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00:00We are talking about the Alpha Strategist Note by the Motilal Aswal Private Wealth Team.
00:05The theme for this month's note is Goldilocks and the Three Bears.
00:10Now I can understand that the Goldilocks scenario has to be about India's macro
00:15and how well we have entered into a period wherein a lot of stars are aligning for things to look better.
00:21The question or the inquisitiveness that I have is over the three bears.
00:25One of the bears might be valuations, but let me not try and probe this too much.
00:29Let me get in the men who've written this note to come in and talk about what the note is about
00:35and what's the outlook looking like.
00:36So Sandeep and Roy, CIO of Motilal Aswal Private Wealth, as well as Nitin Shanbhag,
00:40Senior VP and Head of Investment Products at Motilal Aswal Private Wealth with us on the show.
00:45Jamal, both of you, good afternoon. Thanks so much for joining in.
00:48What brought about this title called Goldilocks and the Three Bears?
00:53It was interesting. We think that and we believe that India is at a Goldilocks phase.
01:00And we thought let's address from the fairytale the three factors that actually are the three bears that are there.
01:10And we kind of zeroed down on the main bears, which is one of these valuations,
01:15which is a perennial concern for a growth economy like India.
01:19The next one was inflation, which obviously is a cog in the wheel at all practical purposes for our economy.
01:26And then obviously the deficits, which also become a governing factor for the currency.
01:33So these being the three main factors, we thought let's address them head on and see how they are fair
01:41and why we believe this is a Goldilocks economy.
01:45So to that extent, you know, we also saw the trend over the last 10 years,
01:51you know, in the last decade and starting all the way from 2013 onwards,
01:55where if you remember, Neeraj, we were actually being classified as a fragile economy.
02:00And all these three aspects really were down on the negative.
02:05And so that improvement has happened. Obviously, in the last 10 years,
02:08we've gone through all these phases that Sandeepan just spoke about.
02:12And today, hence, we believe and we'll obviously explore more of them as they show progress.
02:16Since you spoke on the valuations, Neeraj, you want us to address that part to start with?
02:24Let's start with that, because I was just, you know, I was just thinking,
02:27it seems that one of the bears valuations, we will never get away from it simply because the flow is so good.
02:33But the other two seem to be, I mean, in some sense, if things go well,
02:39might actually become very small bears with the time to come, Sandeepan.
02:44Yeah, yeah. So, yeah, on valuations, I think some interesting data points that we came across,
02:53I think Nifty, for example, has been on a re-rating on a trailing P basis over its course of history.
03:01So we dug out some data that in FY07, the Nifty 10-year rolling trailing P used to be only 14x.
03:10And since then, we have gone up. You know, today the trailing P average is about 22.5x.
03:15We'll be somewhere in the range of about 24. On a forward P basis, we'll be about 21.1 or so on an average of 20.
03:22And that has also got a lot to do with the fact that the index compositions themselves have changed.
03:27You know, we are getting a lot more growth oriented stocks in the index, etc.
03:32So valuations stand alone would not make a real comparison.
03:38If we go back to history, we have to look at valuations with the growth that comes with it.
03:45And there, I think we are fairly poised. Our own estimates are about 13 to 14% EPS growth over the next two years,
03:53which puts it in good stead, you know, at this moment, when the entire world is talking about slowing down.
03:59I think this becomes one of the only economies where you see that kind of earnings growth along with GDP growth and the macros, which are extremely healthy.
04:07So the past few years, over the last three, five, 10 years have been, you know, 25 to 18.
04:13But 25% is the last three years past year itself. Right.
04:16So GDP growth in any case, you know, have been upwards of 6.2 and always been around 6 to 7% for us.
04:22So with that as the premise, I think valuations now we can also move to the mid cap space.
04:28In the mid cap space, Nitin.
04:31Yeah. So, you know, we've been saying that the mid cap and small cap at an aggregate seem to have run up too much.
04:38And consequently, that's also reflecting the valuations.
04:40In fact, both mid cap and small cap on the index level are trading at more than two standard deviations as per their long term average.
04:48Having said that, the growth trajectory expected by, you know, the market in general is far, far higher than the large cap.
04:56So if we talk only nifty, then the next one year we are expecting about close to 10 to 11%.
05:02The next year, close to about 18% growth.
05:04Whereas in the mid cap, the average growth would be in the vicinity of anywhere between 20 to 22%.
05:10And for the small cap, it could be in the vicinity of maybe 16 to 18% on average.
05:15So clearly the valuations cannot be looked at on a standalone basis.
05:19They have to be looked at from an earnings growth perspective.
05:21More importantly, Neeraj, we also feel that the ROE profile, you know, that has seriously improved for the entire aggregate category.
05:29Hence, if the quality of earnings is improving, then that should keep some kind of a support or some kind of a cushion as far as valuations is concerned.
05:39But having said that, mid and small caps, one definitely needs to be far more bottom up in terms of stock picking.
05:45Actually, I was going to come to that.
05:47Sorry, I'll just have a cross question there, Nitin.
05:51People don't have a mid cap, a nifty mid cap or a nifty or a BSE small cap futures in their portfolio.
06:00And a lot of sectors which are promising larger profit pools and stronger growth over the course of the next, let's say, three to five years don't necessarily fall in the nifty 50 or even the top nifty 100.
06:16So while this conversation around valuations in the mid cap and the small cap space are warranted, could portfolios still have high quality mid cap and small cap names as a larger proportion and still do well?
06:32Absolutely. And this is a trend that we've been seeing over the last six to eight months that while at a broader level, people may be cognizant of valuations, but there are a lot of opportunities.
06:44For example, chemicals as a space, a lot of stock opportunities out there may not necessarily be part of large cap.
06:52Similarly, all these new age sectors that are coming about, whether it's to do with renewables, whether it's semiconductors and all of these, none of these stocks are available in the top 100 space.
07:05So incrementally, when one is looking at structural growth stories, given the capex, given the manufacturing impetus that the government is also putting through, we believe that a lot of portfolios could continue to have some piece of mid caps and small caps in them.
07:21And hence, one feels that having a multi-cap approach rather than just saying that the mid cap and small cap at an aggregate is overvalued, one should not look at that space.
07:33One should tend to have a bias towards multi-cap and large cap, but do continue to invest in mid cap and small cap strategies as well, albeit you need to stagger it out over the next six to 12 months.
07:46Okay, Sandeepan, the other point that you mentioned about the other two bears, one is valuations, but the other one is the deficits, right?
07:53Just trying to understand with this whole rate cut cycle coming in and our macros looking the way they are, you reckon it will cease to be a problem area?
08:01In some sense, CAD probably already is, right?
08:05Yeah, so that's what we wanted to bring out that how India has evolved over the last 10 years and how the perennial deficit problems of ours have got addressed by this government and the central bank.
08:19And obviously, the macro tailwinds obviously helped there.
08:23And hence, that ceases to be a problem child at this moment for sure.
08:30The CAD is controlled, the fiscal deficits are controlled, the budget is less inflationary and more expansionary, and that really helps.
08:43So these prudent norms, I guess, tends the bear, which is the deficits for us.
08:49And on the third one, which is inflation, I think the joker in the back has always been for us the oil prices.
08:57And with that being controlled, thanks to the global slowdown, China slowdown, and a huge unrest that is still unfolding in the Middle East, and yet there is no spike in the crude prices, really puts us in a very, very comfortable zone when it comes to the inflationary pressures.
09:21Well, certainly, in fact, that was going to be my question is does to you guys when you look at what's happening to commodities, right?
09:27Does oil seem to be in a structural lower range?
09:32I won't say a downtrend because who knows what the trend might, but does it seem structurally to be now in a lower range?
09:39And is that therefore a longer term positive for India?
09:42I mean, who can predict crude prices?
09:44They may go up.
09:45But for now, the hypothesis is, is that the hypothesis?
09:49Yes, you know, from the from the technical standpoint, also, as also from a fundamental perspective, we feel that the prices would remain more or less tamed and range bound than going through a breakout anytime soon.
10:06See, it has seen the worst of things that could have happened.
10:10And yet we don't see the prices going up.
10:13A lot of it obviously has to go with the with the global demand.
10:17The lack of it.
10:18Right.
10:19And with an impending, you know, recessionary pressure that is building up in US, China going through its own bout of slowdown.
10:27The Russia-Ukraine war obviously has its own dynamics that has given oil prices a different kind of control altogether.
10:34I think all these things have come together and then given us again a Goldilocks situation on oil prices.
10:41OK.
10:42OK, gentlemen.
10:43One last question.
10:44We have that much time.
10:45But, you know, I actually wanted to ask, too, but there is a management ratings.
10:49We'll have to squeeze it into one.
10:51I'm going to try and let you choose.
10:53One of the slides speaks about how sector rotation is going to be more visible going forward.
10:58And of course, we have a section on gold with gold prices having hit new highs yesterday.
11:02Anyone which you think you want to lay more emphasis on before we wrap up?
11:06We'll just put one on the gold.
11:08Gold, we have a price of about $2,800 on the dollar, which we have spoken about in the past.
11:13And we remain structurally bullish on gold.
11:16On sector rotation, we believe that it could continue to be heightened because a lot of sectors which had rallied over the last six months to eight months.
11:28We believe some ownership is coming down out there purely on terms of valuations as well as order execution.
11:36That is something that will be visible.
11:39The private banks seem to be offering some kind of value.
11:43People do find some opportunities in pharma in the current context and maybe are smattering in terms of consumer durables.
11:51To that extent, we believe sector rotation is here to stay and perhaps may even heighten given where the markets are as of today.
11:59Very interesting. Gentlemen, lovely note. Thanks so much for putting it together and for talking to our viewers about it.
12:05Much appreciate your time.