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00:00Thanks for tuning in to Talking Point. I am your host, Neeraj Shah. The case for a chat
00:17today as we are wedged between a rate-easing cycle decision by the US Fed and the US elections
00:24is this on your screen. Will rate cuts bring in flows to emerging markets and India? Is
00:33India expensive for a 10% downside? Because that is what a lot of people fear. And within
00:39sectors are private banks, the largest and arguably one of the cheapest large sectors
00:45poised for upsides over the course of the next 12 months. That and more with our guest
00:52on Talking Point today, Vikash Kumar Jain of CLSA. Vikash, so good having you. Thanks
00:56for taking the time out. I hope all is well. All is well, Neeraj. Thanks for having me.
01:01The pleasure is always ours. Vikash, I want to start off with this. How do you see what
01:08happens to emerging markets in India in the wake of a rate-easing cycle? Because if we
01:13look at the past history and enough number of times and enough ways this can be dissected
01:18about what happens to markets over the next 12 to 24 months, the view isn't quite clear.
01:23Sure. I think the view isn't clear because we're just focusing on the action of rate
01:32cut rather than the reason why the rate cuts were done historically. So that's where it is
01:40important to understand why the rate cuts are happening. Soft landings, which the market is
01:46talking about right now, are actually rare. That's something which has happened only a
01:51couple of times in over 100 years of history in the US. That's why many previous rate cuts
01:59have not followed up with great market action. So I think rather than following what happens
02:07after the rate cut, we need to focus on the reasons why the rate cuts are happening.
02:13If I think at this juncture, at least the equity markets have taken a comprehensive
02:20and a convincing view that we are getting into a soft landing. That's not how commodity markets
02:29are convinced. And there are differences over there. I'm not trying to draw a parallel to 2008,
02:38but since that's something which is more recent in memories of many of us,
02:44sometime in the fall of 2007 as well, we were arguing that there could be a soft landing.
02:54And what happened in 2008 wasn't really the prettiest of pictures. What we need to
03:03appreciate is many times rate actions take time to play through into the economy.
03:10And that's the bit that many of us in the markets aren't really that patient.
03:17And if a particular rate hike or a rate cut or a lack of one has not led to any significant change
03:24in the near-term economic picture, we start thinking that more or less we've digested all
03:30of that. That may not be completely true. So that's why I think the jury is still out.
03:35However, what we need to, the way we typically, my personal way of looking at markets is to try
03:42and predict how narratives will move rather than predicting the eventual outcome of things,
03:48because the eventual outcome at times is something which takes much longer for us to figure out with
03:55a lot of accuracy. So it's important on narratives when trying to position portfolios as well.
04:02And that is where I believe yesterday's consumer sentiment data point that came out of the US
04:10wasn't really the best one. I would say come the Friday after this one, we will have the jobs
04:17numbers and the employment number. That's going to be very pushy. I think the focus now shifts
04:22away from inflation and shifts more towards some of these metrics, which measure the health of the
04:28economy. If employment falls in a more dramatic way over the next couple of readings, then that's
04:37where suddenly rate cuts per se will not be seen as exciting, but will be seen as more necessary.
04:44And so that's the bit that we need to keep thinking about. So I would say those
04:51first Friday of every month, the job reports that come out, that become far more important over the
04:57next few months and could be one of the days which can cause a lot of volatility. So that's something
05:02that we need to watch out for. Okay. Well, the reason ascribed could be an important determinant
05:10as well as Vikash is saying. The question though is that, because the other, the question of course
05:16is that, one, because it's a mug's game trying to identify what the markets could do. I'm not
05:22saying you guys do that, Vikash. It's a job compulsion to give out targets. So you're of
05:27course doing it very well over a 12 month period. But I mean, over a 15 or a 30 day period, I would
05:33presume it's a bit of a mug's game to try and do that. My question though is, what might be a lot
05:37more informed opinion from you for us would be, what is it that you reckon could happen to flows?
05:44And what is it that you're gauging from your clients about flows into India now that the
05:49easing cycle has started? Is there a one-to-one correlation between an easing cycle and flows
05:53into India? And if not, what are the nuances this time around for inflows into India?
06:00I think that's a very relevant question, more so in the last quarter of this calendar year. Those
06:05flows will be very important because we get into, I would say, a pretty big period of supply coming
06:14in equity markets as well. So that's where more FII inflows will be required. However, can that
06:22be taken for granted? We do not know. See, if there is a rate cut and this narrative of soft
06:34landing continues, then we can be hopeful of more inflows into EM market. However, if this
06:42narrative of soft landing comes under a bit of doubt, even under a rate cut, you're an investor
06:48sitting in the developed world would not feel comfortable putting money in a more risky asset
06:53class. That's how they would view emerging markets as. Then there will be no such major incremental
07:01inflows. Why those two scenarios are very, very important is to add to all of this, what makes
07:08this whole cocktail even more interesting is what China has been doing over the last few days.
07:15Although I have to say, whatever feedback I've been getting with my global colleagues,
07:20the belief in the action taken by the Chinese authorities in terms of being able to cause
07:27a more sustainable rally is still very low. However, if there is a rally in the Chinese
07:33markets, and we do not see a lot of incremental inflows coming into EMs, then there's going to be
07:40allocation away from India just to chase that rally because it's become a consensus under
07:46which. So that's the other thing that we need to kind of bear in mind, to bring all of this
07:53into to make more sense to what is happening closer to home in India. We head into a period
07:59where there's going to be a big race in terms of supply that we will see for this quarter,
08:07if you were to believe many of these media reports, and many of these upcoming IPOs and
08:13other fundraisers if they were to be successful. I think the number that we are looking at is about
08:18$7 billion of total IPO that has been raised, only IPOs. So far, in the first nine months of
08:26this calendar year, the number that could come in could be much more than that in the last three
08:31months itself. So there is definitely a requirement of more inflows into India.
08:39Because if that does not happen, then a lot of the foreigners who are interested in these IPOs
08:45may simply sell out of the secondary market and invest there. So clearly, that could cause
08:51some nervousness in the already listed secondary market space. So in fact, like for example,
08:59last month, the month of August, where we saw a pretty big increase in the weight of India,
09:04despite that, the total FII inflow was only about a little over a billion dollars in that month.
09:12Now, where that came from, there was a very big buying by non-India dedicated passive money that
09:19came into India. But a large part of that buying was from non-India dedicated active sellers.
09:25In fact, although there was over a billion dollars of inflow in the month of August,
09:32more than that went into the primary market. So secondary market actually saw a small outflow
09:38for foreigners. So that is where I think getting this incremental flows from an FII flow perspective
09:46will be even more important than any of the last few months because we are likely to see a very big
09:55supply coming, very big demand for new IPOs coming into the market in the last quarter.
10:02Prakash, it's an interesting point that you raised because when I did,
10:11and correct me if I'm wrong, of course, but when I looked at the last 12 to 18 months,
10:15I thought the foreign participation has been pretty decent in the primary markets, if you will,
10:21and primary market subscriptions have looked very, very robust. I mean, we just closed the small IPO,
10:27of course, but that got subscribed 224 times. Another one which is open, again, a smaller one,
10:32subscribed 24 times on day one. It's quite strong, this appetite for primary paper.
10:42One, is it desirable? Because if there is no primary paper, then liquidity will take the
10:46markets to bubble territory. And two, does it worry you or is it okay that with the kind of
10:51liquidity sloshing around, you will get over subscription, but why should that be a problem?
10:56Because the stocks will eventually list and do what the earnings determine them to do, right?
11:03So see, okay, so what I was trying to say was more about the impact of that
11:09offering supply, that supply on secondary market. But I see, I think there is a need,
11:17there is still a section of futuristic industries, which are not very well represented in our
11:25benchmark. I would say if you were to compare the top 10 constituents of Nifty over the last 10 to
11:3415 years, or even a little longer, most of them have stayed constant. That's not the case if you
11:40were to look at many other large economies, because many of new age kind of companies,
11:46whether you look at the US, whether you look at even China, many of these tech companies and some
11:51of these other companies are now better represented in the market. So whether this is
11:57something which I'm worried about, not really. I mean, from a longer term perspective, it's
12:03desirable that the index, the primary index of the primary market and the index of the country is more
12:11representative of where the growth is expected to come from. So I think that's desirable.
12:16From a shorter term perspective, what you need to appreciate is the rush towards
12:21primary offerings is also to do with the fact of that there is a significant lack of ideas
12:28that we are facing in the secondary market. And to generate alpha is very, very difficult
12:33to get an upfront discount and a large allocation in one of these things, although that's difficult.
12:38But to try and get that is what institutional investors are after. Because that's where a lot
12:43of the alpha for many of the listed funds have come from. But Vikas, sorry, may I just ask,
12:48I can understand if the nature of the paper that would have come in would have been of a completely
12:54different nature. Like, I mean, I'm just saying, for example, if Zomato got subscribed with an IPO
13:00today, in a massive fashion, because it's just a differentiated business model, a lot of companies
13:05which are getting subscribed are not really, I mean, for lack of better word, differentiated.
13:11There are parallels existing with proven records in the secondary markets as well.
13:17And it's not that the primary card paper is coming at a very high discount, right?
13:21So then why? Or is your opinion different?
13:26No, I do not differ over there. See, I think what you need to appreciate,
13:29I think we are also at a point where if you talk to many people privately,
13:35the kind of valuations that you're able to get in public markets are perhaps even better than
13:40what you're getting in private markets. So there is obviously a rush to invest and to raise money
13:46in public markets in that process. See, we can't regulate all of these things. It's not for you
13:53and me or anybody to ration that. That's the beauty of how capitalism works. And in this process,
13:59of course, there's going to be some disappointments, some failures. If you look through,
14:05for most sectors, if we look at valuations for those sectors in India, and for the same sectors
14:13across the world, in most cases, I won't be surprised to find that India is the most expensive
14:22valuation, not just as an overall market, but across sectors, sector by sector.
14:27Like an Indian consumer company would be the most expensive in the world.
14:32I would say Indian tech companies would be nearly the most expensive in the world.
14:35So those are things that what that does is clearly a way in which you kind of try and
14:44monetize that thing. Eventually, a market like what we are in at this point of time
14:51will possibly supply is what will bring it down. Because unlike many other previous,
14:58if you were to look at history and the history of large corrections that have come in global
15:02markets, that have typically coincided with something wrong happening with the economy.
15:08If you were to look at EMs, then discipline going haywire of some kind of deficits getting
15:14created, leverage being there. Those worries are not there in India right now. That's the good part.
15:22Most of the worries that we have are more to do with excitement and the equity markets and
15:27perhaps that excitement getting frothy or not frothy and those parts.
15:32So this is likely, if it's an equity market problem, it will be solved by the, or if it's
15:39an equity market excitement, a problem will be created in equity market. And that problem might
15:43very well come from supply. And it could pretty much, how it could come if there is too much
15:49supply. And at the same point of time, supply comes at a time when foreigners are not able to
15:53plow in a lot of incremental money, but simply take out money from secondary market and reassess.
15:59So that's where some of this could happen. Are your clients telling you that? I mean,
16:03because for example, we were at one of the other investor conferences of your peer groups and there
16:09the conversation seemed to be that people are actually looking for avenues to invest into
16:14India. They recognize that some parts of India is expensive, but they still want a piece of India.
16:19What are your clients telling you? Well, I would say the discussion needs to move in terms of when
16:26you put horizons in perspective. What you're saying is absolutely true. And so we had our
16:34big Asia forum in Hong Kong very recently, and where we possibly end up getting almost
16:412000 investors over there. Very, very busy conference, very well attended, possibly one
16:46of the most popular Asia conferences. What I could sense was clearly a massive liking for India.
16:57However, that does not translate into immediate flows, because people are not comfortable with
17:06valuations. So I think the way I will read that is, the two things that I said, firstly,
17:13there's a massive liking amongst foreigners for India. Secondly, at the same point of time,
17:18we don't really have an economic problem. We only have a stock market. Both of those things mean
17:24that if there is a stock market problem leading to a pullback, perhaps the pullback will not be
17:30deep enough. It will be a relatively shallow pullback rather than a 40%, 50% correction,
17:35which we typically think of a bear market. It will not be that much. Because the longer term
17:40story is still pretty powerful.
17:42Pretty powerful. That's true. Vikash, you made a point about how representation of sectors
17:47or themes which are not well represented should be there, and those which get earnings growth,
17:51etc. This whole new age tech sector that has gotten formed, what is your view here? Because,
17:57for example, I read a note which had a very nice tagline from your house, which said,
18:02are you talking about an urban slowdown? Ask Diljit and Coldplay or something like that, right? So
18:08a very nicely written note there. But my question is this, what's your view on the Zomatos,
18:14PB Fintechs, and this whole tech enabled sectors, which are probably promising mercurial growth?
18:19Will they have higher representation on the benchmark indices, the Nifty and the Sensex too?
18:25Could there be multiple times what they are right now in size?
18:29See, I think those two are easier to answer yes to both of them. Yes,
18:32there will be multiple size of that. And will they have a higher representation? Absolutely.
18:37However, I would avoid taking a broad brush approach to things called tech. In fact,
18:43we as a house do not do that. We don't really cover things like tech. We appreciate that tech
18:50at times is just another way or another distribution channel. And the cores of
18:55many parts of the businesses are still there. So we don't really cover it as a tech sector,
19:02we cover it based on the core offerings that that sector has. So I think the kind of report
19:08that you mentioned would be consumer tech and covered by some of these quick commerce companies
19:13and all of that. But the others that you mentioned about is more around Fintech,
19:16they'll be covered with the finance. So I would say you need to look at things.
19:21There is some amount of tech, which is going to be there across most businesses. So we should
19:25not really be misusing the word tech. However, there are certain themes where if they are
19:32genuinely solving a problem, and there is a clear case for them to grow the business and the
19:37industry. I think those things are there. I would say quick commerce possibly is one of that spaces,
19:41where we actually had a very nicely titled detailed report called Apra Kadabra. So I
19:49think that's something which is the other one that you should take a look at. But clearly,
19:54there are areas where things are much more promising than the others. And that's where
20:01one needs to differentiate. I'm not in the camp. Yes, in a bull market, you try and
20:05use a broad-bush approach, but that's where eventually survivability and sustainability
20:11will be measured. To do that hard work to appreciate where a more sustainable business
20:18model will be and which is just going to continue growing. I want to do a small conversation,
20:25Vikash with you on the one thing that's actually started to move a little now,
20:30but had baffled people for such a long time as to what to do with banks,
20:34private sector banks in particular, laid low for such a long time. And sure, I mean, the growth
20:41numbers were a bit off. And each of the large five private sector banks had idiosyncratic issues too.
20:46But do you reckon that the next 12 to 18 months, if the markets have to do well,
20:52then banks will be key participants?
20:55See, I think the 12 to 18 months bit is not always easy to guess because
21:04I think they're definitely facing some challenges in the near term. But
21:08if you look at a slightly longer term perspective, and many investors who are investing in India are
21:14trying to play the long term story, the fact that it could continue for a few more, clearly,
21:20many more years, it is going to be difficult for banks to not do well, if the overall economic
21:29growth thesis that we are talking about, kind of really plays out for them to have credit growth
21:35closer to what nominal GDP is, is something which is not difficult to imagine. Yes,
21:42there are some near term worries that have got created. I think for people who have a slightly
21:48longer term horizon, more like a three year kind of horizon, this is one place where there is still
21:54possibility of rewriting of multiples. And at times, market has this ability and a willingness
22:04to extrapolate the near term. And it could do that at good times, it could do that at bad times.
22:09I think for banks, it is happening on the reverse. And that's where the normalization of and that
22:15dawning of reality whenever that happens, would lead to some improvement in the way people look
22:20at it. So from a slightly longer term perspective, yes, this is one of the few spaces, very few
22:25spaces where I still see room for a potential rewriting, which could be possible on a slightly
22:31more medium term perspective. Got it. And would it be restricted to large private banks? Or do
22:35you believe SOE banks could also feature in that list, Prakash? I would say the rewriting in the
22:40SOE banks has already happened and that's pretty visible. It is the large private sector banks that
22:46I'm particularly happy with. One last question, Prakash, and again, just broadening out.
22:54There's a Bloomberg story which says that buy ratings are vanishing in India's overheated
22:59market. Now, I mean, it's a very, I won't say hyperbolistic headline, but something which is
23:06really pumping up the issue. But my question really is that at your house, do you sense that
23:11the number of stocks on which you can comfortably give a buy call
23:14is a lot lower right now than what it was maybe 12 months ago?
23:18Absolutely. I mean, that's something that we've been talking about for the last two,
23:23three quarters as well. We've seen a couple of quarters where a bigger chunk of, a pretty big
23:29chunk of companies say more companies have seen upgrades as compared to downgrades in terms of
23:35estimates, in terms of earnings estimates. However, analysts, when they were taking action
23:41on price target and recommendation, there were far more downgrade in recommendation than upgrade.
23:47I think we are dealing with a unique situation for a few, because a few things have changed.
23:56We are used to a period where the marginal price, the marginal stock price was determined by
24:05FIIs. And those FIIs used to compare valuations in India versus valuations elsewhere.
24:13That has fundamentally changed for now. The marginal price is being determined by domestic
24:21investors. And these domestic investors in most cases have only one market to invest.
24:28They do not really compare valuations with what is happening in another market on a regular
24:35basis. So I think just the fact that India is more expensive or it is more expensive versus
24:42history is typically the way analysts look at things. And there could be these short-term
24:49periods where that is not a good gauge to give you short-term performance. And perhaps we are
24:57in that short-term period where more fundamental analysts, and I myself am one looking at a
25:03particular sector, but it is going to be difficult when you look at some of those benchmarks.
25:08But such periods do not last for many, many years. They do last a few months,
25:14and they will last a year or two. That is going to be challenging because eventually
25:21people will follow the money. You can already see foreign companies trying to list into India.
25:28So there are things that will happen to normalize this big arbitrage that is existing.
25:35But in the very short term, this thing can continue for a while. And that is where the
25:40challenge comes in because many analysts would look at history or look at bear bears and think
25:47that this is not straightforward. And that is where the struggle will continue.
25:52Most certainly, Vikas. Great having you. Thanks so much for taking the time out and joining us
25:56and giving us your perspective. Maybe if the festive season is too soon, then closer to the
26:02year-end or maybe once the new calendar begins, we would love to do a conversation. But thanks
26:06for joining in today. Thank you. Thanks for having me. That is the CLSA View. And that is
26:11all the time that we have on this edition of Talking Point. Thanks so much for watching.