- Why does #MotilalOswal Wealth Management believe it is a year for all-round strategy?
- Will gold play a crucial role in portfolios going forward?
Niraj Shah speaks to Ashish Shanker and Nitin Shanbhag on 'Alpha Strategist'. #NDTVProfitLive
- Will gold play a crucial role in portfolios going forward?
Niraj Shah speaks to Ashish Shanker and Nitin Shanbhag on 'Alpha Strategist'. #NDTVProfitLive
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TVTranscript
00:00 month and it's kind of gone ahead without too many accidents but for fund flows out
00:04 of India and some other EMs.
00:06 But what do you mean essentially?
00:07 What's the crux of this note which is titled as year of the all-rounder?
00:10 Thanks Neeraj.
00:11 Happy to be speaking to your viewers first time in this calendar year.
00:19 As you know, these notes are basically, they set the tone for our clients and investors.
00:26 Basically the January note sets the tone for the year.
00:30 So when we say that this is the year of the all-rounder, it sets the tone for how clients
00:35 should allocate their money across different asset classes.
00:39 Now if you remember, we had given a very aggressive buy call on equities after the state elections
00:44 occurred and we said that people who are waiting on the sidelines should go in and that call
00:49 has worked fine so far because equity markets have been buoyant in spite of FII selling.
00:55 Now when we did the investment committee meeting in December and looked at all the data, a
01:01 few things struck us.
01:05 First from an equity market point of view when we looked at Nifty or Large Cap, whilst
01:10 relatively we may be expensive compared to global markets, but from an India context
01:15 we were reasonably valued and earnings have been extremely good so far over the last three
01:21 years.
01:22 This will be the fourth year of double-digit earnings growth, FY24.
01:29 Now if I look at the broader market, mid and small caps, we did have this conversation
01:34 last time.
01:35 Although the valuations are a bit rich, but I think the underlying earnings growth is
01:38 extremely strong and as far as that continues, I don't see a challenge there.
01:43 What is the remarkable thing is the resilience of domestic investor flows.
01:47 I mean every month you're adding about 25-30 lakh demand accounts so new investors are
01:53 coming into the stock markets directly, plus you're seeing the SIP flows go up every month
01:57 on month.
01:58 Hence, when this kind of FII selling happens, you still do not see too much of downside
02:05 or a very large amount of volatility because a lot of the selling is being absorbed by
02:09 domestic investors.
02:11 Having said that, valuations are not necessarily very compelling or extremely cheap.
02:16 So we believe that this year, again, from an equity standpoint should be good considering
02:22 the way India is looking in terms of economy, in terms of flows, in terms of the certainty
02:27 on the elections.
02:29 I mean it's never over till it's over, but at least there is a reasonable degree of certainty.
02:33 We are also given a positive call on debt if you recollect, Neeraj, early on last year
02:38 because we said that at least we don't know when the interest rates will get cut, but
02:42 we believe that we are seeing the peak rates.
02:45 So as a result, we are told most of our clients and your viewers that they should buy long
02:50 duration funds in debt or buy long duration bonds.
02:57 We also hold a positive view on gold at the moment, given what is happening around the
03:02 world and the fact that interest rates are probably going to head lower later this year,
03:07 if not earlier.
03:08 Gold as an asset class, considering all the geopolitical issues that are surrounding us
03:14 and the currency issues that we are witnessing, I think gold is definitely a great asset class
03:19 to have.
03:20 So when we looked at it in entirety, Neeraj, we didn't find any asset class which looked
03:25 really negative.
03:27 And it's quite refreshing to see this kind of a setup.
03:30 Hence, we said that this year, actually, you will be good if you stick to your core asset
03:37 allocation.
03:38 So if as an investor, you are saying you want to be 40 equities, 40 debt, maybe 20 gold,
03:43 then you should not be overboard on any asset class.
03:46 You should just stick to your asset allocation.
03:48 Hence we said that this is the year of an all-rounder.
03:52 In this year, you have to go in with a team with more all-rounders so that depending on
03:57 the pitch and depending on the circumstances, you are able to deploy multiple forces to
04:02 ensure that you come out on top.
04:05 If you lose early wickets, then at least there are some others to take guard later on.
04:09 But Nitin, in some sense, so by the way, and gold, I think you guys were constructive maybe
04:13 in May last year as well, if I'm not wrong, that note had spoken about gold too.
04:17 But here's my question.
04:19 From a call of being unequivocally bullish on equities to saying it's a year of all-rounders.
04:26 So yes, all asset classes look good.
04:29 But does it mean that equities don't look as good relative to others as they were looking
04:34 maybe in December or earlier?
04:36 So let's break up the entire equity basket into market caps so that your viewers get
04:44 an understanding of where valuations are.
04:46 From a large cap perspective, we are reasonably valued.
04:50 If you look at the one year forward price to earnings multiples, we are at about 20
04:55 times.
04:56 And that is in line with the long-term 10-year average for the Nifty.
05:00 The mid and small cap is where we see valuations having gone up quite rapidly due to the performance
05:07 in the last year or so.
05:09 So from a mid-cap perspective, the long-term average is about similar 20 times.
05:14 But the one year forward valuations are close to about 25, 26 times.
05:18 Similarly, the small cap long-term averages is about 16 times.
05:23 And the one year forward is way above 20 times.
05:26 So at a broader market level, if I were to glance on equities, while we remain extremely
05:34 constructive on the long-term outlook given the fundamentals being so strong, but I think
05:40 we need to have a slight bias towards large cap as well as multi-cap strategies.
05:45 So we are not saying that we are not as constructive on the equity markets.
05:49 We are just a little considerate of where valuations stand, especially in the mid and
05:53 small cap space.
05:54 We feel that by allocating to multi-cap managers, the underlying fund manager has the freedom
06:00 to tactically allocate between large cap, mid cap, as well as small cap more on a bottom-up
06:07 basis depending on what platform you choose, whether it's mutual funds, BMS, or alternate
06:12 investment funds as well.
06:14 And the bias towards large cap will just help tide through any interim volatility.
06:19 And one thing, Neeraj, that we've always learned is that even in the best of bull markets,
06:23 you always see an interim correction of anywhere between 10 to 20%.
06:27 So that can be around the corner in any which ways.
06:30 We feel that the risk reward today suggests that there can be a bias towards multi-cap
06:35 as well as large cap strategies.
06:37 And the long-term outlook continues to be as constructive as it was last year as well.
06:43 Ashish, coming on this, in your note, and you referred to this, of course, slightly
06:49 differently, but in your note, there's one of the statements at the top speaks about
06:53 that the US Fed expected to start lowering interest rates.
06:56 But you mentioned correctly maybe that it may well happen in the second half as well.
07:02 And we are in the week of the Fed's peak, so to say.
07:07 If indeed the Fed dashes hopes of a March cut and maybe the market starts pricing in
07:12 June or later, does it have the potential to bring down global risk appetite and global
07:20 assets because the world markets may be pricing in a March cut even now?
07:24 I think, you know, we are not pricing in a full-fledged risk on in any case, because
07:32 if you look at what's happened in the last month or so, we are anyway seeing a lot of
07:38 FIS selling.
07:41 I think, you know, we know that it's peak rates and US Fed will cut rates, but it could
07:49 happen in the second half of the year because inflation continues to be extremely sticky
07:54 and the US has its own compulsions.
07:59 So I don't really think that is being modeled.
08:02 And I mean, I don't think a risk on full-fledged, if the risk on happens, Neeraj, by any chance,
08:06 and if the Fed does indicate that, you know, they're going to cut rates sooner, then I
08:13 think you're in for a further re-rating on valuations on India.
08:17 Because just think about it in 2021 September, which is when you saw the last peak of the
08:22 Nifty, of course, we are well above that right now.
08:25 You were trading at 30 times trailing multiple.
08:28 Today trailing, you're trading at something like 22, 23 times.
08:32 So is there room for a further re-rating on the Nifty?
08:35 There is definitely room, but that will happen when, you know, FIIs come back into the market.
08:40 And I'm very clear that they will come back at some point, because if you look at it anyway,
08:45 and if you look at the global construct, I think most people are underweight from, you
08:51 know, what they should ideally be on India.
08:53 Yeah, that's true.
08:54 But in some sense, we started to see at least the last week or 10 days, or maybe in the
08:58 month of January, a bit of a shift towards better valued markets relative to the expensive
09:03 markets like India and some others.
09:05 So could that be a bit of another angle which might bring about some near term volatility?
09:13 Is that possible?
09:14 Just dwelling away from the note per se, but to the more immediate measures?
09:18 It's quite possible.
09:19 I mean, that's why when we looked at the data in balance, we said that, you know, this is
09:23 not a year where you go, let's say overweight.
09:25 I mean, you have, there are times, you know, when it's clear in front of your eyes that,
09:30 you know, markets are cheap.
09:31 And, you know, from here, downside is very limited and, you know, you take a big bet.
09:36 But that's not the case today.
09:37 Today, you're priced very well.
09:38 Today, you're priced very well.
09:39 So there is no room for error.
09:40 Let me put it that way.
09:41 Got it.
09:42 Full toss nahi hai.
09:43 Okay, fair call.
09:44 Just the one aspect more on equities before we talk about something else as well.
09:50 Nitin, you dwell a lot on numbers.
09:52 And you guys have consistently made this point that while the market may be scared around
09:55 the broader end of the spectrum, but earnings growth is kind of making up for it, for the
09:59 large caps, maybe even for the broader end of the spectrum.
10:01 Now, I was looking at your data, right?
10:04 And the CAGR numbers for the small cap index for the last three years has been very strong
10:10 as well.
10:11 So, if this is the kind of pace and even if a bit of a moderation in the pace for the
10:15 small cap 250, earnings growth continues, does it therefore ease the fears that the
10:23 street has had for the last three, four months, where it's incessantly the call is that small
10:28 caps are expensive and that's a place to be fearful of?
10:31 Yeah, sure.
10:33 So, look, as you said, the last three years have been phenomenal for both the small cap
10:39 as well as the mid cap.
10:40 You're seeing upwards of 35 to 40% earnings growth on a compounded basis.
10:45 Now, this did not happen even during the 2003 to 2007 era, right, which is the last really
10:51 long term bull market that the Indian market saw.
10:54 Now, even if we are able to keep some kind of a steady pace, what we are saying is that
11:00 it is wrong to firstly look at the entire index and then take a call on mid and small
11:05 caps, because there are two, three things, Neeraj, that one needs to be concerned about.
11:11 The first aspect is quality, good management, good balance sheets, companies which consistently
11:17 deliver in terms of volumes.
11:20 And all the stocks represented in the index may not necessarily have those constructs,
11:25 right?
11:26 So, valuations isn't the only aspect that we would like people to focus on.
11:32 It's also the quality.
11:34 The other thing is the size of opportunity.
11:37 Which sectors is that company really present in?
11:40 Is that sector having a great growth profile over the next three to five years?
11:46 Is that pool expanding?
11:48 I think these are the factors that will go in to a fund manager really allocating or
11:52 to investors really allocating into mid and small cap space.
11:55 While the large cap is a far more easier call, relatively speaking, as more passive, you
12:02 know, you can pretty much look at the index and then take a call because it's a handful
12:06 of companies.
12:07 But once you get into the small cap space, which is like 250 odd companies, I think the
12:12 call there has to be far more selective.
12:14 It typically is more on a bottom up basis.
12:16 I mean, mid and small cap stock selection will play a greater role.
12:19 So far it was a beta market, right?
12:21 Whatever you touched has gone up.
12:23 Yeah, yeah.
12:24 Yeah.
12:25 Well, and which is a great place for funds and stock pickers to come out and maybe even
12:30 outperform because accidents will happen.
12:33 And it is only when the right stocks are picked in the portfolios that things will do well.
12:36 Okay, just before we take that break, though, I know we need to slip into one, but just
12:39 one quick word.
12:41 Maybe I missed it, but I didn't see that slide which speaks about whether we are in this
12:45 amber zone or green zone, which typically comes right.
12:48 So on the sentiment indicator, maybe I missed it.
12:51 But what is what is that indicating this time around?
12:53 We are still in fair valuation zone as far as the Nifty is concerned.
12:59 And we still have a long way to go before we touch the expense.
13:02 Okay, music to the ears.
13:03 Gentlemen, stay on.
13:04 We need to slip into a quick break.
13:06 Television compulsions.
13:07 We come back and talk about the other end of the market because it's as they say, that
13:11 it's a year of the all rounder.
13:12 So can't talk only equities.
13:14 We talk about fixed income and we talk about gold on the other side of this break.
13:17 Viewers, stay tuned.
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15:52 Right back with the conversation on Alpha Strategist, a note that comes in from Motilal
16:01 Oswal, wealth monthly, and they speak to us on that.
16:04 We've spoken in the previous segment about equities.
16:06 We've got about six minutes to try and talk about fixed income and gold, which they are
16:10 constructive on in the year of the all rounder in cricketing parlance.
16:14 Gentlemen, fixed income.
16:16 Now, what is anticipated?
16:18 It's a year of potential rate cuts.
16:20 Maybe the RBI does a lot on liquidity in the first half as opposed to tinkering as much
16:24 with repo immediately, considering that the global markets and the global banks might
16:29 also be singing a different tune, who knows?
16:31 So how do fixed income investors approach the next six to 12 months?
16:38 Right, so let me give you a little bit of a perspective and also we'll dip a little
16:42 bit into portfolio construction, which are the modes for investors to really enter into
16:46 to build a portfolio over the next three to five years.
16:49 Sure.
16:50 So the first is that I think irrespective of what the Fed may do, the RBI will be far
16:55 more watchful.
16:57 We do not at a domestic level have the level of inflation concerns that the global markets
17:02 are going to, but the RBI will keep an eye on the interest rate differential between
17:09 what our repo is vis-a-vis the US Fed.
17:12 Also remember that from a 10 year perspective, if you look at the US 10 year and the domestic
17:18 10 year G-Sec, the difference now is just about 350 basis points, right?
17:24 Which is the lowest that it has been for quite a long period of time.
17:30 And when that happens, typically you do not want that differential to be far too narrow
17:38 because to that extent, your currency can also be impacted.
17:42 So even if we see that the US Fed may cut over the course of this calendar year, I think
17:48 the RBI will keep a slightly more calibrated approach to how it behaves with its domestic
17:53 interest rates.
17:54 And you touched upon a very valid aspect that if you add more liquidity into the system,
17:59 that by itself can demonstrate a 25 BPS rate cut.
18:04 So today the yield curve as it is, is extremely flat.
18:09 All the way from the one year to the 10 year, you're trading at about 7%.
18:14 Our outlook over the next two to three years is that this curve should dip lower and it
18:19 should also steepen, which is basically to say that the shorter end, the one to three
18:25 year segment should ease off faster than the 10 year.
18:30 But we do see that the current 10 year, which is around the 7.2% mark at a terminal rate
18:37 over the course of this easing cycle can go maybe to the 6.75, 6.7 odd percent.
18:44 And hence, given the fact that India has also been included in the JP Morgan Global Emerging
18:50 Market Index is when we actually put out that call for saying that people should participate
18:55 into the 10 year G-Sec either directly or even through funds, because you earn a combination
19:01 of accrual 7% plus any potential capital gains that may come along.
19:07 Now, there are two, three other points within the fixed income portfolio that investors
19:12 should take notice of.
19:15 One is multi-asset funds, and there is a category which is between the 35% equity to 65% equity.
19:24 And there are certain multi-asset funds which operate in that space.
19:28 Those funds which have relatively lower exposure to equity can be looked at because they can
19:33 still give you an indexation benefit if you hold them for more than three years.
19:38 So you get a combination of equity, fixed income, as well as gold.
19:43 And having a correlation of different assets can really help the portfolio.
19:47 Apart from that, there is one other category, which is REITs, Real Estate Investment Trusts.
19:53 And we believe that that offers investors an ability to participate into the commercial
19:59 real estate market without having to engage in that kind of high ticket size.
20:04 The real estate sector has progressed fairly well over the last two, three years, especially
20:09 post the pandemic, and at least within the top seven to eight cities in India, we are
20:14 seeing volumes rise effectively with a lot of corporates asking their employees to come
20:20 back to work as against the earlier work from home culture.
20:23 We do see that the current tailwinds to the residential real estate sector will translate
20:28 themselves to the commercial real estate sector also over a period of time.
20:32 And hence, a REIT is a great asset to own because it's a hybrid fixed income instrument.
20:38 It offers you steady cash flows and over a three to five year period can offer you capital
20:43 appreciation as the commercial real estate market gets a steady outlook.
20:47 So these are multiple ways in which you can participate and construct your entire fixed
20:53 income portfolio.
20:54 And at the periphery, also avail of some of these private credit funds and high yield
20:58 funds.
20:59 Ashish, you want to add something to that?
21:01 And then also a flavor on gold, because you've mentioned to us earlier in the show that gold
21:06 looks attractive to you.
21:08 So just to add to what Nitin said, I don't think our viewers that interested in India
21:15 get cut sharply because India has always been a moderate inflation country.
21:19 So we don't expect inflation to come up very, very sharply.
21:22 And I don't think we hold that view even for a country like the US.
21:26 I think for a prolonged period of time, we are in for a moderate inflation kind of era.
21:31 But yes, over the next two to three years, there is a tactical opportunity that rates
21:36 will come up based on the factors that Nitin just highlighted.
21:39 And one can definitely participate in it.
21:42 Coming to gold, I think, see the call is based on two, three points.
21:46 One is there are a lot of these geopolitical issues around us.
21:50 Now, I understand that the market is currently, you know, from time to time, the markets do
21:55 get concerned, but has largely now ignored and moved on.
21:59 But one cannot deny the fact that any one of these geopolitical issues can flare up
22:03 at some point in time.
22:04 So gold is like a protection against these kind of incidences.
22:08 And it gives you firepower at that point in time.
22:11 You know, typically when geopolitical issues flare up, you have equity markets falling.
22:15 It's a risk off and something like a gold tends to move up.
22:20 And that's a great opportunity for you to take some money off gold and, you know, rebalance
22:24 into risk asset classes.
22:28 Second is, you know, as interest rates go lower globally and, you know, there are currency
22:35 shifts as well, which are happening.
22:39 Gold clearly comes out as an asset class, which is agnostic to currency.
22:45 And hence, we believe that the next, so gold is a more structural call, Neeraj.
22:49 I mean, next two to three years, four years, we feel gold as an asset class should do well.
22:53 And hence, you know, we are advocating that at least, you know, between 5 to 15 percent,
22:58 depending on what is the total construct of the portfolio, you can have in gold.
23:02 And in India, you can participate to SGBs, which gives you tax free returns.
23:06 And or you can participate to some of these ETFs or index funds, which have gold as an
23:13 underlying.
23:14 So that broadly, you know, sums up our view.
23:17 And just to, you know, kind of end with that, we're getting parlance.
23:20 I think we are going into a pitch which is neither a straight batting wicket or, you
23:25 know, outright bowling wicket, right?
23:27 There is something in it for everybody.
23:29 So I think that's the kind of pitch we are looking at this calendar year.
23:34 And hence, you know, having a bit of all asset classes is a good idea.
23:39 And through the course of the year, you know, hopefully clarity will emerge.
23:44 Yeah.
23:45 Pardon me for sounding an out and out Mumbai car, but something like a one kid a pitch,
23:48 if you will.
23:49 But no, I appreciate this views.
23:52 Gentlemen, both of you, thank you for laying it out, what the year could mean.
23:56 The year of the all rounder.
23:57 I think this is very valuable for people to know and understand.
24:00 Please do dig in deep into this and try and think about this when you're thinking about
24:03 your portfolio building construct for the next 12 months, maybe even longer.
24:08 Thanks so much, Nitin, as well as Ashish for talking to us today.
24:12 And thank you.
24:13 And viewers, thanks for tuning in.
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