Monthly markets podcast India September 2022

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 have two short interviews with in house guests Maanas Agarwal, Portfolio Manager, Multi Asset Class, followed by Manoj Bajpai, Head of Equity Portfolio Management at Barclays Private Clients India. They will share their views, insights and investment strategies around some of the key questions that a lot of us may have in the current environment.

Hi, Maanas, thanks for joining us today. Maanas, what is our call on inflation and growth, and how are we positioning our multi asset class portfolio strategy to take advantage of the opportunities and better manage portfolio risks?

Maanas Agarwal (MA): Narayan, we expect that inflation will stay above RBI’s stated comfort zone before declining below 6% by maybe early next year. This is in line with RBI’s own estimates. Similarly, we believe that GDP growth should be close to 7% for this current financial year, placing India as one of the best performing economies globally.

Now, such favourable macro factors should bode well for the markets and we have positioned our portfolios to benefit from such tailwinds. We have an overweight stance on domestic equities and prefer Indian over global equities now. We are positive on sectors like financial services, technology and consumer goods. We are also overweight on Indian debt, primarily to take advantage of the high accruals in the three to five year segment of the yield curve.

Given our constructive view on the economy, we have also taken exposure to certain high yield segments to enhance portfolio accruals. We are wary of the upside risks to inflation and interest rates given the geopolitical tensions and recent central bank actions. Hence, we also have exposure to real assets through real estate investment trusts and infrastructure investment trusts as an inflation hedge, and also to gold ETFs to act both as an inflation hedge and also a safe haven during volatile times.

Our equity portfolios continue to have a quality bias as we see markets being volatile in the near term. On the debt side, while we have an overweight on debt, we have still kept the portfolio maturity below three years as the yield curve has flattened in the recent times and we want to protect ourselves from any spikes in interest rates.

NS: Sure, Maanas, but if we are overweight both Indian equities and Indian debt, what are we funding that from? Also, how are we executing our overweight call on Indian debt?

MA: The overweight call on both of these asset classes is being funded from our cash allocation. For debt, with the yield curve being very steep towards the short end of the curve, for example the one month T-bill view is close to 6% whereas the yield for the one year T-Bill is almost 6.75%, hence we are able to add to portfolio growth without taking a significant duration risk. Therefore, most of our overweight exposure in debt is invested in near term target maturity funds and floater funds.

NS: Yeah, thanks, Maanas. What are the key risks that we foresee, and have the markets fully priced in all of them already?

MA: Narayan, while inflation and geopolitical tensions will impact global sentiment and can also spill over to the domestic markets, we would also be very watchful for domestic triggers. Especially like I mentioned earlier, India is being considered a resilient economy which is well placed to continue growing at a fast pace. Hence, any triggers which risk derailing this particular narration around the Indian economy or even dent the buoyant investor sentiments could lead to a market correction.

Domestic investors have been key in providing support to the markets, and we have seen recently foreign investors have also come back. Any reversal in their sentiments could lead to volatility in the near term. Sustained high commodity prices could lead to fiscal discomfort and higher interest rates which may lead to further downside. Indian markets have also exhibited a certain exuberance compared to their global peers, and it is tough to see them sustaining this over a longer term without intermittent attempts at mean reversion.

NS: Maanas, there is an active debate amongst the investor community on buying the dips strategy. Which school of thought are you subscribing to?

MA: We are core believers of asset allocation and disciplined investing. We believe one should stick to their asset allocation and use any deviations as an opportunity to rebalance the portfolio. While buying the dips will usually happen because of the market correction there then has to be a process or a framework around the rebalancing and the amount that needs to be rebalanced. This discipline, we believe, can help achieve significant alpha in long term.

NS: Thanks, Maanas. Let me now move to Manoj. Hi, Manoj, thanks for joining us today.

Manoj Bajpai (MB): Hi, Narayan, good to be with you again.

NS: Manoj, amongst the four key quadrants for Indian equity markets, that is macros, earnings, valuations and flows, and market risk pricing, that is Indian VIX, which ones do you see as key drivers in the near term and in the medium term?

MB: Well, Narayan, we believe in the near term there will be undoubtedly an overhang of the global macro risks like inflation, rate hikes, recessionary fears, geopolitical risks, etc. On the Indian equity markets, and this may manifest itself in the foreign flows along with VIX, and this may, in turn, drive the valuation metrics. However, over the medium to longer term timeframes, earnings and earnings growth should continue to prevail as the leading driver for our equity markets.

NS: Manoj, do you believe the Indian equity market will be able to decouple from its developed market and even emerging market peers? If yes, then what makes you believe that this time it will be different?

MB: Well, that’s an interesting one and the current debate is very much around it. And if you try to absorb all that has transpired over the last seven to eight years and has accelerated over the last two to three years during the pandemic, we see a steady improvement in the standing of the Indian economy at global level.

India, over this period, has moved on the path to enhance the efficiency through improved policymaking like PLI schemes, RERA, smoother bureaucratic systems like Aadhar, ample availability of capital and a strong government intent to adopt new technologies like digital payments and EV push.

At the same time, international issues during this period like the US/China economic conflict, China’s COVID policy, China’s real estate problems, then the Russia/Ukraine conflict, which is ongoing, food and commodity inflation, etc. have pushed the Indian economy to take the global growth leadership. We believe that there has been a structural reduction in the cost of capital for India as well, and what we see today is the reflection of that and we do expect it to continue in medium to long term, and this is structural in nature.

NS: Yeah, thanks, Manoj. What have been the key contributors and detractors in the portfolio performance in this calendar year to date?

MB: Well, Narayan, this has been a tough year for active fund managers because what we have seen at a broader level, this year been a year of reversal wherein domestic oriented companies like banks, financials, consumer discretionary including autos, consumer non discretionaries, post pandemic opening themes like travel and leisure have been the key contributors on the positive side. At the same time, the companies focused on the global markets, like information technology, where we have a good amount of data in the portfolio, have been the key detractors.

NS: Finally, Manoj, what are the key themes and sectors you are overweight on and why?

MB: So, Narayan, our investment philosophy is focused towards selecting strong businesses which are expected to win over the business cycles. But, therefore, our stock selection process is governed primarily by bottom up research ideas and less of thematic ideas.

Having said that, we do like to change the weights of our holdings depending on where we are in the business cycle. The key themes which we are inclined towards are at this point of time are:

• Information Technology: We believe the trend around digitisation, artificial intelligence, Internet of Things, cloud is strong and sustainable over the long term. In the near term, also, we believe that concerns around the margins for these companies in the sectors are overdone
•  With the energy transition we believe trends around electric vehicles, recharging infrastructure, ethanol blending, green power had appropriate government support both at domestic and international level and will continue to attract capital at lower cost
• Finally, coming to domestic consumption, which is a secular theme driven by strong demographics, increasing purchasing power, low household debt, and strong premiumisation trends will continue

NS:  Yeah, thank you again, Manoj and Maanas, for joining us today.

MB: Thanks, Narayan.

MA: Thank you.

NS: And with this, we come to an end of our podcast. Thank you for listening to us. Stay safe and healthy, and happy investing.