03:25 seems to suggest that if this were to continue,
03:28 there is a bit of a safety net for markets.
03:30 Earnings plus liquidity is a potent combination
03:33 for climbing over some walls of worries.
03:35 While the risk reward is not in favor,
03:36 can India do slightly different?
03:38 I would love for you to bring about the intellect
03:41 that you have around what this global peace and liquidity
03:45 means for Indian markets.
03:46 Yeah, so actually, there are a lot
03:49 of layers in the question itself.
03:51 So I'll try to address all of those.
03:53 OK, the first is that globally, while liquidity
03:58 is sloshing around, you can see from the net selling in India
04:03 itself that there is some risk off.
04:06 In fact, if you look at the last week's data,
04:09 there is a lot of flow which is actually happening into China.
04:12 Now, this makes two points.
04:13 One is that does that mean that people are going away
04:16 from risk?
04:16 The answer is probably not.
04:17 Why would you move from India to China?
04:19 China, probably the risk is higher at this moment in time,
04:21 given all that's going on over there.
04:23 But what's happened is that there is some value bias which
04:26 is coming in.
04:27 Because I don't know if you've seen,
04:29 but across sectors, the valuations
04:31 of a lot of very good quality Chinese companies
04:33 is actually in single digits now,
04:35 versus India, where the whole market itself is over 20.
04:37 So what's happening is that there
04:39 is some reallocation of portfolio happening.
04:41 So that's at the FPI level, and that
04:44 connects with your second point as to why FPIs are selling.
04:47 So there is a reason for that to happen.
04:49 So it's not necessarily complete risk off,
04:51 because there is enough liquidity, but this.
04:53 Now, then you come to the second point, which
04:55 is something that, to a large extent, is unprecedented.
04:58 Now, this is where you actually compare it
05:00 to what happened in Hong Kong, China in 2004, '05, '06, '07,
05:03 '08.
05:04 Now, what's happened is that this huge wave
05:07 of financialization of savings and people participating
05:13 in the market has started.
05:14 And which is what I think you can see from the SIP flows.
05:16 Now, there are a lot of layers in that,
05:18 but what's actually effectively happened
05:19 is that all the bouts of selling which
05:22 have come from the FPIs have just
05:25 been completely absorbed by the domestic market.
05:27 Now, here what happens is that this
05:30 is a little scary, in a sense.
05:31 And if you look at the aggregate data,
05:34 I think the FPI stake in the India Inc.
05:38 was peaked at around 23%, and it's down 5%, 6%.
05:41 Now, maybe I'm too old school, but earlier
05:44 if someone had told me that 5% of India Inc.
05:46 is going to be sold by foreigners
05:48 and nothing will happen, the market's actually gone up.
05:52 So it is also somewhere where people like us also
05:55 have to take a little bit of humble pie,
05:57 because I actually thought the market will fall this year,
05:59 and that's been the call.
06:00 And wherever I go, people keep asking me this.
06:02 [NON-ENGLISH SPEECH]
06:03 You thought that it's going to fall, but what's happening now?
06:06 But now what I think is happening
06:07 is that if you compare it with the example of what
06:11 happened in Hong Kong, China, this can go on for a bit.
06:14 The only reason why this would stop--
06:17 and that is the second part of--
06:18 I'm preempting what you will then say, OK,
06:21 how does this stop?
06:22 One is that as of right now, there
06:24 seems to be not much interest in looking
06:26 at aggregate valuations.
06:28 So if a company is delivering earnings, then keep buying.
06:34 The counter corollary which supports this thesis
06:37 is the fact that if you see, even in this earning season--
06:40 and this is happening globally, not just in India, but globally--
06:42 you see a small miss, and the stocks
06:44 fall dramatically, which kind of supports my thesis
06:47 that a lot of this participation can go away
06:49 if there is disappointment.
06:50 And the second is that there has to be something else to buy,
06:54 because this liquidity is real.
06:56 And people have now kind of made money in the market,
06:58 or at least not lost money in the market
06:59 now for a long period of time.
07:01 So unless something like real estate or working capital
07:03 or people start deploying money elsewhere,
07:05 I think this will continue for a bit longer.
07:08 Now in this scenario, it's a little tough.
07:11 And honestly, that's exactly what's
07:13 happened to a lot of market participants, including us,
07:16 thinking that at some stage it will stop.
07:18 It has not stopped.
07:19 And I think this will continue for a bit.
07:20 VIKAS KHANNA: Yeah.
07:21 And difficult to kind of call an end to it, because as you said,
07:25 it's not something that too many of us have seen in the past,
07:28 this kind of liquidity participation
07:31 from the domestics in a meaningful way.
07:33 Direct, PMS, AIF, mutual funds, and the passive flow,
07:38 pension funds, et cetera.
07:40 Just one point before we take that break.
07:42 It's very curious that the market,
07:44 while it's punishing some of the companies which are missing,
07:48 is not shy of disproportionately rewarding expensive stocks
07:52 if they are delivering.
07:53 Trent, a case in point yesterday.
07:55 KPIT, a case in point yesterday.
07:57 And there are countless other examples.
07:59 I mean, it's just a dichotomous market.
08:01 Punishment meted out to even weaker hands,
08:03 even if the valuations are attractive.
08:05 But complete blowout buying into some of the businesses
08:09 which are delivering growth.
08:11 So look, that's the nature of the market.
08:13 I think given the fact that it's becoming incrementally more,
08:16 if I may call it, domestic and retail,
08:21 this tends to happen for short periods of time.
08:24 Now, short could mean a year, could mean two years.
08:27 What that means is that-- what is happening really
08:30 is that not having any reason to sell
08:33 becomes reason to buy the position.
08:36 And there is this mindset that if it's not disappointing,
08:40 why should I--
08:42 why fix if it ain't broke, that type of mentality.
08:45 So I think that's what's happening.
08:46 But at some point in time, this catches up.
08:50 And for people like us who are constructing
08:52 model portfolios, our research team,
08:54 we quite struggle with this kind of scenario.
08:59 But yeah, that's the nature of the beast at this point
09:01 in time.
09:01 Until there is disappointment, we
09:03 can't see selling happening in the market.
09:04 You made this very valid point about concerns on the anvil,
09:07 and therefore build a portfolio which can kind of suit
09:10 the mindset that you bring into the table when you're building
09:13 that portfolio, you and your team.
09:14 What is the model portfolio like currently?
09:17 So OK, so you start from the top.
09:19 I think the biggest change that we made to our model portfolio,
09:26 I think, is slightly different approaches.
09:28 We never go over 5% cash.
09:31 But we used to be 3%, so it's going to 5%.
09:35 So we have 5% cash now.
09:38 And then what we've done is that we've
09:40 added weight to the utilities.
09:43 So there is the in-weight has come in.
09:47 The PG in-weight has come in, for example.
09:49 Now, more than just the fundamentals of that,
09:52 more importantly is that it's a little bit of protection
09:55 for your portfolio.
09:56 So Power Grid, Power Grid, In-weight, NTPC,
09:59 these are the types of names that we've added.
10:01 All of these are overweights now.
10:04 So without going into specific details, broadly,
10:07 what we are doing is that almost 8% to 10%
10:10 is like a rock solid, kind of bulletproof kind of portfolio.
10:14 In the rest, what's happened is that we
10:16 had a very, very good run in our model portfolio for three years,
10:21 taking outsized bets, playing, if I may call it,
10:24 domestic economy and value.
10:27 But what's happened is that value has one issue,
10:32 is that if your call is right, then value is no longer value.
10:36 And that's what's happened to our portfolio now.
10:38 So what has happened is a lot of convergence has happened.
10:41 And if you see, when we started to adjust everything together,
10:45 we came to the point where everything was just
10:47 getting closer to the index.
10:49 And so I'll give you an example.
10:52 We had a huge underweight position
10:54 on levers, which was quite unpopular.
10:55 A lot of pushback from clients, but it really worked.
10:58 And we had a huge overweight on ITC.
11:02 That stock has been phenomenal.
11:03 And I think we were one of the few fans of that
11:05 when it was in the hundreds, somewhere between 100, 200.
11:08 And we kept adding weight to that.
11:10 Now, when it came together, what's happened now
11:12 is that you don't know what to do, because it's worked.
11:15 And that is where the difficulty starts.
11:17 Now, what has happened is that I think that the model portfolio
11:23 now is in a position where, for the larger companies,
11:27 it's not like we have a large cap bias in the portfolio.
11:29 But we've naturally gravitated towards the larger caps,
11:32 because of the fact that that's where
11:33 the value is relatively better.
11:36 Now, this is also linked to my earlier point, which
11:38 is that the participation has happened more
11:41 from the domestics, which, if you look at the way in which
11:45 ownership of stocks used to be back in 2000,
11:49 let's say, 6 till even 20 was dominated by the FBIs.
11:54 So there was natural bias towards consumers and large cap
11:58 banks.
11:59 But that kind of reversed over the last four.
12:00 But we are kind of now gravitating back towards that.
12:04 So we have a very huge bias for that.
12:06 A lot of things like consumer discretionary,
12:09 which are just overpriced, we've just taken them off.
12:12 Even premiumization beneficiaries,
12:13 you've taken them off.
12:14 Yeah, yeah.
12:15 So premiumization, technically, Maruti also
12:17 is a premiumization beneficiary, in a sense.
12:20 And so is Hindustan Lever, as well.
12:22 So they have come closer to the benchmark.
12:24 But what we've done is some of the discretionary
12:26 have gone off.
12:26 So we are playing discretionary now indirectly.
12:28 So we have real estate in there, which is not in the--
12:31 so why in real estate has come in,
12:33 even though there is no real estate in the NFT?
12:37 And then there is things like media and all this.
12:40 So we've added a few of these names
12:42 in there to play that kind of theme.
12:44 So what's end up happening is that the large caps are
12:46 close to the benchmark.
12:47 And the expensive small caps have gone and got replaced
12:52 by non-benchmark names.
12:55 That's broadly how it's got constructed now.
12:57 Real estate is interesting.
12:59 And the reason I find it interesting
13:00 is because the pre-sales continue to be higher,
13:02 despite the fact that the valuations may
13:04 be a bit of a question.
13:05 But the question that I have, though, is for the ancillaries.
13:09 So a lot of people have said that plywood, cement,
13:13 or whatever it is, they have not quite
13:15 gained because inventory was there,
13:17 and that was getting sold.
13:18 And now inventory is at whatever month
13:20 lows, different statistics.
13:22 And now that the newer construction is getting done,
13:24 there will be a demand for ancillaries coming through,
13:27 for cement coming through in a big way, et cetera,
13:29 infrastructure plus real estate.
13:31 Is that a valid argument?
13:32 Yeah, so look, we've been through this cycle
13:36 very positive on the domestic capex cycle.
13:40 And I would say equally excited about both the infra
13:42 and the real estate.
13:44 I would think at this point in time,
13:46 given that there is elections coming up,
13:47 so there has been a little bit of slowdown on that side.
13:49 We are a little bit more positive on the real estate
13:51 cycle, so as to speak.
13:53 And the best way to play that is not just
13:54 to own the real estate names, because these are all normally
13:57 very niche urban plays.
13:59 We are talking about the whole cycle.
14:00 And in that, apart from having some cement names,
14:05 I think we have JK Lakshmi in there.
14:07 But we also have names like Styloam, for example.
14:10 So we are playing it through that.
14:11 And in fact, we have a team which actually looks
14:13 at building materials together, not just them.
14:16 At some stage, once the post-election lull is gone,
14:19 and we can expect to see some kind of pickup
14:22 on the infra side again, maybe the weight
14:24 will shift towards cement a little bit more.
14:27 But as of right now, on this entire space,
14:28 we are quite constructive.
14:32 Got it.
14:33 What about newer themes?
14:34 I mean, conversations with the government
14:38 seems to suggest that rooftop solar, for example,
14:40 right up there.
14:41 Defense pens will probably stay right up there.
14:44 Suddenly, out of nowhere, railways
14:46 came into being for three years on a trot
14:48 and gave some superb earning surprises as well.
14:51 What about some of these new or recently developed
14:53 themes which might have a slightly longer runway?
14:55 Power, for example.
14:57 This hydropower and the wind power, et cetera,
15:00 and those ancillaries too have given some strong guidances.
15:03 What do you like here?
15:04 Yeah.
15:04 So look, what's happened is that--
15:07 OK, so one big challenge with all the four themes
15:10 that you mentioned, in fact, one common theme
15:12 is that it is very difficult to play these themes.
15:15 The number of stocks which are genuinely high liquidity--
15:18 see, also, I work for institutional equities.
15:21 So one big benchmark that we have internally--
15:25 it's a rule of thumb.
15:26 It's not really a benchmark-- is that a meaningful fund house
15:30 should be able to build a meaningful position
15:32 in the stock.
15:34 So unlike our retail research team,
15:38 which has a lot of these under coverage,
15:41 we don't actually have that.
15:43 And a very simple rule of--
15:44 I don't know.
15:46 This is one fascinating thing.
15:47 Earlier, small caps, mid caps used
15:48 to be 2,000 crores, 3,000 crores, 4,000 crores.
15:51 And now, at 15,000 crores, is where you really
15:55 start operating, because the size of the funds is so much.
15:58 And in fact, some of the new IPOs as well.
16:00 That's the conversation we have with fund managers,
16:02 that how is this going to matter to me?
16:05 The amount of work that you have to do to assess a company of 2,000
16:09 crores versus 20 is the same.
16:11 And if I'm not able to put it as half or 1% of my portfolio,
16:15 where the portfolio has become 25,000 crores now,
16:18 how do you operate?
16:18 So honestly, on all of these themes, we have not gone deep.
16:22 What I can make an anecdotal comment
16:24 is a lot of these themes have run ahead of themselves.
16:28 And this is some of the coverage stocks that we have.
16:31 Because what's happened is that low liquidity stocks also
16:34 invariably end up doing that.
16:35 The pendulum swings too far.
16:37 And in some of these, it may have happened.
16:39 So I think we'll wait for some of these to become investable
16:42 and see what happens.
16:44 One final question, and that is on the dichotomy
16:47 between IT services and ER&D, if you dwell on both of these
16:50 spaces, per se.
16:52 Because it's the same for the last maybe 12 to 18 months
16:55 or 24 months.
16:56 But even at the end of the quarter,
16:58 when I speak to the ER&D guys--
17:00 today we are speaking to KPIT before you came,
17:02 or LTTS last week--
17:03 the outlook for growth is a lot more confident and promising
17:08 as opposed to IT services.
17:10 Now, do you believe IT services are
17:12 reaching a bit of a bottoming out phase or not quite,
17:16 part one?
17:16 And part two, despite that discretionary spending
17:19 being not evident, could ER&D still do well
17:24 despite the higher valuations?
17:27 OK.
17:28 So slightly tough one.
17:33 So I'll give you a slightly more nuanced answer.
17:37 We have about 90 seconds.
17:39 OK, so the Indian IT services companies will figure it out.
17:43 But we think that they are hitting an air pocket
17:45 in the short term.
17:46 So they will come out of this, but I
17:48 think in the short term there is a bit of a challenge there.
17:51 So relative valuation is the only game in town.
17:54 We used to have ER&D, but we think
17:56 we are not comfortable with the value.
17:58 A lot of these names we had under coverage
18:00 and in the model portfolio, they're off it now.
18:02 OK, sorry, I'm told we have some more time.
18:04 If you can take some time and tell me
18:06 why is it that ER&D doesn't?
18:08 Is it the valuation argument?
18:10 It is.
18:11 Unmesh, I'm just trying to think.
18:13 KPIT is talking of maybe delivering 18% to 20% growth
18:18 for the next five to seven years, purely by auto.
18:22 Other adjacencies notwithstanding,
18:23 LTTS is saying that we'll do 10% organic,
18:27 and there is an inorganic move going to happen.
18:29 Eventually that will be whatever, 12%, 13%, 14%, 15%,
18:31 16%.
18:32 So growth is there.
18:32 So why then take them off?
18:36 Yeah, so the model portfolio is also very concentrated.
18:39 We want to play it that way.
18:41 That doesn't mean we have no ad ratings in there.
18:43 But a lot of our--
18:45 if you see our long term, three to four year kind of long term
18:47 Tata, LXE type names, which were there,
18:49 which we rode all the way.
18:50 In fact, some of these--
18:51 we made our name in the market pushing
18:54 some of these ER&D players.
18:55 I think at this point in time, we
18:56 are getting to the point where we are a bit less
18:58 emotional about them.
19:00 And I think that on balance, are they great companies?
19:02 Should you stay invested?
19:03 Answer is yes.
19:04 But hold recommendations don't make it to the model portfolio.
19:07 Got it, got it, got it.
19:08 Don't sell, but don't do anything.
19:09 That is not going to get to the model portfolio.
19:11 So the benchmark is high.
19:13 I get your point.
19:14 Last question.
19:14 What is the most active sell?
19:16 It will obviously not be a part of the model portfolio,
19:18 but where is it that you're the most negative on?
19:23 I'm-- I think on the metals, with the exception of Tata
19:30 Steel, we have a huge underweight position.
19:34 And a lot of it has to do with the imponderables of what
19:37 is going to happen in China.
19:39 Until the time we see a little bit more clarity there,
19:42 I think--
19:43 because you're asking for one, so I'm telling you.
19:45 That and some of these smaller NBFCs.
19:48 In fact, even Bajaj Finance, we have a huge underweight.
19:51 But that could correct, and we could still--
19:53 we still like it, the business.
19:55 But on the margin at the NBFC, looking
19:58 at the way the asset cycle will play out over the next two
20:00 years, and the imponderables in China,
20:03 I think the metals names, with the exception of Tata Steel,
20:06 we think is other two big underweights for us.
20:09 Great.
20:10 Well, this was lovely having you in the studios, Unmesh.
20:12 And look forward to have this kind of conversation more
20:14 often.
20:14 Just so good to do this in person.
20:16 But thank you for your time today.
20:17 Thank you, Nilesh.
20:18 Thanks for having me.
20:18 The pleasure was ours.
20:19 And viewers, thanks for tuning into this edition
20:21 of The Talking Point.
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