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00:00Hello and welcome to Talking Point. I'm your host Neeraj Shah. It's the day of the big
00:17Fed decision. All Fed meetings are watched out for, all Jackson Hole symposiums are watched
00:22out for. This is different because this may be the start of a change in stance. I'm using
00:31the term may because it's never done until it's done. The street is working maybe with
00:35the 50 basis points as well of rate cut. But before we get in our guest, I just want to
00:39lay out what the current status of the Fed move is and the expectations thereof and what's
00:48the resultant impact on India or other emerging markets as a result of this. So let me try
00:56and pull up some words on this wall to try and tell you what's to be watched out for.
01:03So the Fed has begun and the decision will be out today. The market is currently pricing
01:08in a 62% possibility of a 50 basis points rate cut. This has moved up, by the way, from
01:14about 25 basis points of a rate cut belief, which was there about a month ago. So therefore,
01:20there is a change in the market expectation of what the Fed will do. Now, the point is,
01:29viewers, what if, what if we do not get a 25 basis points cut? So, you know, the reason
01:36why I say this is because official figures showed yesterday, by the way, that the U.S.
01:41retail sales in August were stronger than expected. And the financial situation and
01:49the financial conditions in the U.S. are the loosest since April 2022, as per Goldman Sachs.
01:55So there is a possibility that we might not get a 50 basis points as well. Peter Maguire
02:00today was saying that there are outside talks of even 75. But I'm saying that even 50 is
02:06not a done deal as yet. So that's the first key thing to watch out for. And that may thwart
02:11the party for risk assets a little bit. But the point is, the real policy rate Z score,
02:19and I'll first lay out the numbers and I'll tell you the importance of this. Whether we
02:22get 25 or 50 basis points, this is important. Now, India on the real policy rate Z score
02:29is at 2.1, Indonesia 1.8, Philippines and South Korea 1.5, Thailand about 0.8. Why is
02:36these numbers important? The graphics will come up on your screen next. They are important because
02:40the Z score refers to the standard deviation of the current real rate relative to the five-year
02:46average. Simply put, if this is confusing you, simply put, a higher Z score means higher real
02:55rates. And therefore, India at 2.1 has higher real rates relative to the rest of the pack.
03:02For Indian reasons, for reasons which are very specific to India, but there is a higher Z score.
03:07And therefore, the possibility of the rates coming down in India, if the Fed were to be the
03:13trigger point for that, or if lower inflation were to be the trigger point for that, or both.
03:17So therefore, the possibility of rates coming off in India are probably that much higher. And if
03:22that were to happen, it makes a fixed income a very important asset class to look at. In fact,
03:29Amundi, in an interview to Bloomberg, has laid out that real rates across Southeast Asian
03:35economies are also higher than a year ago, which suggests room to ease a situation likely to
03:43benefit the local bond market. Now, remember viewers, what does this do? If indeed this is
03:49going to benefit the local bond market, plus our bonds are now a part of the JP Morgan Global Bond
03:55Index, and a few other indices, as the case may be, in times to come, it could be very constructive
04:00for the Indian bond markets as well. So do the market look away from equities completely and
04:07look at bonds, or do the markets look at both? Or is there a case that because of
04:11the perceived higher valuations, don't look at equities and look at bonds? Well, our guest today
04:18will tell me, Neeraj, you are not talking sense, because he's been a proponent of equities at a
04:23point of time when everybody was talking about equities being expensive, right around the election
04:28period as well. Since then, the markets have rallied another 2,000-3,000 points. Vikas Kemani,
04:33founder of Carnelian Asset Management and Advisors, is with us on the show today. Vikas, so good
04:37having you. Thanks for taking the time out. I hope all is well. It's always good to speak with you.
04:43Thank you very much for having me. The pleasure is entirely ours, Vikas, I must tell you that,
04:46because it's such an important day ahead of the Fed meet. Now, Vikas, tell me, first plainly,
04:51would a Fed decision or 25 or 50 basis points, what do you expect, by the way, there,
04:56and would that decision be material for global equities and for Indian equities?
05:05I think, Neeraj, this boat has sailed, according to me. It does not matter it is 25 or 50 basis
05:11points, according to me. The fact that the direction has changed, and I think that has
05:16been more important. Now, that 25 to 50 basis point can be important for a trader or a short-term
05:24player, but somebody who is investing from a long-term, medium-to-long-term perspective,
05:28the direction is more important. And as you remember in our previous conversation also,
05:32about 6-8 months ago, we said that Fed rate has peaked out. And what time it turns or changes
05:39is a matter of 6 to 12 months. Nobody can predict that. And I think now that one thing is very clear
05:45that the boat has sailed, the tide has turned. Now, whether it starts with 25, 50, that is not
05:50important. But from an Indian market perspective, why it is more important is, whenever Fed rates,
05:56raises interest rates, most US investors pull out money from the emerging markets,
06:01because the typical rulebook is, as Fed raises interest rates, emerging market import inflation,
06:06interest rate increases, and the equities weaken, and hence. And as the Fed peaks out
06:11and starts reducing, emerging market receives flow. And that is what precisely happened.
06:16In India, we lost a lot of, we saw a lot of outflow from foreigners. And now we are beginning
06:21to see, as that indication of turn has happened, we are already beginning to see good flows. So,
06:25according to me, significance of this from Indian context is that we will see a significant
06:31fund flow cycle beginning over next many years from foreign investors towards Indian markets
06:36and emerging markets. Okay. So, Vikas, the belief or the whole thing has been that
06:44flows, I mean, in the last two, three weeks, flows have started to some of the cheaper
06:48Asian markets already, Indonesia, and the likes, right? We are starting to see some
06:53flows in the last three or four days towards India as well. Would you see the color of the
06:58money being passive? Or would active foreign money also come in? Because everybody talks about one
07:04thing, oh, valuations are expensive. I know you do not, but a lot of people do. I know you are a
07:09believer. You are saying, you have told me in the past that, you know, valuations may be expensive,
07:12but there is growth. I am trying to ask you, what color of foreign money will come in?
07:17Precisely, I will say that, you know, like I said, I will probably correct you the point
07:21you made, money is moving towards cheaper markets. So, money is moving towards the emerging market
07:26or money is moving away from emerging market. Now, within that, there is an overweight,
07:30underweight allocation happens. Like, for example, in the last three years, when emerging markets
07:35were losing money, India also lost money, but India on a relative basis lost lesser money,
07:40because India was looking more promising. Same way, when money is coming back, initially,
07:44money might go more towards the markets where they were underweight, right, which could be,
07:48in your definition, the cheaper markets. But my point is that this money is allocation money.
07:53And then within that, like, you know, let us say, if you give me, any investor give me money
07:58to invest into equities, I might do that allocation in different sectors. Same way,
08:02money allocator towards emerging market will do different in different markets based on their
08:07own conviction. The point is that overall water levels are going up, overall flows are going up,
08:12and India will surely be beneficial on that. Some investors within that basket might find
08:16India might expensive and might not allocate. But in general, I see a situation that no,
08:23you know, allocator of the emerging market can ignore India, you know, cannot be underweight
08:28India, because India is one of the most promising market from a growth standpoint of view. You
08:33cannot see this kind of sustainable growth in any market in the emerging market space.
08:39And hence, my conviction is that India will receive very large flows.
08:44You know, I read an article, maybe Vikas Kimani gave an interview to a newspaper,
08:50which said that if indeed markets are so expensive, why aren't they correcting and that's
08:54true viewers that markets aren't quite correcting. Now, because I want to ask you the contra question
08:59as well. Now that India's eclipsed China in the MSCI EMIMI weightage, and as per Morgan Stanley's
09:07note, very soon might eclipse China on the overall weightages as well. Could the converse happen that
09:13everybody's saying that, oh, India might be expensive? Or some people are saying, let's say
09:16that India might be expensive, and therefore flows might be muted? Can the converse happen
09:20that because of India's weightage, we might be surprised by the quantum of foreign flows that
09:25come in, in this easing cycle? Can that happen? Absolutely, I think we will be surprised,
09:30we will have a deluge of money. And in fact, we'll have a launch of money coming into Indian
09:33markets. You know, now whether timing and pace, I can't really, I mean, it could be one year,
09:38two or three years. But, you know, the fact just, just imagine it just in analyze, I mean,
09:43China is a one market where US investors aren't allocating, there's a huge, this thing happening,
09:48which is the large market where you can deploy billions and billions of dollars,
09:53you know, with the confidence of growth coming around, and where you have the democracy,
09:57when you have the, you know, very solid corporate governance system, where you have the growth,
10:01where you have, so there's no market, you know, if you ask me, I mean, yes, markets like Indonesia,
10:05but how much capital they can absorb. So point is that when money comes, this India is a very,
10:10very, very large market. And fortunately, the size depth of market is increasing.
10:15One side when people complain about a lot of IPOs and supply coming in,
10:19yes, this supply is essential for this absorption of this money, which is going to come in.
10:23And that is a happy news, that's not a bad news. And, you know, the glimpse of this, you can see
10:29when Japanese economic cycle, economic miracle played out, you know, lots of investors flogged
10:34to Japan, you know, between 1965 to 1989 was a bull market for Japan. And, you know, initially,
10:41lots of skepticism was there. But towards the end, you know, in 70s, late 70s, late 80s,
10:48there was no investor, you know, globally, who was not going towards in Japan, despite being
10:53expensive. And Japan, mind you peaked at 60 times Nikkei, P of Nikkei in 1989. So I think, you know,
11:01I'm not making a point that what trade will trade, Indian market will trade. But the point
11:05I'm directionally trying to tell you, that when the money comes in, you know, it just sort of,
11:10is an allocation money, it finds way to a market. And I do believe that, and by the way, one data
11:16also must one must keep in mind, US as a percentage of the world market cap today is 61%.
11:23Last time it peaked at 51%. So how much more money US can absorb and the fact that, you know,
11:30the rate cut cycle is beginning, there's also case can be made out that, you know,
11:33US economy will be shocked. Hence, you might not have the same kind of,
11:37same kind of sort of equity story going forward there. So there aren't many equity markets with
11:43a good story going around the globe. And hence, I see that, you know, we all will keep getting
11:47surprised with the amount of money flow, which will come both from domestics as well as foreigners.
11:52Got it. Because one, one counter question to the point that you just made. So paper,
11:58paper coming in primary paper coming in is probably welcome, because it will absorb
12:02so much of liquidity that is sloshing around both domestic and global, which will come in.
12:06But a lot of people point towards how PE exits and founder exits are happening.
12:14And whether that's a sign in the past that used to be considered a sign, right promoter
12:20he knows something more than the street does, therefore go out. But I see people like you as
12:24well, buying out those large chunks of paper, wherein a PE firm, which has been in for around
12:30exits, or maybe in some cases, even the promoter is selling some stake. What do you say about that?
12:36There could be many reasons why people sell, right? A lot of promoter selling could be a
12:40reason for people haven't seen this kind of wealth for a long period of time. So when you
12:44see this kind of wealth, a part of safety thing triggers in, I think many generational, you know,
12:51next generation is not interested. So, you know, many first generation entrepreneurs,
12:56second families are selling businesses either to PE or to, you know, the markets.
13:00So I think it is very much similar to by the way, what happened in 80s in US, you know,
13:04many businesses. So basically the difference between promoter and management is getting
13:08bigger and bigger. Today we have five, seven companies listed in the markets without promoter.
13:12There's no promoter to that, you know, modern companies. Incrementally this number will keep
13:16going in. Buying business, selling business will become very, very easy, is becoming easy.
13:20So this is, you can see this trend happening, playing out exactly how it happened in US.
13:26Business will acquire size scale, tuck in acquisitions will happen. All those things are,
13:30I think, you know, powerful, the course will happen. Private equity funds sell for, you know,
13:35because the life cycle is over, but they are deploying more capital back into the market.
13:39It's not that they're taking away money from market, right? In fact, somebody wrote a very,
13:43one newspaper wrote a very interesting thing that, you know, in 2020, promoters sold post
13:50pandemic almost 60, 65,000 worth of equity stocks. Now go back and do the mark to market of that,
13:55whether that was a smart decision or a bad decision. The point is, you know, selling
14:00by promoters does not necessarily mean only that it's negative. Of course, you have to look at the
14:06situation. You have to look at the company. I'm not making any blanket sort of comment, but yeah,
14:12you have to, you know, see India's story in right perspective. According to me, we are in a very,
14:17very transformative phase and you have to, of course, individually analyze individual opportunities,
14:22sector management, but we will be creating one of the largest wealth or as, you know, basically,
14:30you know, 80, 90% of India's wealth is yet to be made over the next 20, 25 years.
14:34So we are in that kind of cycle. And once you have that, then I guess,
14:38ideas to just remain invested and sit through pains, which come and go.
14:43I tell you viewers, whenever you are slightly more skeptical about the Indian markets,
14:47you got to hear Vikas Kemani, not just this interview, really. I mean, the interview has
14:51been bullish and constructive for a long time. For now, it's paying off. So keep that in mind,
14:56because where within this whole landscape are you more constructive on? Because different people,
15:01I mean, there are many thousand ways to skin a cat, but I'm trying to understand how does
15:05Vikas Kemani think about this? So I think, you know, again,
15:09India is one of the very widest story in my 25, 30 years of career. I haven't seen
15:14so many sectors playing out. You have great opportunity in manufacturing,
15:17you have great opportunity in financials, technology, consumption, infrastructure.
15:21I mean, it's one of those periods where, you know, things are happening at a great space
15:26and interesting space in every aspect. And this is one of the most widespread balancing growth.
15:31You have a domestic consumption story, you have export story, you have manufacturing story,
15:35you have services story. So, you know, so this is where I think we are, in my opinion,
15:39against point for choices, that we can pick up what we like and our focus continues to remain
15:44great quality managements in good businesses and at a reasonable valuation. And mind you,
15:49I am again telling you that you are able to find out despite, no matter what people,
15:54you know, make the narrative about. To give you an idea, in our Bharat Amrit Kal Fund,
15:58our portfolio earning growth is 22, 23 percent. ROE of the portfolio is 90, 90 and a half percent.
16:04You know, debt to equity is 0.1. You know, PEG ratio is, you know, 1, 1.1. So, you are able to
16:11find reasonably priced people who make the argument of expensive, I think, are approaching
16:16markets from reversion to mean perspective. But that doesn't work in a transformative economy.
16:21You know, reversion to mean works in a steady state economy. But transformative economy,
16:26reversion to mean doesn't work. And that's the reason we need to study and understand
16:29different, different markets. And my conviction is that, you know, there are many, many pockets of,
16:35you know, opportunities within those segments I spoke about.
16:38Each has to find its own comfort and, you know, build portfolios.
16:43Such a valid point in some sense, because where with, I mean, okay, just help us understand this
16:49better, right? Because you said it's a wide bucket. Where is it that, I am not asking for
16:53stock recommendations here, but where is it that you are more constructive on within this
16:58transformative set? I mean, there might be 10 themes that you really like. Tell us about one
17:04or two where you believe the things are changing in such a transformative way that the sector
17:09earnings will look materially different, let's say five years out.
17:16So, again, manufacturing we've been speaking about for a very, very long period of time.
17:20That's a wide bucket. Sorry, but that's a wide bucket.
17:25Narrow it down. Yeah.
17:26I know, I know. I'm coming to that. So, I think that's a very wide basket. But within that,
17:30I think in my opinion, auto components will keep surprising, you know, markets. There's a great
17:35story in place. We will keep seeing it within pharmaceutical. CDM was a space, I think,
17:41probably where IT was in mid-90s. And it's a very, very massive 10, 12 years, 10, 20 year story.
17:47We'll keep surprising, getting surprised on that. Within consumption, by the way,
17:51you know, we've been all along negative on consumption and its valuation for last five
17:54years. Last three, six months, we invested heavily. First time we are significantly overweight
18:00in the space, but we are able to find reasonably priced, good, high quality consumption stories
18:04where we can see 15, 20% growth coming through. Premiumization is playing out,
18:08customer spending is playing out. So, you can, within IT, by the way, which is considered
18:14relatively slower sector, I think there are companies which are growing at 18, 18, 20%
18:19within AR and D space, which is the fastest growing segment in that space.
18:24Product-oriented companies, again, are growing very, very well. You can find those companies
18:28also in this space. So, look, there are pockets of opportunities. You know, we look at broader
18:33theme and then go and narrow down. Within that space, what grows faster, what grows,
18:37deliver better risk reward, and then we look for those kinds of ideas.
18:41Got it. Well, you know, Vikas mentioned about how CDMO is at a place where IT was. I want to dwell
18:46on a little bit on the present as well. Vikas, just stay on because I need to get in my colleague
18:50Rucha to talk about what's ailing IT services today because from amongst, in a very, very flat
18:57market per se, nifty IT is sulking big time in trade today. Rucha, what could the probable reasons
19:03be? Right. So, nifty IT is falling in trade today and this is largely on the back of one news that
19:09came out in Accenture wherein Accenture is set to delay its staff promotion from June to December.
19:15Now, this is the information according to Bloomberg and Bloomberg reports that Accenture had
19:20told its employees in an internal email that they are also considering to permanently
19:26shift the promotion cycle from June to December. Now, I'll tell you why will this be happening.
19:30Now, clients generally set their budget in December for the coming up calendar year. So,
19:36if the December cycle comes into the picture with respect to employee promotion,
19:40the company gets better clarity with respect to how clients are looking on to their budgets
19:45and then the company can decide on to their expenditure like employees, ESOP costs, etc.
19:50So, this might be the reason why Accenture is considering to get a better clarity on demand.
19:55Now, talking about IT as a whole, well, Citi had come out with a note on Accenture per se,
19:59the global team when it did mention that surveys point to relative demand stability. Now, mind you
20:04over the last couple of quarters, demand was in too pressure because of
20:08different macro uncertainties like war, interest rate, etc. But now the surveys
20:12conducted by Citi indicates that there is relative demand stability if not a dip in demand.
20:18Also, clients are however cautiously optimistic towards CY25 budget which means that CY25
20:24that is calendar year 25 will likely be better than calendar year 24. But different events like
20:29the federal meeting which we have and the election cycle which is coming up this year could also
20:35affect clients' budget and hence the budget could also affect how much they spend on IT and hence
20:41reflect in the revenue for IT companies. Now, pressure also continues to be on smaller
20:47discretionary deals. Now, discretionary happens when clients have to cut out on their budget to
20:52accommodate different expenditure as well. So, pressure on smaller deals although continues
20:58and budget reprioritization is also happening by clients. But comparatively, like if we stand
21:03right now and if we compare IT's outlook four quarters back, we can see that there is relatively
21:10better green shoots which even different companies had mentioned in the first quarter earnings.
21:15Yeah, point well noted. Rucha, thanks for bringing that to us. Vikas,
21:19any thoughts here? You've been constructive IT, there's been a bit of a rally but
21:24some of these rallies get punctured at times by some developments, the latest being Accenture
21:30saying that hey, we'll do the promotions only six months out and some people taking it as a sign of
21:36there being continued stress. No, IT is one of the most closely watched sector and I think
21:43every small item gets used or analyzed and I mean my way of looking is very different. Look again,
21:51while directionally I think sector is bound to grow. Now you can argue whether it will grow 8%,
21:5610%, 12% or anybody's guess. I think NASSCOM has given a great guidance in terms of like sector is
22:02growing. The only thing is we have to find out within that what offers better risk, what sector
22:08can grow. This year also IT sector has done very well. If you see many IT stocks are up between 50
22:15to 80% and if you look at last two years, many stocks in our portfolio are up between 100% to
22:23300%. So point is that while of course very large IT companies will always have a challenge in terms
22:30of growing because the base is very large and bit of internal changes are happening in terms of
22:36technology changes and they are kind of going through that phase. But fact is that directionally
22:41it's going well. We are not negative on IT sector and I have said in the past also that
22:50IT is also a good play on Fed interest rates going down and that has started playing out in
22:55last six months the moment indication of the Fed cutting it came down. Still in my opinion,
23:00lot of transformative work in US has not started. A lot of companies were so far spending only
23:08required money on IT development but I think the transformative or transformation work is yet to
23:13happen because every company needs to spend more on tech or needs to spend more on digital
23:18technology. Otherwise you won't be relevant and still there's large wide opportunities on that.
23:23So I think we are constructive in the sector. Now which company to play and all is a matter of
23:28which segment to play is a matter of choice by each of us. Fair call. That's completely
23:32understandable. Vikas, what about other forms of non-manufacturing space? So for example,
23:42BFSI, I know from our previous conversation that you've told me that if India has to grow the way
23:47everybody envisages it to, banks are a sure shot presence there. What about non-banking names? We
23:54missed that part the last time that we spoke. So both lending non-NBFCs and non-lending financials.
24:03How are you, how constructive are you? You may be constructive and all but
24:06in the pecking order, do they come lower down in your overall portfolio or are they right up there?
24:14You know, we could see some bit of pressure on NIMS coming through and hence,
24:18you know, about six months ago, eight months ago, we had more aligned our portfolio towards
24:25non-credit as well as non-bank. So we own fairly large NBFCs in our portfolio,
24:30which has done pretty well. We own non-credit players, life insurance company, which has done
24:35again well. So I think we kind of made that, you know, that does not mean that we are not bullish
24:42on the credit segment, but there is a bit of intermittent probably 12 months consolidation,
24:4615 months consolidation possible. And hence, you kind of adjust your weights towards
24:51some of the names which you think can deliver better return in order to generate alpha.
24:55Both credit and non-credit are going to do well. I think like, again, if you take 10,
25:0015-year view, whether it is insurance, whether it is wealth player, whether it is any segment,
25:04you think we are significantly under-penetrated and as wealth creation happens, as per capita
25:09income goes through, more and more savings get channelized through the same sort of two or three
25:13channels, whether it is, you know, capital markets, whether it is insurance companies,
25:16whether it is mutual funds. So all of them would be, you know, growing reasonably well.
25:21We own AMCs because we think that they are structured in a good place from a growth
25:25perspective. So all these things, I think, do us look very, very good. Right now, we are a little
25:31bit more overweight on non-credit and non-bank place, but we are not negative per se on banks
25:36as well. Okay. My final question, because I'm not asking you to comment on this one, but
25:42at times it becomes my job to ask you about the most spoken about thing and that is Bajaj housing
25:47finance and the fact that yesterday, as of yesterday, the market cap of that one name
25:53eclipsed the market cap of 10 subsequent housing finance names. Is this a sign of exuberance or is
25:59it the market paying premium to a quality franchise? Yeah, Bajaj group obviously is
26:07most sought after. They've always been trading at a premium, whether it is NBS space or this one.
26:14I think there's a huge sort of premium for that governance and execution, which well deserved and
26:19Sanjeev is a good friend. So, you know, very, very good. I mean, we, and I mean, I don't sort
26:27of, we've, you know, analyzed that like the franchise, probably we find valuation slightly
26:32expensive at these levels where it is, but, you know, look, to each his own. I would not call it
26:38exuberance, but at the same time, I think, yes, we have to be careful. There are stocks where
26:42there's a lot of exuberance, there are no stocks where you are able to find interesting place.
26:47Market level, I still don't think we are in exuberance mode. Yes, there are pockets of
26:51signs, worry, risk are getting developed when you see poor quality companies also going public.
26:56Good quality management going public and getting valuation is one aspect, but
27:00more worrying aspect to me is poor quality management, poor quality businesses going
27:04public and getting, you know, good reception. That is my, in fact, bigger worry where a lot
27:09of retail investors and, you know, lose money permanently. And that is what I will always
27:14caution against. In Bajaj housing kind of cases, you may not make money, but you will not lose
27:19money. And that's at least, you know, a good part, but so that's where I would say the exuberance
27:23should be avoided and we should be careful. Okay. Vikas, excuse me for making you talk on
27:28a stock, but it was not a recommendation, but I just thought I should ask you because it's such
27:32a big talk of town, but thank you. Fabulous talking to you today. Thanks for so many insights
27:37that you've shared with us today. Thank you very much. It's always a pleasure talking to you.
27:41Thanks, Vikas. And viewers, thanks for tuning in to this edition of The Talking Point.