- Investors would be happier in 2020 than they have been in 2019.
- Last decade, all asset classes have made money.
- Engineering, commodities and pharma which are linked to exports to do well.
This decade has been dominated by only one thing – central bank policy action, low interest rates and rise of mega caps. It is not only an Indian phenomenon, it is also a global phenomenon. There has been Microsoft, Apple, Google . How much of the current decade will translate into the next decade as well?
You are right. It has been predominantly driven by policy action. We have to remember that it is a continuation of what happened towards the end of the last decade — which was marked by the Lehman collapse and financial crisis. So, the central banks becoming active is a carry-forward from where the last decade ended. It has been a phenomena where interest rates globally have been on a downward trajectory and surprisingly all assets have done very well. It is very rare that fixed income guys as well as the equity guys have made money and towards the end, even the commodity guys — mainly gold — have made money.
Small guys have not made money.
Last decade, smallcaps have also made money. What we end up doing is we start to look at the index of the smallcaps and we get a little bit carried away in our negativeness because towards the end of the decade, the last two-three years, we had very challenging times, particularly in India with the tightening of liquidity which is not a normal phenomenon globally. But it was there and as also risk aversion. We get carried away with that but otherwise in this decade, good opportunities have come in the smallcap side also.
But as we look forward, the headlines are talking something different and the Nifty number is reflecting something completely different. Do you think both will align at some point or has the index per se overseen that tide? Can we say we are not going to get back to the lows?
Markets are reflection of a) fundamentals and b) flows. So you are right…
And sentiment, which we have not been aligning with?
Sentiments are the outcome of how the market behaves, rather than being precursors. Obviously, the fundamentals have not kept pace and it is high time that the economy starts to grow faster. Otherwise, there is going to be a headwind for the markets. Having said that, the flows in the Emerging Markets, particularly in the last two months have been very high. We are very happy that Indian markets have gone up. In December, we are up 1.5%. Brazil is up 8%, China it is up 8% and even Hong Kong with all its issues is up 8%!
Last decade, all asset classes have made money, even smallcaps: Sunil Singhania
So the last one, one-and-a-half month is predominantly an Emerging Market rally and India gets the rub-off positively because flows come into India but it has underperformed to that extent largely because the economy has not kept pace.
Going forward, we believe in optimism, we believe in hope and at least we are quite confident that by March we should start to see the GDP growth rate numbers coming at at least 5.5-6% if not higher.
Just before that, a big catalyst will be the Budget. While there is talk of an impending income-tax rate cut, and people buying more consumer goods, I do not know how much of it is going to materialise. But besides that, what is the messaging to the finance minister? What is the need of the hour from the Budget this time because we know they are going to miss the fiscal deficit target as well.
I hope that the expectations do not go up too much before the Budget. If the tax rate cuts come and all is fine, but otherwise, we should not put too much hope on that because of the fiscal deficit number. Also, I tend to agree with one of the economists who said that if the finance minister says India's fiscal deficit for the next two years is going to be 5%, it is not going to be the end of the world.
In fact, after a knee-jerk reaction, all the markets should go up because it is a practice followed globally. When Lehman collapsed, the fiscal deficit in the US inched up to 9-10% because that was the need of the hour. Right now, if we need some extra money to pump into the economy to kick-start it, I do not think there is harm in the fiscal deficit going up to 4% or 4.5%. We have lived with that even earlier and the good thing is we have a great foreign exchange reserves right now. We do not have to bother too much about that side of the economy and even if the fiscal deficit goes up a little bit, it is not going to be the end of the world.
If I had to put in a spot and get a year-end target for December 2020, what would it be?
I do not know but I think it is high time this polarisation of the market ends. So many people are expecting the midcaps and smallcaps to outperform, it has become a consensus trade. But the guys who are tweeting are the ones who are having the view, the guys who are not tweeting, have been sitting on largecaps and even making a lot of money.
The disparity in valuations is now very stark and at some point, fundamentals have to catch up with the market. I would say that the equity will give you positive returns. I do not know what the headline indices might look like but overall as a basket, investors would be more happy in 2020 than they have been in 2019.
For last two to three years, expert have been making a case that the mega caps are becoming large and obese and the risk there is valuation, not business. But that view has not got vindicated because of liquidity and low interest rates. If we are in a world of low growth for a long time, liquidity will remain abundant and flows continue at the same pace.
It is a very clear signal that there is now benefit in being large and particularly in the e-commerce and the digital world. I think winners take all. After Amazon, the second largest maybe 5%, 10% the size of Amazon and that is also one of the reasons why the large have become larger because in that segment, the winners take all. But in the other segments, the smaller companies also have a chance.
Earlier, the largest FMCG company could demand all the space in a grocery shop. Now because of e-commerce, even the smaller guy can have a share of eyeballs. So things will change in the digital world and e-commerce.
“The trends where we used to have for 15-20-year cycles, are becoming shorter. You cannot buy anything and keep it for 20 years. The disruptions will kill you if you do that.”
— Sunil Singhania
We say in the market that courses remain the same, the horses change. Each decade, always gives these mega trends. The '80s belonged to Japan, then came the US, then came China and the last 10 years have been all about the US. How would you identify money making ideas for our viewers?
One thing is obvious, that the return expectations have to go down dramatically because the beginning of this decade was more about interest rates going down. We started with very high interest rates in 2008-09, post Lehman. After that, the interest rates kept going down. Now, we are at the fag end of that cycle and interest rates cannot go down further from here. They can stay here, at least in most developed nations. We have to be very clear that the return expectations have to be lower.
Second, the trends where we used to have for 15-20-year cycles, are becoming shorter. You cannot buy anything and keep it for 20 years. The disruptions will kill you if you do that.
Third, the Indian investor will have to start looking at opportunities of investing abroad selectively. This year, even the US companies have given 30-35% return. I think in India the trends are going to be very different and very difficult. We have already seen the consumption play out beautifully.
Consumption will continue to grow but the valuations are such that I do not know if returns could be made there. On the other hand, there would be the so-called sectors which are facing headwinds but which have the core advantage of difficult to replicate aspect. So, core brick and mortar sectors which have established factories, cash flows, right now have very low PE because they are out of fashion, and no one is investing in them. Ultimately, those are the sectors which will start to make a lot of money.
I would say some engineering companies, some commodity companies, at least for the next three-four years, can give very good returns. It is very difficult to call a decade because as I said things are changing so radically.
But you sort of warned everyone about two months back that there is a bubble in quality. DO you believe that it is in one's best interest to reduce exposure there, if not completely exit?
The idea of the note was to just give a perspective so whatever we have studied and whatever we have practiced. When we invest in equity, there has to be some rationale to it and it is all about buying profits.
I think that note was more to alert investors that quality obviously is quality and it will always trade at a premium but to what extent is what the investor has to be careful about. So, whether the investor has to reduce or not will depend on the investor's perspective and the risk-taking ability. But as an investor, we would stay away from very high PE stocks unless the growth rates justify those high PEs.
Do you think there are any exceptions wherein the growth rates justify the high PEs?
There are some companies which continue to grow at 25%.
Within financials and even outside of financials. But they are very rare. By and large, 90% of the companies which are trading at 60-65 PE do not have growth rates of more than 10-15% and the perception is that these companies are growing at 20%. But when you actually sit down with the numbers, which unfortunately very few people do, you realise that even in the last decade very few of them have grown even at the nominal GDP numbers.
You mentioned engineering, you mentioned commodities. Take us through some of the other themes that you are looking at. How stock specific are you going? Are you looking at size versus earnings? What is the rationale for investing as well?
For the next two-three years, our view is that India is not going to go back to 7-8% growth rate in a hurry and at the same time, the world is looking much better in terms of growth, particularly the US. China is also stabilising, commodities have started to inch up and with Brexit, hopefully there will be some growth even in Euro region.
So, we are looking at companies and sectors where they have decent sales coming from exports and that is why I mentioned engineering, commodities which are linked to the world and even pharma is starting to look interesting. However, in pharma, you cannot call the sector per se as a buy or a sell. It will be more stock specific. But with this four-five years of underperformance and valuations now at a decent level, rupee a the margin at 71 is better for the exporters than what it was three, four months back .
The fact that the regulatory headwinds are now reducing in the US, particularly companies which were in generics, have started to face bankruptcy because of the sharp fall in the product prices. A lot of companies have gone into bankruptcy and that is reducing the pressure on pricing for US centric companies. So, pharma can also be very interesting.
So I will pick up two themes – one what could be called as a super crowded trade, private banks, some insurance companies and one which is a completely disregarded trade that is PSUs. Not every PSU is bad, like Coal India, NTPC or BPCL. Financials is where the growth for next two or three years is visible but that is where the FII ownership or the institutional ownership is very large. Which way would you lean as a money manager?
I would agree that where there is consensus, normally money is not made. The biggest wealth has been created in one of the largest private sector corporate banks which is a consensus buy but which still continues to do well because even the most optimistic numbers can be exceeded in terms of performance.
On the PSU side, most are monopolies. However, the question mark there is that they depend a lot on government policy actions in terms of what they would end up buying in terms of some other company or what they are going to do. We own the largest public sector bank. But other than that, our view on other public sector companies is not that great. In this public sector bank, the FII ownership is only 9%. I always tell my analyst that foreigners own only $4.5 billion worth of the largest bank in India which has a 35% market share.
Also a credit card business and also insurance business and many others…
Yes. only $4.5 billion worth of bank which has a 35% market share and which is a decent bank. It is not comparable to private sector banks but it is much better than other public sector banks. So, there are pockets but by and large other public sector companies depend on a lot on what the government would want them to do. If there is some indication from the government that they would not interfere in business which has been there on and off, if that signal comes in, some of these companies can definitely give good returns.
Would you buy your own business? When I say your own business, I mean mutual fund industry, wealth management, there are options now?
It is a great business.
On a serious note I am saying that…
Yes, on a serious note and the reason I became an entrepreneur was because I saw the opportunity there. I do not want to give our secrets because our investors would be watching but this is the only business where you make money for the entire life of one sale. If we raise Rs 100 crore, we make fees on it for the rest of life, till the investment is there with us and that makes it unlike any other product. If Hindustan Lever has to make money, they have to sell every day. I think it is a great business.
Also, Indian people are getting richer and they are getting more organised. The financial savings as a percentage of their savings is increasing and in every saving which comes in, the wealth manager and the asset manager will have a role to play. It has great future. On the listed space, things are expensive. What is good is very expensive in India but we will have to live with it if the growth rates justify it.
We had a psychic and a tarot reader predicting that it would be the year for real estate post the Budget next year. Do you see any silver lining for real estate?
The tarot reader has been a little late because the best performing sector for this year has been real estate. The tarot reader should have forecast it last year.
“My joy lies in hunting for new stocks and researching them, meeting them and I get the kick out of meeting the smallest of the smallest entrepreneurs.”
— Sunil Sunghania
But as a trend what is it that you foresee, you rightly talked about financialisation of the economy, that is really playing out as a trend. But the last 10 years like you said was all about consumption. What is that one big trend that you see play out for the next 10 years?
It is going to be infrastructure because without that, I do not think we are going to be a 5-10 trillion economy. Whatever we might believe and say and be the most optimistic, we will have to do something about our infrastructure and for that we need spending and it is a cycle. You do the spending, your GDP growth rates inches up which gives confidence to the foreign investors to pump in more money and then it becomes a great circle, the way China has been able to do it. That is something which we will need to do for this country to be $5-10 trillion.
What happens if we do not move the classic way and we continue to dip into our savings — which is why the consumer boom has happened? India's savings have gone down. Indian consumers continue to leverage their balance sheet and that is why the growth in consumer durables and autos has come. Job and income levels have not gone higher. What happens if we continue to lever, our economy does not do well but consumption as a theme continues to grow?
There is a difference, I think if you look at the number of income tax returns, you will get your own answer. In the US if 90% of the residents are income-tax payers, in India it would be 5 or 10%. So, the possibility of levering ones balance sheet is very limited. If you look at the housing loans, there is a salaried class which every bank and every housing finance company would be willing to lend to; but then you have a big pool of self-employed people who would be showing the minimum income levels in their income tax returns but who would have wealth, but not in an organised manner. They would not be able to leverage. So the ability to lever is very limited in India. It might last for a year or two, but by nature, Indians will not remortgage their house to do consumption. In the US, if your house is worth $1 million and becomes worth $2 million, the person would borrow $1 million and go on a world tour. In India, we will never do that. The attempt would be how do we get our mortgage out.
It would seem natural that power would stand to benefit but given the kind of regulatory challenges the sector has faced, is that something that you would still take a risk on?
It can be a dark horse and there are reasons for it. One, technically the power companies in India are a proxy to financials because we have a fixed rate of return so 13-14% and if you are risk free interest rate is 6.5-7%. Typically they should trade minimum at two times book but right now they are trading at one time book, largely because of issues related to power.
The other positive which can happen is that everywhere the government wants to privatise distribution. We recently heard that in Odisha, five circles are being privatised. So a lot of these opportunities will come and in that distribution space the ROEs can be much higher than the 12-13-14%.
We had the major IEC event 10 days ago and we had one PE investor followed by one classic old timer, Manish Chokhani. He is exactly of your view which is that you cannot back consumption and you cannot buy these expensive stocks now. Rajan Anandan from Sequoia said that he was focussing on the India of 2030 which would be AI driven, data driven, millennial spending on experiential travel. Why are you not talking about these big themes?
There are two aspects to it; I would agree that we have become old and we are old school that is what you intend to say in a nice way.
Is classic old investing dead?
No, I do not think so because what has happened in India, the Indians have spent on all you mentioned but who has benefited out of it? All the foreign companies. I agree with Shankar Sharma in that respect that India has been too liberal. We were not able to benefit out of our e-commerce.
Amazon, Flipkart, Paytm all of them are….
China restricted them and so you have Tencent and Ali Baba and the local investors were able to participate. The trends will emerge even in India but how many Indian companies will be able to benefit out of it is the question. The very rich Indians could start looking at investing abroad to the extent regulations allow.
Buffett has made 90% of his wealth after he crossed 60, you are not 60. So, the best years are yet to come. Is there a number you are chasing?
My joy lies in hunting for new stocks and researching them, meeting them and I get the kick out of meeting the smallest of the smallest entrepreneurs. The next decade, hopefully I will have more time doing that rather than trying to chase being the largest AMC or being the biggest AMC or whatever. That would make me happier and wealthier, Wealth would be an outcome of something you do well.
Read More News on
Download The Economic Times News App to get Daily Market Updates & Live Business News.
ETPrime stories of the day
9 mins read
11 mins read
12 mins read
- Investments in Spanish Residential Real Estate
- Options For Real Estate Investments in India
- Why Invest and How To Do It: Avoiding Landmines In Your Investing Life
- Selecting Rules for Investing and Trading
- Property Investment in South Africa - Good Value To The International Investor
- Investment Strategies and Human Behavior
- Looking Ahead To 2007: Where Can Investors Continue To Expect Stock Market Gains
- Investing - Investors Have Been Duped
- Smart Investment for Beginners: Demystifying REIT and Real Estate
- Investing: Ways To Predict Future Cash Flows
- Ten New Investment Concepts, the Time Has Come
- India Heads Fast In Exports
- India and Pakistan Relationship
- Asset Allocation: Critical to Your Investment Success
- Ecommerce In India - Building Trust
- Are You Investing Or Speculating? - Your Answer Could Be Detrimental to Your Future Wealth
- Penny Stocks - 5 Tips to Pick Top Price Stocks With High Returns
- Globlization And Its Impact Of Insurance Industry In India
- Self Employed Refinancing Problems - What Can Business Owners Expect?
- Investors' Education And Grievances
Expect lower returns in India, invest abroad selectively: Sunil Singhania have 4059 words, post on economictimes.indiatimes.com at December 31, 2019. This is cached page on Talk Vietnam. If you want remove this page, please contact us.