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00:00We have with us Ajay Tyagi, Head of Equities of UTI Asset Management, joining in.
00:16Hi Ajay, good morning, thanks for taking the time out to talk to us, it's Samina joining
00:20you from NDTV Profit.
00:22Ajay, just taking a cue from the sort of listing some of these primary market or newbies on
00:29D Street have got, what are your thoughts, do you feel like with the amount of listing
00:34that we've been seeing in the last couple of months, potentially could be or has been
00:39the reason of liquidity getting squeezed out of the broader markets?
00:42So yeah, good morning, I would say see liquidity is still abundant in the marketplace, we are
00:50seeing flows both by way of mutual funds, SIPs and lump sum and the good news is that
00:57even FIRs have turned positive now.
00:59So yeah, I mean, I don't think that there is any lack of liquidity, but at some stage
01:03there would be fatigue that will catch up.
01:06You know, the valuations for the markets have only been inching up.
01:11Of course, earnings growth has been coming, but at some stage, there will have to be a
01:15convergence between earnings multiple and earnings themselves, and I think that would
01:21be the reason for fatigue.
01:23Obviously we have started seeing that fatigue in a few sectors already, some bit of liquidity
01:27is being channelized into new IPOs, now that also at some stage reverses because if the
01:35quality of these new IPOs is not up to the mark, which is only visible after a few quarters
01:40of listing, then you could see a lack of excitement on that side of the market as well.
01:46So in general, I would say that liquidity remains strong, but we can't take our eyeballs
01:53off valuations.
01:54Yeah.
01:55Completely agree, Ajay.
01:56In fact, we've been complaining about valuations from the end of last year, and there's been
02:00no letting up in that sense.
02:03Just coming back to the IPO space before I move on to the secondary markets, do you feel
02:07like the IPO market though is in a bubble?
02:10I mean, the BSE SME IPO index has given 160% returns in the last year, and that comes in
02:17at a P of 65.
02:20Every single IPO we've seen has been oversubscribed at least a hundred times.
02:24Do you feel like the space is exploding and this could be a bit of a concern?
02:28Yeah, without mincing words, I would say that it certainly is a cause of concern, especially
02:34the SME IPO market.
02:36I think that's the market where you hardly see any institutional participation.
02:41That's where the retail part of the market gets completely agog, and without necessary
02:47checks and balances, things very easily go overboard there, and that's what we've been
02:51seeing right now.
02:52So SME IPO, clearly a case for concern.
02:55As far as the main market is concerned, I would say, yeah, here also one needs to exercise
03:01caution.
03:02Now, there's a good part of the story and a bad part.
03:05The good part of the story is that, look, India is one of the very few markets where
03:09such kind of high quality IPOs keep coming by.
03:13The other day I was reading data around the UK markets, and it's a very sorry state there
03:18because in the UK, over the last two, three years, there have hardly been any IPOs, and
03:21therefore domestic investors are frustrated in terms of where to put in incremental money.
03:27India to that extent is quite blessed, but see, there's a 80-20 Pareto law everywhere
03:32in life, and that's true for IPOs as well.
03:34So if you're getting 100 IPOs, please bear in mind that 80 of these IPOs will not create
03:39wealth for you in the fullness of time.
03:41They may give you listing gains, but they may not essentially be those wealth creating
03:45companies.
03:47So you have to be extremely focused when you do research.
03:50And eventually, yes, some of these companies will turn out to be great businesses to hold.
03:56The onus of doing the right research and picking up these gems lies on the investor.
04:01So yeah, I mean, good part is we have a very good funnel, but we have to still distill
04:09that funnel and take out companies which are really worthy of being held for the long term.
04:15Yeah.
04:16Ajay, you started this conversation and we both concluded that valuations are stretched,
04:22but liquidity is in abundance.
04:25In that sort of a backdrop, do you see a low probability of a deeper correction in the
04:30equity markets in the coming quarters, even if earnings disappoint?
04:37That's a very difficult question to answer.
04:39And with each passing year that I've spent in the markets, the one thing that I've learned
04:43is that markets basically prove you wrong all the time.
04:47So my 25 years of experience in the markets tells me that it's very, very difficult to
04:52forecast how this creature would behave over the next six to 12 months.
04:57You're absolutely right.
04:58If you would have asked me this question about are markets expensive, then exactly 12 months
05:01back, I would have said, yeah, they are expensive and look here, we are sitting at this market
05:05which continues to make new highs every other month.
05:08But yes, our concerns really remain around valuation.
05:14The big picture remains solid.
05:16India is tracking well on most macroeconomic vectors.
05:21And investment is also a bit of a relative game when India gets compared to many other
05:26emerging markets around us, not just geographically, but in the same universe.
05:32India really stands out as one of those OSs where you continue to see growth and growth
05:39being steady for decades to come.
05:41So yeah, there's a short term and the long term, I would say in the short term, the probability
05:46of a correction to our mind is higher.
05:51And please don't miss out on the fact that a bull market itself comprises of many corrections.
05:57So this is nobody's case to say that in a five year or a 10 year bull market, you won't
06:02see corrections.
06:03I'm just reminded of this 2003 to 2010 bull market where there were at least three very,
06:09very strong corrections along the way, while earnings growth remains strong.
06:13So to your point, if earnings growth surprises us on the positive side, does it mean that
06:17we would barely have a correction?
06:19I would say no, that wasn't the case in the previous Super Bull market that we saw.
06:23That hasn't been the case in global markets as well, whether in the US or in Japan.
06:27Whenever things go a little overboard, it's, you know, election is always lurking around
06:31the corner.
06:32Yeah.
06:33Ajay, do you believe that focusing on quality over momentum may be a better strategy from
06:39here on?
06:40And I ask you this because one of the top performing funds in the recent past has been
06:44from your stable.
06:45The UTM momentum has caught everyone by surprise.
06:49I mean, the outperformance has been significant.
06:53Do you feel that from now on, the bet should be on quality as opposed to momentum?
06:59Yeah, again, that's a brilliant question.
07:02We've been grappling with this.
07:05And as I said in the previous question, it's almost impossible to time these things.
07:10So, you know, you can only look at the data and figure out where are you in the cycle.
07:15And you can never actually forecast and say that, look, this is the turning point.
07:19And therefore, we must switch the tap from on this one and open the tap on the other
07:23one.
07:24So that it never happens like that.
07:26But yes, the charts are telling us that we are very deep into the momentum cycle already.
07:32And at the same time, we are actually at a very, very initial stages of the quality cycle
07:38starting to look north.
07:41And if you look at data, which goes all the way to 2005, because thankfully, we do have
07:46data for the momentum factor, the value factor and the quality factor from 2005.
07:51And we follow the cycles over the last 20 years, then, you know, the data is suggesting
07:56that we are certainly at the cusp of quality turning around and starting to surprise.
08:00At the same time, momentum actually going into a consolidation, taking a breather, perhaps
08:05even correcting.
08:06So, yeah, I mean, I would agree with that analysis of yours.
08:09We do are reaching to the same conclusion.
08:12It's a tough market for any fund manager to navigate right now.
08:17The other question on the same lines, you know, there's so much of talk about moving
08:22to the large cap space and you alluded to the fact that a lot of the FI money has started
08:26coming back.
08:27Now, part of it on Friday was largely on back of the rebalancing of the FTSE index, the
08:31World FTSE index.
08:33But that aside, if you do, if you do believe that we've borrowed returns from the future
08:39because the NIFTY has been outperforming year to date, the idea that passive large cap would
08:48be enough to play that space may not stand.
08:52Do you think now is a good time to play the large cap space and do it through active fund
08:57managers?
08:58Because up until now, their performance wasn't even beating the benchmark.
09:01Sure.
09:03See, in any market which is extremely polarized, you would find active fund managers finding
09:10it very difficult to beat the benchmark.
09:11So, you know, let's take the case of the US markets as well.
09:15If they were those magnificent seven stocks, which were actually, you know, surprising
09:20everyone month on month, both fundamentally and therefore in terms of their stock prices,
09:26it would have been well impossible for any fund manager running a diversified fund to
09:31beat the respective benchmarks.
09:33And so has been the case in India.
09:34The market has been fairly polarized and, you know, therefore the ability to beat the
09:39benchmark is very low.
09:40But, you know, our view is that the markets may actually consolidate over the next 12
09:46months.
09:47They may even see a correction.
09:48And it is during times like these that active fund managers basically have a higher ability
09:55and a higher probability to beat the benchmark.
09:57So, yeah, I mean, I would say that the next 12 months look to be loaded more in favor
10:03of active managers.
10:06And, you know, the last two or three years have pretty much been the case of anything
10:11and everything going up.
10:13It would be much more selective from here on.
10:16I think a lot of these businesses which were badly beaten up in 2020 saw a very sharp fall
10:24from their, you know, respective abyss.
10:28That's gone.
10:29So that price movement, that very sharp price reversal and movement is now gone.
10:32From here on, like I mentioned earlier, it ought to be a convergence between earnings
10:37and valuation.
10:40And wherever managers are able to figure out businesses which would have a much better
10:47earnings profile over the coming years, I would say the rewards should ideally be waiting
10:52for them there.
10:53Yeah.
10:54Ajay, there are two sectors, both global facing.
10:57Tech, usually in a lower rate cycle, tends to outperform, and it's also one sector that
11:04over the last decade has given investors positive returns.
11:08The last few weeks have been rough for IT stocks.
11:11On the contrary, metals, where fundamentally things are concerning, but just because the
11:16Fed cut rates in China today, of course, lowered rates and, you know, pushed in some liquidity,
11:22metal stocks seem to be up and about.
11:24Also the fact that LME Inventory stands the record low.
11:28How do you play both these global facing sectors?
11:31Do you buy into IT on reasonable valuations?
11:35Do you buy into metals despite weak fundamentals?
11:38What is the bias?
11:39Sure.
11:40See, there is always this question of the very near term versus the longer term.
11:47Now, these two sectors that you mentioned, one of them, which is IT and tech, is basically
11:52a structural growth industry.
11:55I mean, we can keep debating for hours and hours together about how technology has shaped
12:00our lives, how technology has shaped businesses, how technology has basically, how technology
12:06from just being a cost saving tool for corporates around the world has metamorphosed into a
12:12customer acquisition strategy.
12:14So now if two companies are wanting to win the battle and get the best customers and
12:20witness growth, then, you know, technology is a very big asset of this because technology
12:25provides that interface.
12:26And if the interface is really great, then customers typically gravitate towards, you
12:30know, these businesses.
12:31So I think technology is into structural growth.
12:35We started seeing the fruits of technology in the late 70s and 80s.
12:42It's continued for four decades, and I won't be surprised if it continues for another couple
12:47of decades at least.
12:48But yes, there will be cycles.
12:49Like you mentioned, there was a weak cycle in 2022 and 23.
12:52We may be getting into an upcycle right now.
12:55I'm sorry.
12:57And from that perspective, most IT companies look attractive.
13:02Of course, they are overvalued compared to the historical past, but, you know, the overall
13:07markets are at least 20 to 30 percent overvalued compared to the last 10 year history.
13:11So to that extent, the overvaluation for the IT sector is not that significant.
13:18The other one is metals.
13:20This is highly cyclical, of course, as we all know.
13:22And of course, in the near term, there could be an element of Fed rate cards, there could
13:27be an element of stimulus coming in from China.
13:30But if we all are of the opinion that global growth is slowing down, certainly in China
13:36and also in the U.S., even if U.S. avoids a recession and goes into a soft landing,
13:42the growth in the U.S. would be a fraction of what it was between 2021 to 23.
13:50Europe itself is showing no signs of strength in any case.
13:54So from that perspective, I'm wondering where would the demand-led pull come for this entire
14:03metal space?
14:04So outside of this technical factor, from a medium-term perspective, the picture is
14:10not really that rosy for the commodity space.
14:14Yeah.
14:15Also, one space, and if it's more domestic facing, even though we aren't seeing too much
14:21activity in this space over the last few days, is consumption.
14:26Are you buying into the consumption cycle right now?
14:29Because there's so much that's happening for us as a general sense that earnings will also
14:33see an improvement from this quarter on.
14:36We're going into the festive season.
14:39Consumption a place you like?
14:40And if yes, what would the bet be?
14:42Would it be urban consumption?
14:44Would it be rural?
14:45Would it be aspirational?
14:46Would it be QSR?
14:48Any sort of biases there?
14:49And whether you're constructive and overweight on it to begin with?
14:52Absolutely.
14:53We are overweight on consumption.
14:56And let me make a very profound statement.
14:58You can't be positive on India and yet be negative on consumption.
15:03We are an economy which is driven by consumption.
15:06Almost 70% of our GDP comprises of domestic consumption.
15:10You can't be positive on India structurally and say that, look, what I don't like about
15:14India is India's consumption.
15:15Yes, consumption goes through its own cycles.
15:17We've seen that high inflation of 2022 and 23 led to pressure on the wallets for most
15:23households in India.
15:24And because of that, yes, the discretionary part of the consumption got curtailed.
15:29It did spill over to some bit of non-discretionary consumption as well, but thankfully inflation
15:34is coming down.
15:35We see better real earnings and savings for households going forward, therefore consumption
15:40should pick up.
15:41That's point number one.
15:43As far as biases are concerned, I would say rather than rural or urban, we try to dissect
15:48the consumption space into consumer staples, consumer durables, and consumer services.
15:56It's our belief, looking at data, that consumer staples would be that part of the market which
16:02should actually see the most anemic growth in the coming, not only year or two, but even
16:07beyond that for the simple reason that the penetration in this category has already reached
16:11to a very high level.
16:13Beyond the point, you can't consume more shampoos or toothpaste or soaps and so on.
16:21You can go on the premiumization curve there, but the volume-led penetration doesn't happen
16:25beyond the point.
16:26India has already reached to a stage where the staples penetration is fairly good, but
16:32the penetration on the consumer durable side, which are many discretionary items that we
16:36use in the household, as well as consumer services, you were alluding to QSRs, which
16:40is a part of consumer services.
16:41I think this is where the consumer wallet will shift.
16:44This is where we will see households and consumers making incremental spending.
16:51That's the part where the penetration, by the way, is very, very low, not only compared
16:54to the global averages, but even compared to emerging market average.
16:58I think that's the, if I may use the word, that's the predilection that we have within
17:04the consumer space.
17:05Yeah.
17:06You know, Ajay, another way to play consumption and to play new energy is through the auto
17:11space or through the auto ancillary space.
17:14Again, we're going into the festive season.
17:17How do you feel the auto sector can be played?
17:21One, would you buy into auto companies?
17:23If yes, where would the biases be, or would you just play the auto pack by simply playing
17:28the angst?
17:29No.
17:30I mean, we would actually try and find out great businesses in all corners of the auto
17:40space.
17:41It's not as if we are, at this stage, limited only to passenger cars, not to two wheelers
17:48or only to ancillaries and not to OEs.
17:53I think there are strong businesses in all quarters within auto.
17:57The good news about auto is that whether we look at passenger cars, whether we look
18:02at two wheelers and also at ancillaries, which are, by the way, supplying either to these
18:08domestic OEs or exporting, I think there is immense scope in the coming years and I would
18:15say beyond the next few years as well.
18:20It's basically very, very linked.
18:23It's highly linked to the valuations within this sector.
18:27Parts of the sector have seen a massive valuation run up.
18:32From a near-term perspective, we would be cautious on those.
18:36Some part of the sector has actually not participated as much and valuations here are extremely
18:41comforting.
18:42While the markets are trading at, like I mentioned earlier, 30% higher than their last 10-year
18:47valuations, within the auto space, there are a few players which are trading around
18:52their long-term valuations.
18:53So, yeah, I think our focus would be basically on such companies.
18:58But auto, in general, remains a fairly, I would say, longer-term, long-runway industry
19:07opportunity.
19:08Yeah.
19:09Ajay, you know, you said if you want to play India, you cannot not play consumption.
19:13I would extend that further and say if you want to play India, you cannot not play the
19:17financial sector.
19:18Now, so many different verticals to play the financial space, right?
19:22You can either go with banks.
19:24You can break the banks into private and PSU banks.
19:28You can then, of course, bring in, you know, asset management companies.
19:32You can bring in companies that are focusing on wealth, so maybe the Edelweiss of the world,
19:37betting on the financialization of the country's savings.
19:41What is your bias?
19:42In financials, where would your bias sit?
19:46And if it's banks, then is it private versus public?
19:48And if it's outside the banks, then what are the obvious choices you'd make?
19:54So yeah, that's a great question.
19:56And I would say this is one of those sectors where there are immense opportunities with
20:00it.
20:01So we are playing financialization of savings on one side.
20:04We are also playing basically credit penetration.
20:09This credit penetration is both on the household side as well as SMEs and even large corporates.
20:15And we are obviously playing this game wherein these banks are financing the consumption
20:23which households are undergoing, whether you're buying a big LED TV or a refrigerator, I mean,
20:28it's all getting financed.
20:29So I think the opportunity here itself is immense.
20:31Now, what's happened in the last few years is that the plays which are related to the
20:36capital markets in one form or the other have seen a very sharp run-up, of course,
20:44because of very strong earnings growth over the last three, four years, and also because
20:48of a massive re-rating in their valuation market.
20:51So it's been on both accounts.
20:53Now, should earnings take a breather if let's say capital markets go sideways for a few
20:58quarters or a couple of years, or they don't have the kind of momentum that I've experienced
21:04in the last couple of years, then there would be earnings slowdown, which will also lead
21:11to de-rating.
21:12So I think this is the part of the market where we would be cautious at this stage.
21:15It is still an opportunity in the fullness of time, but from a very near-term perspective,
21:20I think it's better to be cautious here because both earnings and valuation re-rating has
21:26been in their favor over the last few years.
21:29The exact opposite of this has been private sector banks, which have barely participated
21:33in the rally.
21:34And it really baffles most of us here because we are really talking about some of the best
21:39managed institutions in this country.
21:41And I'm not saying best managed banks or NBFCs.
21:43I'm saying some of the best managed corporates in this country are pretty much the companies
21:52which have not participated in the rally for the last three years.
21:55Of course, there have been near-term concerns, but there is no real longer-term concern which
22:01should pull them back.
22:03So from that perspective, that's the segment we remain most positive on at this stage within
22:08banking and financial services.
22:10Yeah.
22:11Ajay, in terms of a portfolio construct, and I know coming from an asset management company,
22:18you would be recommending individuals to follow a strict rule of SIPs or STPs, and we all
22:23agree that it's time in the markets, not timing the markets.
22:27But if I could just bring this down in a very pointed way, would you recommend investors
22:34to stay on the sidelines with incremental addition to the markets, hoping that there
22:40could be a better opportunity, because you did indicate that you do see the year to be
22:43one of consolidation or maybe even some correction.
22:47So would it be wise to sit on some cash, and if yes, what quantum would you advise them
22:51to sit on in terms of percentage for an average risk profile investor?
22:57Sure.
22:58So see, that's a very, very difficult question to answer, to be honest.
23:01I did say that it's impossible to figure out the direction of this feature over the near-term.
23:07And therefore, to make any such kind of, I would say, advice about how much cash to hold,
23:14how much to invest is always fraught with that risk of markets surprising you one way
23:18or the other.
23:20But all that we are saying right now is that from a big picture perspective, this is not
23:26the time to be making lump sum investments.
23:29This is not the time to be actually feeling, having this feeling of missing out or having
23:36missed out the rally of the last two years, and therefore now playing catch up by making
23:41one big investment into the markets at this stage.
23:45So for investors who either missed out or investors who participated in this rally,
23:51going forward, at least for the next 12 months, the most rational thing to do is to make SIPs
23:57on a monthly basis.
23:59Should markets correct?
24:00You should be happy because your investments are being made at lower levels.
24:04Should markets refuse to correct and stay where they are or even inch up?
24:08At least you won't have that regret of staying outside of the market.
24:11So the only rational, and see, investing, as they all say, is majorly a behavioral science
24:18rather than knowing deep about your company.
24:22So it's your behavior which ought to be in the right place.
24:27So from a behavioral perspective, I think it's our advice to continue participating
24:31in the markets by way of SIPs.
24:34Ajay, one quick one on chemicals.
24:38There seems to be some sort of a rebound that's playing out.
24:41And after many years of underperformance, I mean, this was a sector that was a darling
24:46of D Street for such a long time, right?
24:48And then came the overcapacity.
24:50Then came the concerns on demand.
24:52But it feels like the situation may be improving.
24:56Are you bottom fishing in the chemical space?
24:58Are any of your fund managers optimistic on chemicals?
25:05So without going into the specifics, I would say that the chemical industry did come out
25:09of, you know, a massive, I'm not even sure whether it's come out completely, but has
25:14undergone a massive destocking over the last two years.
25:19And that's the reason why many chemical companies, I mean, I would say most chemical companies
25:23in India did face, you know, growth pressures and also did face margin pressures.
25:29But we seem to be coming close to this destocking cycle.
25:33And at some stage, you know, the industry will start to see restocking once again, which
25:38would mean that the growth engine starts for most of these chemical companies from India.
25:44So yeah, I mean, we do have been watching this cycle over the last couple of years.
25:49We seem more confident today compared to a couple of years back.
25:54And yeah, I mean, we would be selective in this industry.
25:57Right.
25:58Thank you very much, Ajay.
25:59We'd have loved to chat with you longer, but on to other news stories that we have to track.
26:05You have a good day and we'll hopefully see you soon.
26:09Good day to you.
26:10With that, we're completely out of time on this edition of Talking Point.
26:12Thanks for watching.