Narayan Shroff (NS): Hello, and welcome everyone to our monthly podcast for Barclays Private Clients India. I am Narayan Shroff, part of the India Investments team, and I will be your host for this podcast.
In this month’s podcast I will share with you a broad synopsis of our India outlook for the period ahead, followed by a short interview with our in house guest Manoj Bajpai, Head of Equity Portfolio Management at Barclays Private Clients India. Manoj will share with us his views on the Indian equity market and his portfolio strategy and positioning in this very volatile period.
Markets seem to be behaving to the playbook we laid out in our outlook for 2022. Indeed, COVID-19 curveballs, inflation scares and the pace of monetary policy normalisation are the three key vulnerabilities and risks for India’s economy we had highlighted. While the country has demonstrated strong resilience to the high velocity of Omicron spread, we continue to believe that this year is likely to be characterised by slower growth, higher inflation, and elevated market volatility.
Also, while it is difficult to predict the black swan events such as the latest developments around Ukraine, the risks to the Indian economy and markets emanates more from any impact on already high oil prices.
As Rahul Bajoria, Chief Economist, India and the Antipodes at Barclays, highlighted in our last month’s podcast, a small 10% weightage of India’s retail inflation index, that is CPI, that comprises imported items is contributing to almost half of the inflation headline numbers. On the other hand, the remaining mostly domestic 90% of the CPI basket continues to be well behaved.
While it is difficult to imagine in the current environment, we do believe that headline inflation prints globally, and hence locally as well, should taper down somewhat due to the various reasons in the second half of the year. However, this may not be fast enough to deter central banks from hardening interest rates and reducing systemic liquidity. Our views on the total size of rate hikes in India remain lesser than that being factored in by the markets.
In India, RBI made its continuing accommodative stance clear in the last policy meeting with no rate hikes. However, the Indian bond market participants keenly await some guidance on how the RBI, as a banker to the government, plans to manage a high supply of government bonds in the coming fiscal year, especially with the bond buying programme through open market operations being a contradictory tool to the liquidity reduction mode.
In the budget for fiscal year 2022-23 as well, the government continued to prioritise sustainable growth with modest fiscal consolidation to support the economy. The encouraging revival in the economy, corporate earnings, business, and investor sentiment indicates that the demand led recovery cycle is likely to widen. So far, recent growth has been polarised around a few sectors, but there are signs that this is also broadening.
While we expect higher market volatility to persist, given the economic transitions underway, anticipated policy normalisation, the latest geopolitical tensions, rich market valuations, and sector rotations, especially the value and growth toggle in play, even with lower absolute returns than witnessed last year, the outperformance of equities over bonds in the Indian market appears set to continue.
On this note, we now have Manoj Bajpai with us.
Manoj, let me put you straight on the hot seat. There are several concerns being raised around global equity markets. Do you think Indian equity markets are better positioned? And, if so, why?
Manoj Bajpai (MB): Hi, Narayan. Yeah, as we know, the current set of volatility is more due to geopolitical tensions rather than any fundamental growth concerns over the medium to long term. So, in the short term Indian equity market is moving in line with the global markets, but over the medium to long term we believe that India is, indeed, in a better position given the positive earnings growth trajectory we are witnessing and envisage going forward as well.
NS: Manoj, the economy is clearly going through a transition. Have you seen or do you plan to change your portfolio strategy to better capture the opportunities ahead?
MB: Listen, Narayan, we believe this cyclical growth that is coming back to the Indian economy has some legs to go. We have taken some exposure into our portfolios through banks, which have good corporate loan books, and also utilities and exposure to commercial vehicle manufacturers as well as some lenders to the sectors. We are constantly looking for bottom up ideas into capital goods and the engineering sector to add some more weightage into this theme into our portfolios.
NS: India has seen a massive services led growth. Do you see this continuing across technology, real estate and financial services? Also, with the long list of reforms and support from the government, as well as the long gap on the private capex in the country, do you see manufacturing jumping in as another big pillar of growth in the country? If so, how are you playing these themes in your portfolio?
MB: Yes, absolutely Narayan. We do believe that addition to capacities in most of the sectors will lead to manufacturing led growth which is coming back after a gap of seven to eight years and can be a growth area for coming years. As we recognise this trend getting stronger, we will be taking exposure to some of the companies that cater to sectors going in for capex. For us, it is a continuous process. For example, sectors like defence look interesting to us, but the key is to identify the businesses that can deliver sustainable growth and profitability over a long period of time.
NS: Thanks, Manoj. How are you positioning your portfolio considering the higher inflationary and interest rate cycles in play this year?
MB: Well, to accommodate that scenario I think we have good exposure to lenders to real estate, cyclicals like utilities, exposure to commercial vehicles space, banking and non banking financial companies. They have a fair amount of representation in our portfolios. These should not just play out well in such a scenario of high inflation and interest rates, but also have great investment case in a well behaved inflation and rates outlook.
NS: Yeah, that makes sense, Manoj. Manoj, you spend a decent amount of time meeting businesses on the ground. What are some of the unique opportunities you have seen, especially in the sunrise sectors that the government has also clearly recognised and laid out plans to support in the latest union budget?
MB: Well, Narayan, that’s the core of our job and, in our strategies as a part of our core and satellite approach, we do look for interesting businesses and themes. Especially in our satellite portion of the portfolio across emerging trends, innovative or ingenious growth and trigger events or turnaround buckets. In the past, we have identified and continue to have exposure to businesses that benefit from such themes such as formalisation, financialisaton and digitisation of the economy. Similarly, we continue to have exposure to businesses benefiting from innovative business models, global supply chain diversification and domestic capex cycle revival.
Also, we believe the government’s thrust to offer PLI schemes to various sectors has improved confidence among entrepreneurs and they are willing to participate in this growth agenda. Manufacturing related to defence sector is one that we think is a long term opportunity as substituting a lot of defence related imported equipment with locally manufactured ones makes good sense. Similarly, there are opportunities emerging in the green ecosystem and sustainability themes in the country where we have been taking some exposure to businesses across market caps.
NS: Finally, Manoj, where do you see the maximum risk in the Indian equity markets? And do you think now is a good time to enter or add equity exposure?
MB: Well, Narayan, it is difficult to time the market and especially so in the current environment of economic transition and sector rotations. Keeping one’s composure high and diversification are the two key attributes that have helped investors. Long term themes have usually played out well for investors. Tactically, we have gone overweight on Indian equities to take advantage of current volatility and corrective phase in the markets. India offers good opportunity when it comes to strong growth trajectory with fairly stable government policies.
NS: Thank you again, Manoj, for joining us today.
MB: Thanks, Narayan.
NS: With this, we come to an end of our podcast. Thank you for listening to us and happy investing.