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00:00All right, thanks for tuning into Talking Point.
00:15I'm your host, Neeraj Shah.
00:17Joining me today on the show is Vinod Karki, Senior VP Equity Research at ICICI Securities.
00:22Vinod, always great having you.
00:23Thanks so much for taking the time out and being with us.
00:25Vinod, before I get to the crux of what you've written in the note, it's a question that's
00:29been coming to my mind every single time people talk about dips in the markets.
00:37I would love to understand how you think about it, that whether this particular cycle since
00:44post-COVID is materially different than what's always happened in the past, in that there
00:52was a large dominance of global flows, which when turned, moved out, were not sticky and
01:00therefore brought the markets down quite a lot.
01:03In this case, FII ownership in Indian markets are probably at the lowest that they have
01:09been in some time.
01:11And the domestic flows of 9,000, 10,000 crores of net flows into SIPs make it a very sticky
01:19flow that comes into the markets every single time.
01:22So is this time really different?
01:27I need it.
01:28So I think, see, markets, if you see historically, they're never quite different.
01:37I mean, it's more or less the same story, but in a different package.
01:40So the clearest comparison can be made from an economic perspective where the demand is
01:49panning out in the economy.
01:51We had a similar patch between 2003 and 2008, where you name the companies, they were similar
01:57in the sense, you know, the capital goods, real estate, utilities, infra.
02:04Banks so far haven't been participating, which makes them value in this cycle.
02:11But eventually there is no investment cycle, so to say, if banks don't fund this investment
02:20cycle.
02:22So the point is, while the market has already, you know, kind of made up its mind that there's
02:28an investment boom coming, that's why all these sectors are rising.
02:32But somehow the assumption is that there will be no re-leveraging cycle, which from a macro
02:39perspective cannot happen.
02:41You cannot have a full-blown investment cycle without the re-leveraging cycle.
02:46So that's the thing.
02:49In terms of, so from an economic perspective, we have seen a similar story play out between
02:552003 and 2008, where the balance sheet driven companies were really outperforming.
03:03Now coming to the flows perspective, see what happens is, post-COVID, you saw interest rates
03:13go to zero and negative in certain countries, which really flared up the valuations.
03:22Since then we have seen a mega interest rate cycle, up cycle in the US, which I think is
03:30the key driver for these outflows and the fluctuation in the outflows.
03:35I think that cycle is more or less ending.
03:38So from that perspective, given that India macro story remains intact, and this pressure
03:47which was coming up on equity valuations because interest rates were, you know, rising very
03:54swiftly, that will ease.
03:57But having said that, the domestic flows have been so strong that it did not give an opportunity
04:02for the market to become cheaper, significantly cheaper, even while this volatility in FBA
04:10flows was seen.
04:11So that's why I think you might get into some kind of situation where the market has run
04:19ahead of what the fundamentals suggest, so the market capital GDP is almost approaching
04:25150%.
04:26Vinod, sorry, which I agree, but the point being, these arguments about steep valuations
04:31have been there since 21500 levels, right?
04:35We are circa 25,000 currently.
04:37And that's precisely my question, are flows really driving the markets higher, or making
04:44sure that the markets don't see a significant dip?
04:47I was looking at your note, for example, right?
04:49And while we talk about how mid caps and small caps are filled with froth, and yes, a lot
04:55of those pockets are, but when I look at your own data, if you look at MFs and FBIs, which
05:00are the largest contributors, presumably, of flows, while MFs have put in money into
05:06mid caps and small caps, where FBIs have pulled out the money is largely from large caps,
05:11mid caps and small caps haven't seen that.
05:13So therefore, are flows determining the market mood higher?
05:16Yes, yes, so that's what I was saying, that there is, despite this huge volatility in
05:25interest rates, and the, I mean, we saw volatility in outflows from FBIs, but on balance, the
05:34market has not corrected to the extent it should have given such fluctuations in interest
05:44rates, as well as FBI flows in between we have seen.
05:47That's because whatever selling came from FBIs was more than soaked up by the domestic
05:53investors.
05:54So FBIs, because they don't see much issue, they've started jumping in.
05:57And what is happening with FBIs is a classic case of trying to undo some of their portfolio
06:04orientation, which is resulting in underperformance.
06:06So you have to remember that FBIs traditionally have been buyers of the, what you should say,
06:13the high quality companies in India, which we have seen that are underperforming.
06:20So if you look at their sectoral flows, also YTD, one thing is remarkable, that the largest
06:27outflow is coming only out of two banks, private sector banks, which we know are high quality
06:34assets, basically.
06:36And they have, within banks, they have actually bought into the lesser quality PSU banks have
06:42seen inflows during this year, and some other private banks, which are not that high quality
06:47also.
06:48So, and what are the next sectors which have sold?
06:53They have sold consumer staples, IT, and energy.
06:58And what have they bought during the first half of this year?
07:04They have been buying all the high beta stocks, basically.
07:08So be it real estate, PSU banks, and capital intensive sectors like telecom, utilities,
07:16those kinds of things.
07:17It doesn't give me a sense that FBIs are negative overall from a domestic economic perspective.
07:24They are buying smaller size companies, selling the darlings, which they used to have, the
07:32large cap quality companies, which they have been accumulating over several years and getting.
07:38And so they're more kind of recalibrating their portfolios towards riskier assets, which
07:44they are outperforming currently.
07:47OK, OK, point well noted.
07:50You know, the other interesting thing was just to see how mutual funds have bought so
07:55much of money into private banks, and yet that's the bucket that hasn't quite done well.
08:00And because of the factor that Vinod mentioned, which is that FBIs have been large sellers
08:05and predominantly amongst the two large banks.
08:09Now, Vinod, therefore, the question that I have is to your mind, what is the
08:16likely near term trajectory, considering that flows may turn a little on the global
08:24side, on the passive side, if the Fed rate cuts were to come in and by virtue of the
08:30fact that India's weightage in the EM basket is now a lot more than what it was, right?
08:35So therefore, do you sense that happening?
08:38I remember we were talking about the Fed rate cut led movements a year ago.
08:45It finally seems like it's around the corner.
08:49So I think if there is a 25-50 bips cut, I don't think that's a surprise because the
08:56bond yields are already below 4 percent, you know, to the bond market is already
09:02signaled more than that.
09:04So if it is if it is limited to 25-50 bips, it will be actually not a surprise at all.
09:11But the point is, if US avoids a recession and the interest rate ups, I mean, the
09:22interest rate rise that we are seeing starts to moderate and I don't see a cut, a
09:29massive cut in interest rates if the US economy continues to be robust.
09:33So the latest ISM data about services and jobs were for July were quite robust.
09:40So I have to remember that US is at the forefront of the AI renaissance, the
09:47investments in energy, and also you can't write off that country in terms of
09:52productivity gains.
09:53They are at the forefront of what's going to drive global productivity and the
09:57investments there in that.
09:59So a lot of value will be created, I think, in that economy.
10:03And the latest data doesn't suggest that even for the short term, we are seeing some
10:08kind of, I think the US recession goals are at this point, at least, speculative in my
10:14view. So you may end up with a scenario where there is no recession, but a slowdown
10:23in growth while the interest rate environment moderates, which I think will be a
10:31reasonably good environment for equities.
10:35You know, but the valuations, even in the US, US is the only country which is more
10:41expensive than India.
10:43I think valuations don't have any scope for further expansion.
10:47So I think there will be, I mean, a phase of where the stock prices don't go much, but
10:56they will go on the positive side, but not high returns.
11:01But nevertheless, some kind of positive returns.
11:03That's how I see currently the Indian and US markets.
11:08OK, OK.
11:09Vinod, I wanted to talk about consumer dribbles, industrials, because where FPIs and
11:15MFs all have invested.
11:16But we have a management of Mazagon Dock ready to talk to.
11:19So I just want to, if I can, before we wrap up, can I just ask you for a very quick view
11:24on some of these shipbuilding slash defense names?
11:27Because they've seen tremendous book to bill ratios, some concerns in the last couple of
11:32days when the stocks have come off.
11:34How do you as a strategist look at some of these names wherein they might be priced to
11:39perfection near term, but the order books are very, very healthy?
11:42How do you see them?
11:45So I go by this simple principle, you may be buying a great business with great
11:50potential, but if everything or more than what warrants is getting in the price, I don't
11:56think they're great investments.
11:58So you have to look if something is at, let's say, going at, let's say it can grow
12:04significantly at, you know, at a rate of around 15, 20 percent over a long period of
12:09time. But if the valuations are like 100 P and all.
12:15So I think that's the key to the order book and the growth may still be there.
12:21But if the valuations are something which is out of the realm of reality, I think then
12:30you have to, you have to go slow on those stocks without naming the stocks.
12:35Yeah, I don't want you to name stocks, of course, just wanted your view on how do you
12:39think about it? Okay, great.
12:41We'll try and talk about the business with Mazgon Doc, but Vinod Karki, take a moment to
12:46thank you. By the way, really good note, Vinod, and maybe the next time that we talk,
12:49I'll borrow some of the things that you've written in this note, because I think it'll be
12:52relevant. So maybe have you a lot earlier than what we usually keep the gap between two
12:56interviews, if you have the time, that is.
12:58But thank you so much for the time today.
13:00Thanks.