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00:00Hello and welcome. You are watching Talking Point. Vikas Parshad, Portfolio Manager, M&G
00:15Investments joins us from Singapore. Hi Vikas, thank you for taking the time out to talk
00:18to us this morning. Vikas, before we go into nitty-gritties, what are you feeling? The
00:24world is looking tough. On one hand, you've got those big elections lined up, not just
00:30in the U.S., but in most parts of the world. You have geopolitical stress, which is as
00:35real as it can get. We've been uncertain for quite some time now, but it seems like our
00:41valuations are playing catch-up. China is coming out, but of course, with stimulus packages
00:47they talk about, but we've seen no pen to paper just yet in that sense. How do you feel?
00:52Do you feel it's risk-off trade for the foreseeable future now, for at least Indian equity markets
00:56or emerging markets as a pack? Hi, good morning. It's difficult to predict short-term movements.
01:02What I will say is that as a global investor, in a global context, Asia looks pretty good.
01:07China looks good, Japan looks good, and India looks good still also. Our time horizon is
01:12long enough that the short-term volatility is less impactful to our portfolios, our positions
01:19are large enough that we don't trade in and out. There are days like today where you're
01:24seeing acute pain in one sector, the auto OEMs, and then also that's flowing into other areas
01:29as well, two wheelers, the auto ancillaries. We took advantage of where some of these stocks
01:36opened this morning to add to our exposure. What we did do heading into earnings season,
01:41because of what we thought were markets that were more resilient than perhaps they should
01:44have been given geopolitical risks, we reduced the name count in the portfolio, we consolidated
01:49our holdings. So in the two-wheeler space, we now only own one of the names. Earlier in the year,
01:54we owned three of them. And so that portfolio management has been helpful so far.
02:00Because, you know, we keep complaining, and in fact, investors complain about India being an
02:05expensive market, and we've been expensive, a very expensive high growth market from the time
02:10I can remember. Do you feel that after this recent correction, Indian equity markets have witnessed
02:19there is still some more room to go for us to become better priced? And if one needs to be an
02:24investor in this market, better days ahead if you're a buyer? It depends. It's always bottom
02:30up. It's stock specific. What I would say is that the market is pricey, not expensive. The reason
02:36that there's a distinction in our mind is that if something is pricey but not expensive, it's
02:41because that's where the growth is. So if you look at what a one-year forward multiple is telling you,
02:46not so much in the context of what that multiple becomes, then that is more important. You need to
02:51do your work. You need to be very specific, very selective. And that's what we feel like we do.
02:55The markets have done well. We have as well. And it's this approach that India's market for
03:00long-term investors. You can't just own the entire market. There are opportunities for alpha
03:06if you do your homework. And you have to think long-term. So that works. We've been having this
03:12conversation for many years that India is very expensive. I've never really espoused that view.
03:17It's pricey but not expensive. And the longer your time horizon, the less pricey India becomes.
03:23So you're right. From a 10-year outlook, this is definitely not an expensive market, right?
03:30But tell me, with your India allocation, are you currently fully invested?
03:35We have been for the past two years. The average cash balance is that we've had.
03:39Going back to the big short seller report that came out in Q1 last year,
03:43has been close to zero. We haven't fully deployed. We continue to see opportunities.
03:48When we went through this portfolio exercise over the last one to two quarters of consolidating our
03:53holdings and what we thought were the winners in each sector, whether it's auto OEMs or hospitals
03:58or IT services, we did the same thing. We went through the same exercise. And we just redeployed
04:04the cash into our core holdings. We did not sit on any cash. But the trick for this year has been
04:09even more so than last year. There have been many ECM opportunities, equity capital markets
04:14opportunities, IPOs, blocks, QIPs. And we have participated in some. Most of them we have not.
04:21But we like our portfolio. So if we need to buy something or we want to buy something,
04:24then we need to sell something. So that's what we've done. But we remain fully deployed even now.
04:31Where is that deployment spread across? You talked about a few sectors,
04:36but in that pecking order, tell me, where are your preferences? Where is the bias? Is it towards
04:41sectors such as IT and pharma, which are more global facing? Is it to metals, which has a
04:46little bit of a China play? Is it to domestic consumption? So it could be auto or to angst,
04:51like you mentioned, consumer staples. How have you structured that portfolio of yours?
04:58Well, the good thing about the portfolio is it's quite diverse. We own all of these. We are
05:03shareholders in auto OEMs. But over the last two years, that exposure has shifted from
05:08four-wheelers, four-wheel passenger vehicles to CVs. And then this year,
05:11there's more split between CVs and two-wheelers. If you look at healthcare, we have consolidated
05:18our pharma holdings. We have consolidated our hospital holdings. But we own, we have exposure
05:23to those as well. There's no pattern when it comes to market cap. We're just looking at
05:27long-term perspective returns. So in the pharma sector, we have some exposure to companies that
05:32are sub $3 billion market cap. And then we own some that are much larger. Hospitals, we own
05:37the large hospital companies, but then also some of the small ones as well. So it's a pretty diverse
05:42portfolio. We own the metals companies. But again, we've been through this exercise of
05:45calling some of the smaller positions and focus on concentrating our capital on what we think
05:50are the leaders. What is a clear gap in the portfolio, but by design, is consumer staples.
05:56The first few days after the election results came out in June, there was a big rally in staples.
06:01We used that rally to reduce our exposure. We have more zero weights in that sector than in
06:07any other, and we've consolidated our holding. But it's still into consumer-facing names. It's just not
06:13consumer as is defined by the staples companies. So if you look at the air conditioning sector,
06:17for example, we are there. If you look at hotels, if you look at real estate, we are very much
06:23exposed to the Indian consumer, but more towards the high end now than before, and much less to
06:28the staples sector. So does jewelry come stocks, retail companies like a trend,
06:35you know, companies that do lifestyles or Nike show up on your portfolio then at this stage,
06:39if it's not consumer staples, I'm guessing it's aspirational spending.
06:43It is aspirational spending and more on the retail side, less on the some of the brands,
06:49some of the newer listings over the past two to three years. Those are fewer in portfolio that
06:53we are exposed to quick commerce and to food delivery already. And we like that exposure that
06:58we have. What we have consciously tried to add this year is exposure to the very high end Indian
07:05consumer. There are some views on how sustainable this demand is. We think that it is sustainable.
07:11Something different has happened. What we originally thought was a K-shaped recovery
07:15coming out of COVID seems to have become a K-shaped economy. And there's clear acceleration
07:21at the high end, whether it's hotels or it's airlines, India's largest airline is adding
07:25business class as an example. If you look at some of the more prominent properties,
07:30hotel properties around the world, the suites get booked before many of the lower categories.
07:35First time we're seeing that you've seen the demand for large high-end homes in the NCR area.
07:42And we see, we believe that that will continue to other parts of the country as well. It is not
07:47exclusively a focus on the ultra-high end, but that is more prominent in the portfolio than it
07:51had been. Also, we haven't spoken about PSUs yet. Our PSU exposure on the banking side today is
07:58lower than it was heading into the elections. And we had lowered our defense exposure also
08:04heading into the elections, but we gradually started building that up in the recent weeks.
08:09Defense companies, I mean, not so much the banks. Vikas, you did mention that you've reduced your
08:14PSU banking exposure and I'm assuming you've rebalanced that with adding a little more
08:18exposure to private sector banks. What about another space that's catching our attention
08:22for the last few months now is capital market sector. So be it asset management companies,
08:27broking firms, platforms, there is so much excitement around these, right? Have you
08:33taken exposure, added positions to that space? Because if you're betting on the India that is
08:38getting financialized, this is a space you must be invested in, I'd imagine.
08:43I agree with that. Asset management, we have exposure to some of the companies. It's basically
08:48a duopoly in the companies that provide services to the mutual fund industry. We have exposure
08:52there. Now, the wealth management firms, I admit that our exposure is lower than it probably
08:57should be. So we are continuing to do our work there. I presume that the next time we speak,
09:01the exposure that we have to that sector will be higher than it is today. And like with many
09:07sectors, we have seen re-ratings over the last two years. We have seen an earnings acceleration
09:13over the last two years. But all these stories are still pretty early on a sector-wide basis.
09:18And you don't need to own all of them. You just need one or two in your portfolio.
09:21So I agree with you. This is an area where investors should be spending more.
09:25And what about insurance, Vikas? Because if you're betting on an emerged India in some sense,
09:31insurance is a play that has enough and more room to go. Would you think insurance is a good
09:37sort of deal in India? And again, how would you play life versus non-life? Where is the bias?
09:43So this is the same debate we had internally. We, in the second and third calendar quarters
09:50of this year, exited the life insurance sector. Our exposure in the insurance sector is outside
09:57of that. So you find it correctly. And that's the exercise we went through. And we decided not to
10:02have any life insurance exposure anymore. That could change over the next few quarters. We'll
10:07see how they trade. I would say that since we exited that particular subsector of the financial
10:11market has traded better than I would have expected. But we'll see. But we'll see.
10:18Vikas, you're closer to the action in China than we are. What is going on there? We sporadically
10:25see good days and bad days on the LME with commodity prices moving. But it almost feels
10:31like the Chinese government is propping up the bulls, right? Because every now and then they'll
10:35talk about releasing a stimulus. But we don't actually see that happening. Similar thing
10:39happened today. How do you play the metals back directly and also indirectly? For an Indian
10:45investor who's got a home bias, would it be a good time to buy into the metal story in India?
10:51Again, you've touched on something that we internally were talking about not very long
10:55ago. So when it comes to the Indian metal companies and metal companies across the region
10:59and around the world, if an investor's new thesis is to buy because of what's happening in China,
11:04we think that that's a bridge too far to cross. They're not very related. The initiatives on the
11:13ground in China are directly to benefit the consumer in the short to intermediate term.
11:18It's not so much on the construction side or property side on the metal side yet, we believe.
11:22That is our view. And so you asked earlier what's going on in China. A lot is going on in China,
11:27but we're not materially changing our China exposure because of any announcements over the
11:33past two to three weeks. We made a big allocation to China at the start of the year and in the
11:37middle of the year. And we continue to be positive on that market for both absolute and relative
11:42performance. So that's a separate conversation. We can talk about that in the future.
11:46So that's a separate conversation. We can talk more about China if you like. But when it comes
11:49to the Indian companies, again, we have consolidated our holdings into fewer and
11:54fewer companies in steel, in cement, in other metals and mining companies.
12:00And they are for India-specific or at least non-China-specific reasons.
12:06Vikas, how large is your stock portfolio? How many counters do you currently hold?
12:11Well, this year, the count is a little bit higher than normal because we've been participating in
12:15a lot of these IPOs. And as you know, most of them are quite competitive, even for the
12:20anchor round allocation. So we end up with some small allocations. What I would share is that
12:24the bulk of the risk is in the top 15 or so holdings, meaning that if you concentrate our
12:30active bets, more than half of that is in the top dozen to 15 or so bets that we have. And then we
12:37have some tier two players in the same sector, perhaps, or in some of the small and mid-cap
12:41space. Also, what I'll share is we have an allocation for small and mid-cap companies.
12:48It's the highest that it has been in the past three years, but it's not at the max levels.
12:53We've been steadily adding to it, again, being very selective. And we continue to find a lot of
12:59alpha-generating opportunities in the small and mid-cap space. Again, the longer your time horizon,
13:03the better the prospective returns you will find. But the amazing thing about India,
13:07the Indian market, is how it has changed over the past two decades. There are now 6,000 listed
13:12companies in India. You're approaching 2,000 companies with a market cap that exceeds 100
13:17million US dollars. Every sector is represented. Every niche is there, even middle to high-end
13:23semiconductor manufacturing. It might not be there today, but in five to 10 years from now,
13:28it will be there. And the right companies are laying the groundwork, even for that kind of
13:32exposure. So it's a market that's evolving. If you look at the underperformance last year,
13:37this year is not done yet. But in 2023, 70% of the index outperformed. And you look at where
13:44the underperformance is concentrated, it was in the large mega-cap names that once upon a time
13:49were the leaders of the market. That will happen again. Today's leaders won't be the leaders of
13:53five to 10 years from now. And we're investing in the India that is rising, in the forward India,
13:59the futuristic India. And we see a lot of opportunities all across the board.
14:03Because a futuristic India has always got the debate of old economy versus new.
14:08And when we talk about new economy, while it's a great conversation, actionables are rather
14:14limited in terms of executing those trades or those stocks, right? Would you agree?
14:20Well, yes and no. So if you look at some of the old economy companies, some of the most
14:25advanced and forward-thinking adoption of technology, broadly defined,
14:30is in the renewable space, is in the construction material space. It's how software is being
14:35incorporated. It's how hardware, robotics, factory automation is being incorporated.
14:40Tracking of shipments is being incorporated. So you have some of these old economy stocks,
14:44like cement companies, like metals and mining companies, construction companies. But then you
14:48also have logistics, quick commerce, food delivery at the forefront of technology adoption.
14:54So when we talk about the India of the future, we're talking about a lot of these sectors that
14:58are leapfrogging way stations along the way that someone might have expected. So for example,
15:05one of the best examples people talk about, or have talked about in the past couple of decades,
15:08has been the telecom sector. And most of India went from not having a landline to straight
15:13having a mobile. We're going to see that leapfrogging in other sectors as well.
15:17Quick commerce is a good example of that. We've gone from talking about a structured retail sector
15:23that is less than 10% and how that will play out on the organized retail side, looking at it through
15:30the lens that we view Western markets. But then now you look at the adoption of digital payments
15:36and quick commerce, that's another leapfrogging event that's taking place. And this is going to
15:40be very large, and we hope to be exposed to that sector for a long time. Because you mentioned
15:45you've subscribed to quite a few of those IPOs that opened in India. And the returns of those
15:52are phenomenal. The subscription numbers are eye-catching. We have a significant big one
15:58that is open today, that's the Hyundai IPO. And I think it's somehow causing the other auto stocks
16:04to give up some gains, because I'm assuming auto funds are rebalancing as we see it.
16:08Do you have a view on this one? Well, directly on any specific IPO,
16:12I'll hold back from commenting, but I will say that we are probably nearing a peak level of
16:19activity when it comes to QIPs and large IPOs. But a deceleration won't be bad, it'll be healthy.
16:26But when you have multi-billion dollar IPOs and blocks coming through in a very short period of
16:32time, that does absorb a lot of the liquidity. What has been impressive to me is how much
16:36liquidity there actually is and how much continues to come in every month from the retail, the
16:40domestic retail investor. So I think that will continue, the IPO activity will continue.
16:45But this has been a pretty frenetic pace that we've seen on the IPO front. Now,
16:50all these IPOs are very healthy. I'm not surprised that parent companies abroad,
16:55whether they are in South Korea, or in Japan, or in the northern part of Europe, are continuing to
17:01list their subsidiaries in India because of the valuation uplift that you get. But again,
17:05this is where the growth is. So we will expect to see those continue to come.
17:09You know, I agree. I mean, some of these IPOs are phenomenal, but there are others that may
17:16not be so great, right? I mean, some of those SME IPOs have been oversubscribed and how,
17:20and there's not too much of a story going for them. And I know you can't comment on
17:23IPOs specifically, but one good thing they've done is they've ensured that there's some of
17:27the liquidity moves there and that prevents some form of a bubble that our markets could have gone
17:31into. If you were to give me a percentage of IPOs that you've subscribed to recently,
17:36would you be able to do that?
17:38It's low. It's low. We evaluate a lot of our opportunities. And as you know, a lot of these
17:42companies, if not all of the companies, do come through Singapore. I get to meet them. It's
17:47heartening to hear their stories and where they've come from. But again, we like our portfolio. As I
17:53was saying earlier, if we want to buy something new, then we do need to sell something. We're
17:56not sitting on cash. We are fully deployed. So we have to be very selective. The hurdle
18:01for investing in an IPO is higher than it is even for companies that have been listed for a long
18:07time because the information asymmetries are too high for us to be participating very frequently.
18:13But we are spoiled for choice. Small IPOs, large IPOs, midsize IPOs in the automotive sector,
18:19textile sector, hospitals. I met two companies just yesterday in the B2B sector and in the
18:26hospital sector. I have another couple lined up for today and tomorrow. So it's a very active
18:32market. It's good to be busy. It's better to be busy than not to be busy. It's good that these
18:36companies are looking to get some liquidity. What's also encouraging is that you're not
18:40seeing founders materially cash out. These are largely OFS type deals. There is primary capital,
18:46but it seems to be going for good purposes. And it seems to be functioning relatively well,
18:52the IPO market. So it's done a very good job of getting IPOs and delaying IPOs if
18:57they're not satisfied. So we're getting very high quality options to choose among.
19:03So for all that incremental money that's coming in, Vikas, are you adding to your existing
19:09portfolio of stocks? Because with all these new ideas, are you getting greedy and sort of building
19:15the incremental cash flow with a different portfolio? Well, I'd like to think that we
19:20are always long-term greedy. And India is a good market to be long-term greedy in.
19:25But because of the valuation uplift that we have seen over the past two years,
19:31and you see some of that, the impact of that today in the two-wheeler space, when you have
19:37earnings going up, but then a re-rating going up much more than that, stocks in the short-term
19:41can be vulnerable to any surprises that are neutral to negative. And so for that reason,
19:47we have consolidated into fewer and fewer holdings. I believe we're largely done with
19:51that exercise. So incremental capital that will come in most likely does go into our
19:56core holdings. And we will save some for the IPOs along the way. As I mentioned earlier,
20:02we think that this IPO activity probably is near IP, but even a healthy correction from this,
20:10this pace, still offers a lot of choice. And that we see continuing.
20:15Right. Vikas, it's so good to have got some perspective from you on the long-term picture
20:20of the Indian markets. But we all do know while India is in a structural bull market,
20:24any bull market is made up of multiple small cycles, right? With everything that's happening
20:29around us, we've sort of in many ways ignored. How concerned are you about what's happening
20:37geopolitically or what's happening, maybe a potential slowdown that we can be concerned
20:41about? Earnings season so far has been okay-ish, no major positive surprises. Do you feel all that
20:47could play catch up? And I know you're not into predicting, but do you feel like at the end of
20:53the year, maybe next year, the nifty may be lower than it is today only because we borrowed future
20:58returns? So you touched on a few things there. I'll say a couple of things. Number one,
21:05that we don't make predictions. We do run scenarios. We think probabilistically.
21:09And we spend as much time thinking about what happens if things go really well,
21:13especially in a market like India, as we do spending time on thinking about what if things
21:17go wrong, how do we lose capital, what are the downside risks? So we think that that is a very
21:22healthy exercise. Within the realm of expectations for each company that we look at, and as we think
21:28probabilistically, we have indeed over the past two to three years widened out our scenarios.
21:32When we look at India in particular, the upside looks like either the probability is higher or
21:38the magnitude of the upside could be higher in many of the companies we're looking at. But then
21:42given the geopolitical risks that you mentioned, we have lowered the potential downside as well.
21:46We've raised the probabilities for the wings. We've assumed more harsh assumptions for supply
21:51chain disruptions or less pricing power, higher costs of money, the interest rates being higher,
21:57inflation being higher. But I would say if two years ago, two years ago, you had told me that
22:04there would be armed conflict in Eastern Europe, armed conflict in Western Asia, potential for
22:09conflict between large countries out here in Asia, I would be very surprised by the resilience of the
22:16markets. No, we can't time any bear market. And this is why we are fully deployed, not sitting
22:22on cash. We are thinking probabilistically and we have widened out the scenarios.
22:27If all the markets in the world were to close today for the year, India would be the only
22:31major market in the world or the only market in the world to have gone up nine consecutive years.
22:35And because the rupee has been generally stable, even foreign investors who are investing in
22:40dollar returns will have gotten a large portion of those returns. That's a big difference between
22:45India and Japan. Japan has done very well as a market, but the yen has weakened materially.
22:50So if you were a dollar investor, you didn't get those returns. So yes, we might have borrowed
22:54some future returns, but we're thinking on a 5, 7, 10 year horizon and beyond. We are looking to
22:59be aligned with the promoters of these companies that we're meeting. They're making long-term
23:02investments and so a pullback would be healthy. But on the balance of what we know, we'd be adding
23:07to our positions rather than panicking. And I guess hence it becomes difficult to do a
23:11tutorial call, but betting on the promoter, I think that is so important for us to all
23:15be mindful of. If you're making a significant investment, it's very important
23:20to bet on the management and have complete faith in what they're doing. But thank you. Thank you,
23:25Vikas. Great talking to you. I'd love to chat with you longer to understand the style of
23:28investing, but maybe that can wait until next time. With that, we're completely out of time
23:33on this edition of Talking Point. Thanks for watching.