Alpha Strategist | Motilal Oswal Pvt Wealth's August View Is Optimism & Arithmetic
Alpha Strategist | #MotilalOswal Private Wealth's August issue of Alpha Strategist is titled, "Optimism & Arithmetic”.
MD Ashish Shanker & Sr VP Nitin Shanbhag share views on markets & top sectors. #BQLive
MD Ashish Shanker & Sr VP Nitin Shanbhag share views on markets & top sectors. #BQLive
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00:00 Well, this month's note on Alpha Strategist,
00:03 the note that is meticulously prepared
00:05 by the team at Moderna Losval, is optimism and arithmetic.
00:11 And they quote Ben Graham when they say,
00:13 "Buy not on optimism, but on arithmetic."
00:15 Now, it would be lovely to get in Ashish and Nitin.
00:19 Now they need no introduction because we talk to them
00:21 every single month.
00:22 I mean, they don't need introduction on this platform.
00:24 They anyways don't need an introduction.
00:26 But it's great to talk to them today
00:29 about what is it that they are trying to convey when they are
00:31 talking about arithmetic.
00:34 Now, gentlemen, I would believe that when a note says that--
00:39 or when a note quotes right at the front that,
00:42 "Buy not on optimism, but on arithmetic,"
00:45 it is sounding cautious.
00:47 Am I reading it right or am I reading it wrong?
00:50 Yeah, so Neeraj, thank you for having us again this month.
00:54 And as I normally say that, every edition
01:00 is a continuation of what we've been messaging
01:02 through the year.
01:03 And if you recollect our conversation last few months,
01:06 we've been quite optimistic, especially on equities.
01:11 And a lot of the markets have kind of played out
01:15 closer to what we expected.
01:17 I mean, you've seen huge FI flows,
01:19 which is driving markets.
01:21 And there is a lot of momentum.
01:24 Having said that, if you see, we have a temperature gauge
01:27 that we publish every month, which basically
01:30 is a word on valuations.
01:31 Now, if I look at the temperature gauge right now,
01:35 on the large cap, it is still in fair value zone,
01:38 inching up towards the expensive zone.
01:40 However, what has moved up very sharply
01:44 is the small and mid-cap space.
01:47 And we continue to be very optimistic about the future.
01:51 The next three, five years look good.
01:52 And a lot of the drivers are in place.
01:55 This is more a messaging of how people
01:57 should build their portfolios.
01:58 So we believe that, given where valuations are,
02:01 some bit of the optimism may be front-ended,
02:04 especially in the small and mid-cap space.
02:06 And hence, the messaging that any incremental allocation
02:10 in equities could happen in a slightly staggered manner,
02:13 especially in the small and mid-cap space.
02:15 And we are seeing that any additional exposure
02:18 that investors may need to take should be taken more
02:21 towards larger large cap or rather multi-cap
02:24 kind of strategies.
02:26 So that's the messaging, Neeraj.
02:27 I mean, I just wanted to ensure that the longer term outlook
02:32 continues to remain positive,
02:33 but the near term markets have run up.
02:37 Of course, earnings have also been decent,
02:40 but it's just that taking a cue
02:42 from the subject of the note,
02:44 when you invest, you cannot just invest
02:46 on sentiment or optimism.
02:48 You have to look at the underlying match,
02:50 the EPS growth, the earnings have to keep pace.
02:53 Otherwise, something will give way at some point.
02:55 - So did earnings disappoint you?
02:57 Also, I ask this question specifically, Ashish,
02:59 because relative to what was the market level
03:03 the last time that we spoke,
03:07 we are about a couple of percentage points
03:09 lower on the Nifty.
03:11 So if at all the markets haven't gotten more expensive,
03:13 relatively speaking, they would have gotten more cheap.
03:16 And yet I'm hearing you sounding a bit more cautious
03:21 than what you were the last time.
03:23 Why this change?
03:24 - Yeah, you wanna comment on earnings, Nitin?
03:27 - So earnings, I mean, we are still
03:31 yet to fully complete the quarter,
03:33 but from whatever we've seen so far,
03:35 most companies have either been at par
03:37 or slightly higher than whatever was estimated
03:40 in terms of earnings growth.
03:42 The only disappointment, if at all,
03:44 at the margin would be IT.
03:45 Otherwise, the pack is definitely led by BFSI,
03:49 both banks as well as NBFCs.
03:52 And clearly, this is a reflection of the fact
03:56 that over the last five years,
03:57 you've seen such a surge in terms of advances,
04:01 such a cleanup in terms of bank balance sheets,
04:04 especially NPAs, so on and so forth.
04:06 They are at decadal lows as we speak.
04:09 Importantly, India Inc. has de-leveraged significantly
04:12 over these last few years.
04:14 And hence, a lot of banks today are well-capitalized
04:18 and well-primed, I would say,
04:20 to fund the next leg of capacity expansion,
04:24 as in when it actually happens.
04:26 So do not see disappointments per se,
04:29 but we'll have to wait and monitor
04:31 how things really progress from here.
04:34 At this point of time, the key sectors
04:36 that are driving the earnings growth is obviously BFSI,
04:38 auto, and at the margin, a little bit of metals,
04:42 but that's more cyclical in nature.
04:44 Consumers will come in.
04:46 The sentiment so far has been rather good,
04:50 judging by the sales that have taken,
04:52 passed in the last quarter or so.
04:54 So we hope that the momentum of earnings
04:57 really continues going forward.
04:59 - So to your point, Neeraj,
05:00 actually Nifty is not that much of a concern, to be honest.
05:03 I mean, the change in the valuation,
05:04 even if you look at our temperature gauge,
05:06 is really marginal.
05:08 And temperature gauge also captures interest rates.
05:11 So if interest rates tend to inch up,
05:12 then the valuations become a little more expensive
05:14 and vice versa.
05:15 So the Nifty, we haven't really seen too much movement,
05:20 but it's basically the broader market,
05:22 which has moved up.
05:24 And that is where we believe that
05:26 one should build portfolios,
05:29 with a little bit of caution and gradually.
05:31 - Got your point.
05:32 So Nitin and Ashish both,
05:36 the last two odd weeks,
05:40 I've heard a bunch of tactical strategists
05:43 come and talk about how some of the pockets
05:46 have run up a lot more.
05:48 And while there has been strong earnings performance,
05:51 the run up has been very strong.
05:52 Maybe a kind of going on the lines
05:54 of what you are saying as well,
05:55 when it comes to the broadening of the spectrum.
05:58 And therefore, sometime in this conversation,
06:01 I would love to talk about, if you can,
06:03 some of these pockets as well,
06:05 wherein you observed a mismatch there.
06:09 But before that, the point,
06:11 since you mentioned that the Nifty is okay,
06:12 I would want to draw a point that
06:16 you guys had made the last conversation,
06:17 wherein you had said that,
06:19 if we correlate the index levels
06:23 to what has happened in the past,
06:26 then we should ideally be at much higher levels
06:28 than what we are currently.
06:30 Now, I'm hearing you say again today
06:32 that the Nifty is not a problem,
06:33 but we've seen a bit of a pullback in the Nifty,
06:36 last 10, 15, 20 days,
06:38 maybe because of the FI liquidity withdrawal.
06:42 You guys speak to a lot of HNIs and institutions locally,
06:47 maybe even globally.
06:49 What's the sense that you get?
06:51 Is there a possibility that the pullback of liquidity
06:54 globally might continue further?
06:56 And could that hurt our markets?
06:59 - Yeah, so I think if you have to look at the FI liquidity
07:05 in the context of what has also happened
07:07 in the previous 18 months,
07:09 and FI has been, in a sense, short on India,
07:12 because you had seen a lot of selling happening
07:15 right up to March, April this year.
07:18 And a lot of the flows which have come in is more catch up,
07:21 because if you look at the other emerging markets
07:24 and you compare India,
07:25 I think India still continues to be in a very, very
07:28 strong spot compared to, let's say, even a China,
07:31 or even some of the globally developed markets.
07:35 So a lot of the flows have been literally playing catch up.
07:40 Now the challenge is, Neeraj,
07:42 if you actually look at what's happening in the US,
07:46 inflation continues to be reasonably sticky.
07:48 We've seen continuously higher prints on inflation,
07:52 and globally, actually, there is a withdrawal of liquidity.
07:56 Typically, when there is a withdrawal of liquidity,
08:00 you tend to have some impact in terms of allocations,
08:03 although the India flows have still been
08:05 reasonably resilient.
08:08 But my experience is that something normally gives way
08:12 when globally liquidity is reducing.
08:13 I mean, markets beyond a point cannot move up
08:17 just on optimism like we mentioned.
08:20 There needs to be liquidity,
08:21 and there needs to be concrete catalysts in the near term
08:24 for the markets to continue their journey.
08:27 So that's really, you know,
08:29 that is another thing that is currently playing on our mind.
08:33 I mean, Nitin, if you want to add anything
08:35 to what I'm saying.
08:36 - No, absolutely.
08:37 I think the correlation has worked
08:39 for a long period of time.
08:41 We are seeing some breakdown of that correlation
08:43 in this year, especially.
08:45 So that's a key monitorable for us,
08:47 at what point of time do equity markets really converge
08:51 to whatever's happening in terms of system liquidity,
08:54 especially with all the G4 central banks, you know,
08:57 pulling back.
08:58 So apart from that, though,
08:59 I think India continues to remain.
09:01 - Yeah, and just wanted to comment on your point on HNIs,
09:04 Neeraj, you had asked how is the sentiment
09:06 and how are they behaving?
09:09 See, like we spoke earlier also,
09:10 a lot of money this year has gone into structured debt
09:12 because the interest rates have been high
09:14 and, you know, the yields have been pretty, pretty attractive.
09:17 So really this rally has taken some of the large investors
09:22 or, you know, HNIs by a little bit of surprise
09:26 because most people hadn't allocated.
09:30 So there is a little bit of a wait and watch,
09:32 which is happening currently.
09:34 It's not that, you know, we are seeing,
09:35 I mean, of course the SIP flows continue,
09:38 the structural, that's the structural story,
09:40 but when it comes to lumpy flows,
09:42 still people are a bit sanguine.
09:44 So I suspect that if markets do correct, it'll be healthy.
09:47 And you might see a lot of HNI liquidity also coming in.
09:50 So, you know, at best, Neeraj, what I see is, you know,
09:53 there could be a kind of a range bound scenario
09:56 because I don't expect, I mean,
09:57 although valuations have moved up a bit,
09:59 I don't expect the markets to crack really
10:01 because the broader macro picture,
10:04 and it'll be healthy if markets kind of spend time here.
10:07 - Yeah, just wondering,
10:09 so you reckon that the HNI flows into the markets
10:12 might come in after a corrective move
10:14 or is this move letting people start thinking
10:19 about putting money, which was not in the markets
10:22 to come into the market?
10:23 Because we know money's coming in from the MF route,
10:25 for sure.
10:26 What we never have a color of is the HNI color,
10:28 HNI community, which you guys have a color about.
10:30 Tell us a bit about it.
10:32 - Yes, so like I mentioned, you know,
10:36 the flows into equities this year have been much lower
10:40 than, you know, some of the other alternative asset classes
10:42 that we've seen.
10:43 So this move up, whenever there's a sharp move up,
10:47 we normally see a little bit of a tempering of flows
10:50 because, you know, everybody wants to get in
10:53 at the right time.
10:55 So I do believe that right now,
10:58 portfolios are in a bit of a wait and watch mode.
11:00 And if the markets do crack from here,
11:02 let's say 5%, 10%,
11:05 then we will see a gush of liquidity coming in.
11:09 Because I don't see a challenge with liquidity,
11:11 to be honest, when I speak to our investors,
11:13 when I speak to family offices,
11:15 when I speak to HNIs,
11:17 and typically these kinds of markets also,
11:19 what they do is they create more liquidity
11:21 from a wealth point of view.
11:22 I mean, if you see,
11:23 suddenly you've seen a lot of IPOs hitting the market,
11:26 suddenly we are seeing a lot of stake sales going through,
11:30 we are also seeing liquidity
11:31 through P and P investments coming through.
11:33 So whenever, you know, there are two sides to the coin,
11:37 I mean, markets have moved up
11:38 and that also means liquidity creation
11:41 in the hands of HNIs.
11:43 - Got it, yeah.
11:44 So I was just wanting to know
11:45 whether they are already thinking of it
11:46 or will it happen maybe 4, 5% lower?
11:47 So I got that answer, thanks for that.
11:49 Now, Nitin, to you, in one of the slides,
11:52 you guys have spoken about how,
11:54 that when you look at the top 500 companies,
11:56 ex-financials, the, forget the P,
12:00 but the cashflow from operations has steadily improved.
12:03 And I think in one of the statements you mentioned
12:05 that if this continues,
12:07 then it actually means there's a scope for re-rating.
12:10 Now, please tell us that how does this arithmetic play out,
12:14 assuming that the improving trend continues,
12:18 does this have the scope of surprising the markets
12:23 on the upside over a three, four year period?
12:26 - Sure, so this analysis that you're referring to, Neeraj,
12:31 really takes into account the top 500 companies,
12:33 ex-financials, right?
12:35 Now, if you look at peak to peak performance,
12:37 which is let's say October, 2021,
12:40 and where the markets are today,
12:41 obviously the markets have gone up,
12:43 Nifty may be up about 10 odd percent,
12:45 mid and small caps would be up anywhere between 12 to 15%,
12:48 but the cashflow from operations
12:50 has risen by a far larger magnitude,
12:53 which is why the EV by CFO,
12:55 which is enterprise value by CFO,
12:57 has pretty much remained at the same levels
12:59 from the earlier peak.
13:01 Also, one more point to note here
13:03 is that cost of capital,
13:04 if you measure it by the 10 year GSEC,
13:07 has gone up during this time period by almost 100 bucks,
13:10 right, it was 6.2% then,
13:12 it's almost close to 7.1, 7.2%,
13:15 around about that range.
13:16 Now, based on whatever the RBI has mentioned
13:19 in its last policy,
13:20 we may be in for a prolonged pause,
13:23 but at some stage over the next two to three years,
13:26 we are definitely likely to see
13:28 interest rate trends moving lower.
13:30 Obviously what that means is that cost of capital
13:34 is likely to get cheaper over the coming years,
13:37 which means this particular ratio
13:39 definitely has a scope for re-rating.
13:42 What is also healthy to see
13:43 is that this is not just consolidated
13:45 within a small group of companies,
13:47 it is much, much more broad-based.
13:50 So to answer your question,
13:51 I think earnings growth definitely
13:53 is the key fundamental reason
13:54 for the driver of stock prices going forward,
13:58 and we believe that this trend
14:00 is likely to stay over the next few years.
14:01 - Just to make it simple, Neeraj, for your viewers,
14:05 essentially what we are saying is
14:06 the quality of earnings is much better today.
14:09 So at the same EPS,
14:11 the companies are generating that EPS
14:14 into cash flows much faster.
14:16 - Got it, thanks.
14:17 Thanks for that, both of you.
14:18 Now, final set of questions.
14:20 We've discussed equities,
14:21 you've spoken about how at a corrective move
14:23 it might be better
14:24 because the arithmetic still is in favor, right?
14:26 I presume that the numbers still point
14:28 towards a one-year probability
14:31 of the markets being higher than where they are right now.
14:33 Is that a fair assumption?
14:34 - Absolutely.
14:36 Again, I would go with that assumption.
14:38 It's just the near term that is looking a bit challenging.
14:41 That's it.
14:42 - Got it.
14:43 So that's equity.
14:43 What about, we haven't,
14:44 the last two or three conversations,
14:46 I haven't been able to ask you anything on fixed income,
14:48 gold, which is what we started off with
14:49 at some point of time in March,
14:51 but we spoke about all the asset classes.
14:52 Any changes, any major changes
14:54 to the fixed income or the gold outlook?
14:56 Canman?
14:57 - Yeah.
14:59 So nothing changes much.
15:02 I think what the RBI has also pointed out
15:05 is to a slight blip in terms of inflation, right?
15:09 The earlier inflation projections
15:11 have just been taken up upwards.
15:14 So we'll have to wait and see whether there is
15:17 at max one more rate hike that may come up in October.
15:20 But to our minds, we are likely to see,
15:23 like I mentioned earlier, a prolonged pause
15:25 and interest rates are likely to remain higher
15:27 for a longer period of time.
15:29 Also, this recent introduction of the interim CRR
15:32 is to take out about a one lakh crore of liquidity
15:35 from the system.
15:36 The system overall liquidity is about 2.5 lakh crores
15:40 as we speak.
15:41 So what that will ensure is that,
15:43 you know, at the shorter end of the curve
15:46 is likely to be at par with the current repo rate,
15:48 which is at 6.5%.
15:50 The curve is absolutely flat as we see it, right?
15:54 But the sweet spot remains between the three
15:56 to seven year segment in terms of accrual.
15:59 So from an incremental fixed income perspective,
16:02 obviously tax notwithstanding,
16:04 we believe that that's the space for AAA or GSEC.
16:09 You know, GSEC is obviously the best way to play it
16:10 because there is hardly any spread,
16:13 any corporate spread to talk about.
16:15 So investors should look at that segment
16:19 from a roll down strategy perspective.
16:21 Also the equity savings funds,
16:24 which allow a multi-asset play
16:26 to investing into fixed income solutions.
16:30 Apart from that, we do see a lot of interest
16:33 given the higher yields in private credit strategies,
16:37 you know, strategies which offer special situations,
16:40 but more from a fixed income perspective,
16:43 whether it be in select plays of real estate
16:47 or even the infra oriented strategies.
16:50 And also you can partake into, you know,
16:52 some of these listed instruments like REITs
16:55 as well as INVITs.
16:56 So there is a whole bouquet of fixed income solutions
16:59 out there for investors to partake in.
17:02 Gold should be played more as a hedge in the portfolio
17:07 to risk off against volatility, extreme volatility,
17:11 that can be caused through risk assets.
17:13 So that's the way we put in
17:16 the entire asset allocation for clients.
17:17 - And our view on gold remains positive
17:21 because if you see central banks continue to buy gold,
17:24 and I think there is something somewhere, you know,
17:28 even countries are trying to hedge their own reserves
17:31 against the dollar.
17:32 On the fixed income front,
17:36 I know that the recent inflation print
17:38 came in a little higher than expectation.
17:40 But however, if you actually analyze it,
17:42 you know, a lot of it is food inflation.
17:44 The core inflation still is under control.
17:46 So we are hoping that, you know,
17:48 once this season is through,
17:50 hopefully these prices should cool off.
17:52 - Okay, and viewers, if you are convinced
17:55 or if you're wanting to know more about
17:56 some of these assets that Nitin spoke about,
18:00 BQ Program has just launched a series
18:01 called the Alternative Bet,
18:02 where we talk about both private credit
18:04 and infra options in that series.
18:06 So do try and have a look at those shows.
18:08 Nitin, Ashish, thank you so much, gentlemen,
18:11 for taking the time out and giving us your wisdom
18:13 and talking about this report, much appreciate.
18:16 - Thank you, Niranjan. - Thank you, thank you so much.
18:19 - And viewers, thanks for tuning in
18:20 to yet another conversation
18:21 on the report "Alpha Strategies" by Moti Lalloswar.
18:25 (upbeat music)
18:29 (upbeat music)
18:32 (typewriter clacking)