foreign investors: We should not be positioning ourselves as a strong man economy; it scares away foreign investors: Ajit Dayal
Is there a hope or do you see FII inflows go up significantly now? We are seeing our weight in the MSCI go up but in the global scheme of things, India’s weight in global market capitalisation is still low and not many big investors are still taking it as an investment class yet.
There are two kinds of investors. One, there are those who follow what we call the passive indices. MSCI has a weight of 0.8% for India and they say only 0.8% of their portfolios should be in India.
Those are the thoughtful, smarter, longer-term investors. What is India’s GDP likely to be over the next 20 years? Can I position my portfolio to capture the future? The biggest opportunity for forecasting or for making money from forecasts is to figure out where something is tomorrow and not where things are today. The active investor will have a larger opportunity to have an outsize bet relative to index weights today. I really do not like these indexes because they are all backward looking as opposed to forward looking.
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More active investors will start looking at India more seriously?
Yes they should and I will end with this one point. Local investors must not get caught up in these day-to-day swings. People ask me why don’t you come on TV every day? I do not have things to say every day but I have nothing new to say every day. I do not look at markets every day at all but as a local investor, you have your allocation which we have built. In Quantum Mutual Fund, we call it 12: 20:80. We have an allocation of liquid funds, have an allocation of gold and buy a basket of mutual funds including our equity fund of funds which invests in other fund managers. Just buy that basket, hold it and you will do extremely well.
What is your view on the valuations in India? People call it expensive all the time and then they say quality never comes cheap. It keeps a lot of people away from the market for a long time because of this fear of not buying expensive?
I have heard this. I used to manage money for foreign pension university endowments in the global space and I used to manage an emerging market pool, a global value fund for Vanguard. I would hear this all the time that India is expensive. India deserves a premium. We have fantastic management, fantastic opportunity and generally speaking a great balance sheet, great auditors, great legal systems.
We deserve a premium for all the emerging markets out there and in my view, India is not expensive. India is trading even at the historical PE ratio. It is trading at a long term average but if you factor in the growth opportunities India, certainly it is not expensive. It is not cheap but not expensive either.
What excites you most about the Indian market? A lot of manufacturing push is coming. Banks are doing well. The runway of growth and superior earnings come hand in hand and do you have good visibility?
There are three things that drive any economy. Broadly speaking one is what you can export. The export story in our case is IT. so IT is the export story in a sense.
You like Indian IT?
Yes, we have been overweight as a group.
Despite the slowdown fears and the derating which has happened this year?
Yes, look at what happened after Covid. Everything shot up a lot and then things normalised to some extent and over cycles. So yes there are threats about AI doing software. We have heard that story many times and that all the people
hires are useless or hires are useless. We hope that the IT companies are smarter than we are and they will actually figure out what they need to do next. All of us we are using phones. We need more IT in everything we do. So I think IT is good as an export story.
On the domestic side, if you look at the domestic consumption pattern, two- wheelers, cars, clothes and consumer staples is a good story. For decades, we found Nestles and Levers and P&Gs and Colgates in India to be expensive. There are expensive stocks, we have not owned these stocks. Sadly for more than a decade, they have never fallen into our valuation numbers on the value front that we like.
The other sector that we like is infrastructure which is the third engine in an economy. What is the government going to spend? What is the private sector going to spend on ports, airports, roads which is again cement, steel etc. and on top of all of this, to some extent, what is the government policy, what is it going to be driving, there may be governments in power that prefer one sector versus the other and that give incentives right now to multinationals.
But manufacturing, in particular electronics…
Exactly, so we are talking about multinationals. We have not built anything of scale as yet and there will be companies that will be born in the future which take advantage of today’s government policies and will scale up big time and become like in China. There are certain towns in China that account 90% of the world’s air conditioners. We will have those in India too if the government policies are right.
You are looking for ideas in manufacturing?
We are but the point is they are too small and too unknown today. They are still concepts.
That is a space which is not very well researched…
And we will have to find the right investible companies as opposed to buying a concept.
So talk to us about the largest weight of the market – financials which are doing phenomenally well right now, the more high momentum PSUs that have come up three-four times already in the last one year or the good quality private sector?
I was going to say the one wrap around of it all is money. You need money for the exporters, for domestic consumption, for infrastructure and that leads to financials. We like that and we have generally been well positioned in that as a group. In financials, we have tended to go more towards the saving side, the insurance side, the financial wealth creation side in the portfolio as opposed to the corporate lending side.
The portfolio business, say Quantum Long Term Value Fund, which I do not manage but I am a shareholder and unit owner, shows that we have moved more towards that towards the insurance, the savings, the pension side. As we get richer, as we get more income, we will start investing more and we have seen that during Covid, more people came in with their PAN numbers to invest in Indian stocks and mutual funds.
On the banking side we have to be very careful as banks are not about lending; they are about ensuring that the money you lend is going to come back to you and that is the most important thing. Once you have identified as an investor, whether you are willing to take a punt in the bank that is growing aggressively and may have poor risk, why are you willing to invest in a company or a bank which is growing relatively slowly but has got good risk and very good credit assessment and credit control that will give you the answer for returns.
I do not want to go into making 4x or 5x, I tell people no first you tell me the risk you want to take and then accordingly you will get the returns for the risk you have taken.
A lot of investors and MNCs we are speaking to are hailing the government for a lot of PLI related work. , GST collections have come – the JAM . A large part of weightage goes to the government for ensuring that a policy framework is provided. How would you rate that and is that also a point of discussion when you talk to big investors?
Yes, I think this is something. I will go one step beyond. The BRIC story came out in 2005, 2006, 2007. It consisted of Brazil, Russia, India and China. Three of those BRIC stories – Brazil, Russia and China – have collapsed. India still stands firm but there is one thing that is common about the BRICS. Each of them were run by strong men. Three of them have gone or have turned out to be poor from a market perception. One remains – Prime Minister Modi and many people are scared. An international investor is scared given the fact that three of those BRC have been knocked down by policies from strong men.
In India, luckily while we have a strong man, we have great institutional capacity like Niti Aayog, Supreme Court. We have institutional capacity. So we have shock absorbers. We should not be positioning ourselves as a strong man economy.
It is more about institutional framework…
Exactly and policy making and many of these government policies are actually very good. They are trying to do very good things but if you attribute everything to one individual, you are actually scaring the foreign investors.
Key men risk as they say?
Exactly! You are making them nervous, thinking this is the next China? What if tomorrow like Xi or Putin, we do something stupid? There will be risk. It is very ambitious and sometimes we mis-position ourselves thinking oh! it is actually going to work in our favour. But that is not the message they want to hear. They want to hear there is leadership, they want to hear there is a good person on top, they want to hear there is one party in power but they also want to know that the system is in place to take it forward.
Processes are more important?
Exactly. It’s the same thing for fund management, by the way. There are four Ps. Who are the people behind the fund management house? What is their philosophy? In our case, we are long term risk averse etc. or value oriented. Third what are the processes in place to take your ideas and philosophy to actually pick stocks and portfolios and fourth, what is the predictability of the performance of the portfolio build? Not the daily NAV, not the weekly NAV predictability.
In a very similar way if you have governments, strong leadership, good people, they have got a philosophy, they have got processes in place to convert their philosophy into action but then that means they have got guard rails they do not sway too much.
That is a nice way of drawing the parallels.
Yes, you do not suddenly say I am Mr Putin I want to take over Ukraine. You do not do stupid things like that and then finally you have the predictability, the outcome you have that in place you will get the foreign money in big time.
Every other day you would see an ADIA or a Norway sovereign participating in Indian smallcap and midcaps. You never saw these kinds of names crop up for smallcaps – $500 million, $200 million companies. It seems this time even foreign funds want to play the broader market?
I will put it in a shape of a pyramid. At the base of a pyramid, there are low risk low return portfolio. So you have come to us for the value portfolio etc. As you climb up that pyramid you are taking more risk, you are moving to largecap flexi cap, midcap, smallcap and finally we see venture capital.
As you climb up you are taking more risk, you should get more return so I would put it the other way I would say the foreigners are saying we have got a core portfolio right exposure to India not too much risk and now we are going up the risk curve and we are willing to take that risk into midcap, small cap, VC whichever way it may be that is the way to look at it which is why I said the money you are getting today 20 billion is nothing you need more foreigners to come into the mainstream portfolio and then inch their way up as they take more risks.
And that is where the broadening of the market and the economy of course starts happening.
Correct and that is where the big opportunities are for those who want to take that risk curve if you will.