Master Talk: India Equities Investment Outlook
Join us for the conversation “India Equities Investment Outlook” with Harsha Upadhyaya, President & CIO - Equity, Kotak Mahindra Asset Management Company
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Transcript
00:00 Good evening, and welcome back to our fifth episode of the MasterTalks series, where we
00:28 will try to understand from our esteemed guest, Mr. Harsha Upadhyay, the Indian equities investment
00:34 outlook. Before we start the discussion with Harsha, let us quickly look at the year gone
00:39 by. We saw Nifty 50 index hit an all time high of 12,430 on 20th January 2020. Back
00:48 then, there were mixed feelings around in the market, the nifty direction going forward,
00:54 with a very limited or no view, no idea of the pandemic and its impact on the market
00:59 about to hit us. Exactly one month later on 20th February, we started seeing market discounting
01:06 the likely impact of the pandemic. Fast forward one month on the eve of 24th March 2020, Prime
01:14 Minister Narendra Modi ordered a nationwide lockdown and around the same time, Nifty 50
01:19 index hit the bottom of 7,511. All of a sudden, the economic activity came to a standstill.
01:27 There were extreme pessimism in the market and the future of global economy looked extremely
01:32 blurred. 20th April 2020 will go down in the oil market history as the day when the US
01:39 benchmark price for the crude dropped below zero for the first time ever. By then, we
01:45 have seen that the market started to recover. There were thousands of views being shared
01:49 in the market that Indian economy will see a U-shaped recovery or a V-shaped recovery
01:54 or a W-shaped recovery or a K-shaped recovery. Though now we know that Indian economy saw
02:01 a more or less a V-shaped recovery. And as we stand today, the nifty index is hovering
02:07 at an all-time high of around 16,600 levels, over a 100% growth from March 2020 lows and
02:15 approximately 20% growth year to date. On that note, let's start today's episode of
02:22 the MasterTalk series on Indian equities investment outlook powered by Refinitiv, a London stock
02:28 exchange group company, a leading financial markets infrastructure and data provider in
02:33 association with Outlook money. I am Syed Owaisaghi, your host for this session. I am
02:39 a proposition sales specialist for investment and advisory business at Refinitiv for South
02:44 Asia market. Today we have with us Mr. Harsha Upadhyay, Chief Investment Officer for Equity
02:50 and President at Kotak Mahindra Asset Management Company Limited. Let's talk to him, learn
02:56 from him and find out his views on Indian equities market. Harsha, we have seen that
03:03 RBI continue to keep the interest rates low and liquidity continues to stay in the market.
03:08 Inflation is hovering around 6%. Data suggests that retail participation in the capital market
03:14 at NSE has risen to 45% in May 2021 from 39% in March 2020. My question to you is, equities
03:23 are once again being looked at as an asset class to generate inflation beating returns.
03:28 Considering the impact of the pandemic on the businesses and the overall economy, are
03:33 we asking too much from equity market?
03:36 Owais, as we all know, equities are for long term. So to that extent, history shows that
03:43 over a long period of time in different geographies, equities have outperformed their respective
03:48 inflation benchmarks. So if one is looking to hedge their bets against a rise in inflation,
03:55 I think equity should be the first asset class that they should go to. However, I should
04:00 also point out that equities are never linear in terms of their returns. There will be ups
04:06 and downs. So the investors ideally should be looking at a long term investment and also
04:12 should be able to withstand the interim volatility that equities will have. So to that extent,
04:18 there is no bad period or a good period for equities. Yes, depending on where the valuations
04:24 are, you may relatively look at a particular period as a bad period or a good period. But
04:30 essentially if you are investing in a regular fashion for a long term, more often than not,
04:36 equities will give you handsome returns. I think even at current levels where the valuations
04:41 may be slightly higher than the long term average. But if you believe that the economic
04:46 recovery is going to gain some ground, given that we have vaccinated a considerable proportion
04:53 of our population and second Covid wave is also under control, then the economic activity
04:59 resumption should continue to gain momentum. And that's where we believe that there is
05:05 upside in the market for medium to long term.
05:08 Thank you, Harshabh. And you made a very pertinent point about valuation. And although it is
05:13 a little stretched, but equities are to be looked at from a long term perspective and
05:18 the journey is never linear. Harshabh, over the last few years, mutual fund industry AUM
05:25 has seen a CAGR of 20.6%. With that, even within that, if you look at equity oriented
05:33 AUM, it has grown at a significantly high CAGR of 25%. We see mutual funds licenses
05:40 being approved by SEBI, we hear PMSs and AIF setting up their shops more frequently. However,
05:46 there is one constant debate in the market doing rounds on active versus index funds.
05:51 We wanted to take your view on how can investors look at allocating capital while investing
05:57 in active versus index funds with lower fees and some quant funds performing well through
06:02 the pandemic in India. Are passively managed funds going to see more uptake in coming months?
06:09 Well, clearly, these are two distinct sets of funds that one can choose from. But as
06:16 the name suggests, in a passive fund, there is no active management of portfolio stocks,
06:22 there is no active portfolio investment process that you follow. You just replicate an index.
06:28 So to that extent, yes, the costs are less, but it also does not give you any upside over
06:35 the benchmark at any point of time, it will just track the benchmark. So for those investors
06:40 who do not want any volatility because of the active fund management, or those who are
06:46 just entering the equities and they are more comfortable benchmarking themselves against,
06:51 let us say, Nifty, Sensex or any other known index, this particular set of funds would
06:57 be ideal, because they do not have to really bother about how the fund house is managing
07:04 the money, what are the biases that one can see in the investment process, nothing of
07:11 any of these issues, you just have to look at Nifty or Sensex or any other index, and
07:17 you will broadly get an idea in terms of how that particular fund is doing. Whereas, if
07:23 you look at India as a market, being an emerging economy, you will always have new sectors,
07:28 new stocks coming into listed space. We have seen that happening over the last several
07:32 years. A couple of years back, you started seeing many of the non-lending financial services
07:39 coming into market, insurance, asset management companies. More recently, we have also seen
07:45 some of the internet companies coming into the listed space, there are more in the pipeline.
07:50 So at every point of time, in a market like India, you will always have new set of stocks
07:55 coming into the market. Many of these may not directly go into the index, they will
08:00 take time before they enter any mainline index. And also, even within the existing set of
08:06 listed stocks, there is ample universe, which can be used by an active fund manager to provide
08:15 outperformance against the benchmark. So, while the costs are higher than a passive
08:19 fund in case of active funds, but if you look at the history, most well-managed, good-performing
08:25 schemes of the country have managed to provide outperformance against the respective benchmarks
08:32 on a medium to long-term basis. Again, one cannot be saying that every quarter, every
08:36 month a particular fund will be providing outperformance, while the endeavour of every
08:41 fund manager in the country would be to consistently provide that outperformance. But markets being
08:48 markets and volatility being inherent to markets, you will have periods of underperformance,
08:54 outperformance in an active fund. But all well-managed funds should be able to give
08:59 you outperformance over a long period of time. So, if an investor is looking at investing
09:06 over a long period of time, then ideally active funds, despite the outperformance that we
09:11 have seen in the recent years, there is still scope for active fund managers to provide
09:16 outperformance in our opinion.
09:19 Yeah, thank you so much. I mean, what you're essentially suggesting is that if new investors
09:25 who don't want to take any risks, they can maybe try their luck in index funds. However,
09:33 other investors should continue to be in the active management space because in a longer
09:39 term period, active funds do outperform.
09:44 So if we look at year-to-date sectoral performance, then metals, IT and PSU banks have done very
09:50 well, while auto, pharma and FMCG have been average performers. I mean, average performers
09:56 when compared to the broader market, they are average performers. On the other side,
10:00 the surge in the inflation has been in focus over the last few months. May and June, we
10:05 saw numbers around 6.3%, while in July, it has cooled down a bit to 5.59%. So my question
10:13 is, looking at the current bull market, what are the sectors interested back closely? Should
10:19 active and passive investors have different sectoral mix in their portfolios, basis changing
10:23 inflation numbers?
10:24 First of all, the passive investors do not have the flexibility to expect variation in
10:31 terms of sectoral exposures. For example, if somebody is investing in a nifty ETF or
10:38 nifty index fund, the composition of that portfolio will exactly replicate the sectoral
10:44 composition of that particular index. So to that extent, there is no flexibility for the
10:48 portfolio managers to really alter that. As far as the active funds are concerned, yes,
10:54 depending on the outlook of market, depending on the relative valuations of sectors, relative
10:59 growth prospects of various sectors, the portfolio managers will make adjustments to the portfolio.
11:06 For example, if you look at Kotech Mutual Fund, currently we have a judicious mix of
11:13 defensive as well as some of the cyclical sectors in our portfolio. Some of the defensive
11:18 sectors such as IT, pharma have given decent performance in the recent past. But as we
11:25 look ahead, we believe that the valuations in some of these sectors do not really allow
11:31 more upside on a consistent basis. Whereas if you look at some of the cyclical pockets,
11:38 for example, financials, industrials, cement, many other manufacturing categories, there
11:44 is a bit of an upside that is still left because if economic momentum continues, we believe
11:52 that there is an earning surprise on the positive side that we can expect from some of these
11:57 cyclical baskets and also a possibility of a re-rating. So, to that extent, incrementally
12:03 we would look at more of cyclical sectors in our portfolio for incremental exposure.
12:09 Whereas defensives have contributed significantly to the performance in the recent past, they
12:14 will continue to be part of the portfolio. But I guess, incrementally, they do not leave
12:19 too much room for re-rating in valuations.
12:23 So, essentially, what you're saying is defensive stocks, IT, pharma have already given a very
12:29 good performance and they are in a good overvalued zone or a fairly valued, I would say. And
12:36 cyclicals still have certain areas where they can see potential.
12:42 So in our study, we found that there are small and large total 80 IPOs listed in 2021 so
12:48 far. Our market is expecting even more numbers of IPOs in 2022. We discussed this in the
12:55 start of our conversation. But clearly, IPOs from Indian startups are the flavor of the
12:59 hour. How should investors look at such opportunities? Early adoption or wait and watch? What is
13:07 the right approach in your opinion?
13:10 Clearly 2020 and 2021 have been very good for IPOs. We have seen a plethora of IPOs
13:17 coming in. And in most cases, I would say, immediately after listing, the investors have
13:23 made money. But to extrapolate the same thing that it will continue to happen over the next
13:29 few quarters, years is not the right way to approach IPOs.
13:34 First of all, there is no difference between an IPO and a secondary market purchase, I
13:39 would say. Finally, you will have to decide how the companies are shaping up in terms
13:46 of businesses, how the management is capable of running those businesses. And finally,
13:51 you have to have a filter of valuation in whichever purchase that you do for the portfolio
13:56 or for yourself. So to that extent, all the parameters that you analyze would be similar
14:03 to a secondary market purchase, even when you are investing in an IPO.
14:08 And one should not really be guided by what happens immediately after the listing. Because
14:13 if you look at the last one decade, and see how many of those IPOs which came in, in the
14:18 last decade, are consistently outperforming the benchmark, you will find that it is less
14:23 than 10% of the IPOs. So clearly over the long term, the euphoria goes down and people
14:29 will look back towards fundamentals to really see whether it is worth investing, worth holding
14:34 on.
14:35 So from that perspective, I would say that one should not just believe that all the IPOs
14:40 are going to make money for oneself. And also in the recent times, last few weeks, where
14:46 the volatility in the market has increased, we have already seen a couple of IPOs quoting
14:50 below the issue price on listing. So, and one more factor that one should remember is
14:56 in a secondary market purchase, you will be able to most probably invest whatever you
15:01 intended to invest, there will be no issues of liquidity, at least for a retail investor.
15:06 Whereas in case of an IPO, it all depends on the probability of getting the allotment.
15:12 And even when you get the allotment, it is going to be very small sum. So when you are
15:16 looking at the overall returns on your portfolio, it is not going to be meaningful unless and
15:21 until you really build a portfolio, looking at the fundamentals for the longer term.
15:27 So I would say that keeping these things in mind, one should evaluate IPOs and if the
15:33 outlook is positive, if the valuations are reasonable, then one should go ahead and invest.
15:39 So just a follow on question to that, we noticed that wherever promoters are diluting significant
15:46 stakes, those are the IPOs that you should be staying away from. I mean, that's the thought
15:52 that retail investors usually have. So are you aligned with that? Or do you have a different
15:57 opinion?
15:58 See, end of the day, what you need to look at is how much they are, not how much they
16:03 are diluting, but what they are going to hold post the IPO. I think that gives you the comfort
16:08 in terms of whether they are going to remain as one of the large shareholders of the company
16:13 or not. And I think in most cases, the promoters are going to remain as large shareholders
16:18 of the company. In very few cases, they would go below the comfort level that a retail investor
16:24 or an institutional investor would have on promoter holding. So to that extent, yes,
16:29 I mean, it's one of the indicators, but I don't think solely you can go by what happens
16:33 on the promoter holding side.
16:36 So company management, liquidity and post IPOs, what is the holdings of the promoter?
16:42 These are the four criteria, in general.
16:45 And valuation, of course.
16:46 And valuation also, of course. And you made a very pertinent point that there is no significant
16:52 difference how you evaluate a company in secondary market or primary market. It is actually the
16:57 same way. It's just that this is just first time listing. So maybe the information in
17:02 the market is a little less about the company.
17:05 In fact, one should be aware that the insiders are going to sell during an IPO. So to that
17:09 extent, insiders always know more than the outsiders. So you have to be extra careful
17:14 in IPOs than in probably a generalistic secondary market purchase.
17:21 Exactly. Thank you so much for your thoughts on that, Harsha. So coming to our next question,
17:27 fundamental metrics suggest that Indian market is a little overvalued zone. So key parameters
17:33 like Nifty 50 PE continues to remain above 25. So my question is, are foreign equities
17:40 being adopted as a way for investors now more worried about high valuations of Indian scripts?
17:46 Are these worries justified? How are Indian financial markets reacting to this development?
17:51 And what is the future outlook looking like for you?
17:55 With clearly over the last few quarters, we have seen a lot more interest in international
18:01 equities or international funds by Indian investors. But to say that it is because of
18:07 the valuation concerns in the domestic market may not be a fair statement. Because when
18:13 you look at some of the international funds or international themes that Indian investors
18:18 have invested into, they have all been trading at valuations which are much higher than their
18:25 own historical levels and also higher than Indian equity valuation levels. For example,
18:31 there has been great interest in terms of technology and innovation focused funds. And
18:36 all of these funds are trading at much higher multiples because the companies which are
18:42 at the forefront of innovation or technology change are generally being seen as something
18:48 which will sustain over the next few years. And the growth is going to be much higher
18:53 than the rest of the market. So in that perspective, these are the ones which are generally trading
18:59 at higher valuation and that continues. So I don't think valuation is the concern which
19:05 is leading to the current level of interest. I would say that the biggest benefit of international
19:12 funds is the fact that you are diversifying out of Indian assets. Because most Indian
19:17 investors are fully or almost fully invested into Indian equities. For them, this is definitely
19:24 a welcome diversification that one can look at. And also it gives you a hedge against
19:30 potential depreciation of Indian currency against foreign currency. So these are some
19:35 of the critical factors rather than just valuation, I would say. And as far as our advice to investors
19:41 who are looking at building their equity portfolio, we believe that yes, at this point of time,
19:48 it makes sense to look at even international funds. But again, these are mostly like thematic
19:55 funds or funds which you can have to a certain extent, not entire portfolio of yours can
20:01 be in these funds. So anywhere around 10% or so in international funds is not a bad
20:09 move. And also it gives you, as I said, diversification benefits and also hedge against potential
20:15 depreciation of currency.
20:17 Okay, fine. So essentially, you're not very worried about the valuations as of now?
20:26 You mean to say on the Indian market?
20:28 On the Indian market, I would suggest, yes.
20:31 As we discussed earlier, definitely the valuations are slightly higher than the long term averages.
20:37 But we should also keep in mind that a bit of this is due to the fact that we had COVID
20:43 led disruptions at least twice in the last 12 months. And everyone expects that that
20:48 is transient. And as you go forward, the economic momentum should improve. Given those considerations
20:54 and the fact that earnings are still growing at a healthy pace, we have seen valuations
20:59 being on the higher side. Yes, it makes equities to that extent less attractive. But I don't
21:06 think for an investor who is investing for the next three, five years in Indian equities,
21:11 it is that much of a concern. Maybe if somebody is looking at a very short term, one can't
21:16 say equities will have volatility and especially at these valuation levels, if there is any
21:21 negative development, any negative trigger, there could be correction in the market.
21:26 Okay, so three, five years or plus, whoever has an investment horizon, he should not be
21:31 that worried about the valuations and carry on. So, so, Asha, with different types of
21:39 recovery models being suggested and indexes soaring to all time highs, there are chances
21:44 of behavioral biases creeping into investment strategy. How can investors be wary of these
21:51 biases? Any market indicators, data points, investors should keep a close watch on?
21:58 See clearly, in a bull market, especially the one like what we have seen in the last
22:03 12-15 months, which is more liquidity driven, you end up seeing most of the stocks performing
22:09 well. So, whatever purchases one would have done, whether it is a retail investor or an
22:14 institutional investor, it is more likely that you would have seen a positive outcome.
22:19 This is one of the biggest issues that one needs to really focus on because there is
22:25 always a behavioral trait, which is of recency bias. And if you believe that what has happened
22:31 in the immediate past is going to continue or even improve from these levels, then that
22:40 may not work out at all points of time. So, one of the things that investors should be
22:45 really focusing on is not to really get biased by what has happened in the recent past and
22:51 look at it as a fresh investment at this point of time, whether it makes sense based on the
22:56 current valuations, current growth outlook, etc. So, that is something that one should
23:00 do. And there is also another behavioral trait that people get caught into, which is of bandwagon
23:08 effect or a groupthink effect, as you call it. Which means that people tend to believe
23:14 that what the majority of investors are doing in the market is the right way to approach
23:21 markets and then they just follow that groupthink philosophy. While it may work until the market
23:30 trend continues to be on the same side, but whenever there is an inflection point or whenever
23:35 there is a reversal in the trend, they get caught because they have not analyzed some
23:39 of the fundamental issues related to growth, valuation, etc. I think there will be many
23:45 such biases that investors will have, but these are the two things that are critical
23:51 at this point of time to make sure that you are not really get caught in these biases.
24:00 And this brings me to my last question, and I am sure most of our viewers would be interested
24:04 in knowing this, and especially from you, what would an ideal equities investment climate
24:10 look like a year from now?
24:12 It was clearly over the last three to five years when you look at it, almost on a continuous
24:19 basis we have had some disruptions, starting with demonetization, GST implementation, then
24:25 the economic sluggishness that we saw. Then over the last couple of years, we have seen
24:33 problems relating to financial sector as well, and then the COVID disruption as well.
24:39 So I think as we look forward, most of these issues are behind us. I think markets have
24:45 got adjusted to this, businesses have got adjusted to this. And if there is no further
24:51 disruption due to COVID, our sense is next year when we are at the same time, 12 months
24:57 down the line, things should be much brighter for our economy. So to that extent, I think
25:03 the improvement in the profitability cycle that we are seeing should gain momentum. A
25:08 lot more companies should start participating in that growth cycle. Today, while market
25:15 has favored mid caps and small caps, there are many mid caps and small caps which have
25:19 not been doing the business as great as what they would really want to or as compared to
25:25 the large caps. Hopefully that situation would change 12 months down the line. So our sense
25:31 is 12 months down the line, at least from a business perspective, things should be a
25:35 lot better and that should favor most of the corporate sector.
25:43 As far as valuations are concerned, obviously nobody can expect what the valuations will
25:48 be at that point of time. But if one is investing for next 3-5 years, even at the current valuations
25:54 which are slightly higher, you should end up making decent returns which are inflation
25:59 beating in our opinion from the equities as an asset class. So overall, it's a favorable
26:04 environment for equity investors and that should improve in our opinion over the next
26:10 one year as well.
26:12 Great. Thank you so much, Asha, for giving your perspective around the Indian equities
26:19 investment outlook, not only from a current perspective, but also from how the future
26:25 looks like maybe 12 months down the line. So with this, we come to an end of today's
26:30 episode of MasterTalk series presented by Refinitiv. Thank you so much, Asha, for this
26:36 very insightful session. We hope that our investment community will be largely benefited
26:41 with today's discussion. Viewers, we hope you enjoyed our conversation today. If you
26:47 have any comments, suggestions or questions, do write to us at letters@outlookmoney.com.
26:53 Thank you.
26:54 Thank you.
26:55 Thank you.
26:56 Thank you.
26:57 (music fades)
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