For those who are looking at the current market fall and especially in context of the post Budget rally, what would you like to tell mutual fund investors? For those who are here for the long haul, does today’s price aberration or last one week’s for that matter, even matter?
I have always been bullish, always positive because the underlying economic footprint of India is clearly on an upward trend and the equity markets respect that. Any corrections are a time to buy. That is what we have learnt in 25 years of the fund.
As a sample let me tell you, the midcap fund that we launched in July 2002 has delivered 23% per annum to the investors. Effectively, if you take the rule of 72, it has doubled the investors’ money every three-and-a-half years. So what more do you want? Ultimately for us, this Budget rally or today’s inflation correction are just events in the market. Ultimately, the economy drives the earnings growth.
So I think that from a five, 10-year perspective, a systematic purchasing is the best way not to get these heart attacks in terms of correction. Today you feel very bad. But, if you had put the money yesterday, you would have said, “Oh, I should have waited for a day.” So, these are all emotional reactions. So have a systematic allocation pattern — be it through SIPs, or via liquid route to STPs or just have a trend line that when the market corrects 5%, I will put in more money. A systematic allocation is the best route. Second, diversification is a must. Very often people look at diversification saying it reduces the risk but not the reward so much. But there is another aspect of diversification. It helps you pick the best returns at all times. One and a half years ago, nobody would have invested in pharma but the Covid crisis suddenly gave pharma a big push up. If you diversify across multiple asset classes, then you will be there when the market surprises you.
Nobody had predicted the doubling of the market from March 2020 to now. The key is stay diversified and take a systematic approach. For us, our investors — more than three and a half million of them — have stayed the course and they have enjoyed the benefit of the market. My message to our investors would be continue investing. To other investors, I’d say look at the long-term track record of the company.
We have made profits every single year in these 25 years. It is possible that a company which is anchored to the economy like us via derivatives of the economy like financial services is always going to deliver an x alpha return over the economic growth of the country. The ultimate message is stay hungry, stay bullish, stay invested.
Given that you said that this decline is a good buying opportunity, is there no concern, fear or worry of this escalating further?
I think it is a knee-jerk panic reaction, number one. Second, inflation spooked the market because there is a fear that the liquidity provided by FII money could reverse to some extent and go back there because interest rates have gone higher. So, somebody might invest in US fee bills today, somebody’s borrowing cost could have gone up but look at what the inflation is telling you. The projected inflation going up means that demand is going to exceed supply in the United States. Demand exceeds supply when consumption is booming, when the US GDP is growing. Now that is good economic news. If the US economy thrives, that is good news for the rest of the world which supplies to the US. China is a major beneficiary but India as a beneficiary of the China plus one strategy is in a pole position.
How long can you expect only liquidity to sustain a rally? We need economic growth and a significant part of the economic growth comes from our export story and taking advantage of our low cost labour, land availability and the ease of doing business. These factors will reinforce the long-term story and that is why I call it a knee-jerk reaction.
Yes, there will be short-term liquidity outflows but long-term money will come chasing because ultimately the US economic story is a good story for the Indian economy. Let us not forget that the basics for the market is about earnings related to GDP and a decent amount of inflation is necessary to keep the economic wheels turning.
I am not a bear when it comes to looking at inflation because for me, liquidity will come and liquidity will go, but it is the sustainable economic growth of our country for which we need an advanced world on a good growth path. I would say look at the bright side of the story.
Given that the banks are really facing the brunt at the current juncture, what is your outlook in terms of the overall credit growth and asset quality? Some of these PSU banks have had a pretty phenomenal series .
Rising bond yields means the mark to market tends to bring down the banks’ non-lending assets, whether in G-Secs or in commercial papers. Hence in the short term, their EPS from the non-core business that is non-lending business, may come down. That is the reason private sector banks are correcting because they generally are very careful lenders and keep a lot of money in treasuries and all of that as a smart methodology. So there could be a short-term correction in the earnings. But in the longer run, considering that rising inflation means rising growth, banks are poised to benefit because they are ones who are going to finance that growth and ultimately any rise in interest cost will be passed on to the borrowers in a scenario where demand exceeds supply.
When demand exceeds supply, the price is set by the supplier. Money is a commodity like any others. When demand for money exceeds supply, that is when interest rates go up but the price is set by the supplier of money which is the bank. Coming back to the same story, the core business of banks will stand to benefit from this rising inflation and rising GDP story. Short term, there will be corrections because of the mark to market losses of their portfolios but that is not the core business of the bank. That is the surplus money being managed in a treasury.
Banks’ core net interest margins have not been affected by this. So again this is a short-term reaction to liquidity. Finally, 35% of our largecaps are banking stocks. When FIIs pull out money, naturally they tend to pull out from where they have a lot of exposure. Plus, there has been a recent runup and so profit booking also comes into play. Overall I do not see this as a sustainable thing.
The longer term PSU banks story is different because of value catch-up and also because related to private sector banks, there was a huge gap. All the news around the budget, the capitalisation, the bad banks creation gave it a positive feel. The news around mergers and strategic divestments gave it a good feel. The correction in valuation, which was huge on a price to book between private sector and public sector, has narrowed. But public sector banks will thrive only when the Indian economy thrives. Keep a close look on the GDP revival and the economic revival. That is when public sector banks would really reap the benefits.
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