Global asset allocators focused on emerging markets will find it difficult to overlook India, says Vikas Khemani, founder of Carnelian Asset Management & Advisors. Khemani expressed a strong bullish outlook for the Indian market, predicting a significant inflow of foreign investments in the coming years.
"India is one of the most promising markets from a growth point of view. You cannot see this kind of sustainable growth in any other market within the emerging market space," he said. He did, however, acknowledge that some investors might find India expensive compared to other markets, but he believes the overall trend will favour India's inclusion in global portfolios.
Speaking to NDTV Profit, Khemani drew parallels between India’s current market position and Japan's historic bull run from 1965 to 1989, focusing on the start of a long-term growth phase.
"The boat has sailed, and the tide has turned," Khemani said, on expectations of a 25 or 50-basis-point rate cut by the US Federal Reserve. He explained that the specifics of the rate cut were less significant than the broader trend of easing rates, which could cause a powerful fund flow cycle from foreign investors into emerging markets, particularly India.
Also Read: US Fed Policy: Amid Rate Cut Expectation, RBI Likely To Maintain Focus on Domestic Factors
India At The Forefront Of Foreign Fund Inflows
According to Khemani, the global monetary environment over the last three years saw emerging markets lose investor interest. While India also saw outflows, it fared better on a relative basis compared to other emerging markets due to its promise of sustained economic growth.
"India was losing money, but relatively less, as it looked more promising," Khemani noted. With the US now turning towards rate cuts, he believes that India will attract substantial foreign inflows. "I think we will have a deluge of money coming into Indian markets," he said, adding that the size and depth of Indian markets are expanding rapidly.
Khemani also highlighted a shift in Indian corporate governance, with a growing divide between promoters and professional management. "Today, we have five to seven companies listed in the markets without promoters, and this number will keep going up," he remarked. He pointed out that selling by promoters should not be viewed as a negative sign as companies are increasingly being managed by professional teams.
Sectoral Outlook
On the sectoral front, Khemani is optimistic about the Indian IT sector, which has performed exceptionally well this year. He also emphasised the strength of non-credit and non-bank shares, citing them as key holdings in his portfolio.
While Khemani anticipates a possible 12–15-month consolidation period in the credit market, he remains bullish on asset management companies, noting that they are "in a good place" amid growing market participation.
Watch The Conversation Here
Here Are The Excerpts
I must tell you that it's such an important day ahead of the Fed meet. Now Vikas, tell me, first plainly, would a Fed decision of 25 or 50 basis points? What do you expect, by the way, there, and would that decision be material for global equities and for Indian equities?
Vikas Khemani: This boat has sailed, according to me, it does not matter if it is 25 or 50 basis point, according to me, the fact that the direction has changed, and I think that has been more important. Now that 25-50 basis point can be important for a trader, or, you know, short-term player, but for somebody who's investing from the long term, medium to long-term perspective, the direction is more important.
As you remember in our previous conversation also, about six eight months ago, we said that the Fed rate has peaked out, and what time it turns or changes is a matter of six to 12 months. Nobody can predict that and I think now that one thing is very clear, that the boat has sailed, the tide has turned. Now, whether it starts at 25 or 50, that's not important.
But from an Indian market perspective, why it is more important is, whenever the Fed raises interest rates, most US investors pull out money from the emerging markets because the typical rule book is, you know, as the Fed raises interest rates, emerging market import inflation, interest rates increase and the equities weaken and hence, and as the Fed peaks out and starts reducing, emerging market receives flow.
That is what precisely happened in India. We saw a lot of outflows from foreigners and now we are beginning to see it as the indication of a turn, we have already begun to see good flows. So according to me, the significance of this from the Indian context is that we will see a significant fund flow cycle beginning over the next many years, from foreign investors towards Indian markets and emerging markets.
Okay, Vikas the belief, or the whole thing, has been... in the last two, three weeks, flows have started to some of the cheaper Asian markets already, Indonesia and the likes, right? We are starting to see some flows in the last three or four days towards India as well. Would you see the colour of the money being passive or would active foreign money also come in because everybody talks about one thing, oh, valuations are expensive.
I know you don't, but a lot of people do. I know you're a believer. You've told me in the past that you know valuations may be expensive, but there is growth. I'm trying to ask you what colour of foreign money will come in?
Vikas Khemani: Precisely, I will say that, you know, like I said, I will probably correct you the point you made that the money is moving toward cheaper markets. See, money is moving towards the emergency market, or money is moving away from the emerging market. Now within that there is an overweight, underweight allocation happening, like for example, when the last three years, when emerging markets were losing money, India also lost money.
But India, on a relative basis, lost less money because India was looking more promising. Same way, when money is coming back, initially, money might go more towards markets where they were underweight, right? Which could be in your definition, the cheaper markets.
But my point is that this money is allocation money, and then within that, like, you know, let's say, if you give me any investor, give me money to invest into equity, I might do that allocation in different sectors. Same way money allocated towards emerging markets will do differently in different markets based on their own conviction.
The point is that all overall, water levels are going up. Overall flows are going up, and India will surely be beneficial on that. Some investors within that basket might find India a bit expensive and might not allocate. But in general, I see a situation that no allocator of the emerging market can ignore India and cannot be underweight on India, because India is one of the most promising market from a growth standpoint. You cannot see this kind of sustainable growth in any market in the emerging market space and hence, my conviction is that India will receive very large flows.
I read an article when it may be Vikas Khemani gave an interview to a newspaper which said that if indeed markets are so expensive, why aren't they correcting and that's true, viewers, that markets aren't quite correcting. Now Vikas, I want to ask you the contra question as well. Now that India has eclipsed China in MSCI EM IMI weightage, and as per Morgan Stanley's note, very soon, might eclipse China on the overall weightages as well. Could the converse happen that everybody is saying that, 'Oh, India might be expensive, or some people are saying, let's say that India might be expensive, and therefore flows might be muted'.
Can the converse happen that because of India's weightage, we might be surprised by the quantum of foreign flows that come in in this easing cycle? Can that happen?
Vikas Khemani: Absolutely. I think we will be surprised. We will have a deluge of money and in fact, we will have an avalanche of money coming into Indian markets. You know, whether the timing and pace, I can't really, I mean, it could be one year two, year three, year, but, you know, just analyse.
I mean, China is a one market where US investors are not allocating, there is a huge thing happening. Which is the large market where you can deploy billions and billions of dollars, you know, with the confidence of growth coming around, and where you have the democracy, where you have the, you know, very solid corporate governance system, where you have the growth, where you have everything. So, there's no market, you know, if you ask me, I mean, yes, markets like Indonesia, but how much capital they can absorb.
So, the point is that when money comes, India is a very, very, very large market and fortunately, the size and the depth of the market is increasing. On the one side, when people complain about a lot of IPOs and supply coming in. Yes, this supply is essential for the absorption of this money which is going to come in and that is happy news, that's not bad news and you know, the glimpse of this, you can see when the Japanese economic miracle played out. You know, lots of investors flocked to Japan. You know, between 1965 to 1989 was a bull market for Japan.
Initially, lots of scepticism was there. But towards the end, you know, in the late 70s, late 80s, there was no investor globally who was not going towards Japan, despite being expensive and Japan, mind you, peaked at 60 times Nikkei. P/E of Nikkei in 1989. So I'm not making a point that what P/E will trade in the Indian market will trade. But the point I'm trying to tell you is that when the money comes in, you know, it is just sort of allocation money, it finds a way to a market and I do believe that.
By the way, one data one must keep in mind is the US as a percentage of the world market cap today is 61% last time it peaked at 51%. So, you know how much more money the US can absorb, and the fact that your rate cut cycle is beginning. Also, a case can be made out that, you know, the US economy will be soft. Hence you might not have the same kind of equity story going forward there. So, there aren't many equity markets with a good story going around the globe. Hence, I see that, you know, we all will keep getting surprised with the amount of money flow which will come both from domestics and as well as foreigners.
One counter question to the point that you just made. So primary paper coming in is probably welcome, because it will absorb so much of liquidity that is sloshing around, both domestic and global, which will come in. But a lot of people point towards how PE exits and founder exits are happening, and whether that's a sign of the past that used to be considered a sign, right? But I see people like you as well buying out those large chunks of paper wherein a PE firm, which has been in for around exits, or maybe, in some cases, even the promoter is selling some stake. What do you say about that?
Vikas Khemani: There could be many reasons why people sell, right? A lot of promoters selling could be a reason for people not having seen this kind of wealth for a long period of time. When you see this kind of wealth as a part of safety that triggers in us, I think you know, the next generation is not interested. So, you know, many first-generation entrepreneurs, second families are selling businesses, either to PE or to, you know, the markets.
So I think it is very much similar to, by the way, what happened in the 80s in the US you know, many businesses. So basically, the difference between promoter and management is getting bigger and bigger. Today we have five, seven companies listed in the markets without promoters. There's no promoter to that. You know, board-run companies. Incrementally this number will keep going in buying business, selling business will become very, very easy, is becoming easy. So you can see this trend happening playing out exactly how it happened in the US. Business will acquire, size, scale, tucking acquisitions will happen. All those things are, I think, you know, apart from the course that will happen.
Private equity funds sell for, you know, because the life cycle is over, but they are deploying more capital back into the market. It's not that they're net-net taking away money from the market. In fact, one newspaper wrote a very interesting thing that, you know, in 2020 promoters, post-pandemic, sold almost 60, 65,000 worth of equity stocks. Now go back and do the mark to market of that, whether that was a smart decision or a bad decision.
The point is, you know, selling by promoter does not necessarily mean only that it's negative. Of course, you have to look at the situation. You have to look at the company and I am not making any blanket sort of comment. But you have to, you know, see the India Story in the right perspective. According to me, we are in a very, very transformative phase. You have to, of course, individually analyse individual opportunity sector management. But we will be creating one of the, you know, largest wealth, or, as you know, basically, you know, 80, 90% of India's wealth is yet to be made over the next 20-25 years. So we are in that kind of cycle and once you have that, then I guess the idea is to just remain invested and sit through the pains which come in.
Vikas, where within this whole landscape are you more constructive on because of different people, I mean, there are many 1,000 ways to skin a cat, but I'm trying to understand, how does Vikas Khemani think about this?
Vikas Khemani: I think, you know, again, India is one of the very wildest stories in my 25-30 years of career, I haven't seen so many sectors playing out. You have great opportunities in manufacturing, you have great opportunities in financials, technology, consumption, and infrastructure. I mean, it's one of those periods where, you know, things are happening in a great space, and interesting space in every aspect. This is one of the most widespread balancing growth. You have a domestic consumption story, you have an export story, your manufacturing story, you have a services story. So this is where I think we are, in my opinion, spoiled for choices that we can pick out what we like, and our focus continues to remain, great quality managements in good businesses and in a reasonable valuation and mind you, I am again telling, you are able to find out despite no matter what people you know make the narrative about.
To give you an idea, in our Bharat Amrit Kaal Fund, our portfolio earning growth is 22-23% ROE of the portfolio is 19-19.5%. You know, debt to equity is point one. You know, PEG ratio is, you know, one, 1.1. So you are able to find reasonably priced people who make the argument that expensive I think, are approaching markets from reversion to mean perspective, but that doesn't work in a transformative economy. That you know, reversion to mean works in a steady state economy, but transformative economy, reversion to mean perspective doesn't work and that's the reason we need to study and understand different different markets and my conviction is that, you know, there are many, many pockets of opportunities within those segments I spoke about. Each has to find its own comfort and, you know, build portfolios.
Such valid points, in some sense. Vikas, just help us understand this better because you said it's a wide bucket. Where is it that I'm not asking for stock recommendations here. But where is it that you are more constructive within this transformative set? I mean, there might be 10 themes that you really like. Tell us about one or two where you believe that things are changing in such a transformative way that the sector earnings will look materially different, let's say, five years out?
Vikas Khemani: I think again, manufacturing we've been speaking about for a very, long period of time, and I'm coming to that. So I think that's a very wide basket. But within that, I think, in my opinion, Auto and auto components will keep surprising, you know, markets, the great story in place, we will keep seeing it within Pharmaceutical, CDMOs space, I think, is a where, probably where IT was in the mid 90s and it's a very, very massive 10-20 years story, you know, we'll keep surprising. We're getting surprised by that.
Within consumption, by the way, you know, we've been all along negative on consumption and its valuation for the last five years, the last three, six months, we invested heavily for the first time. We are significantly overweight in space. But we are able to find reasonably priced, good, high quality consumption stories where we can see 15, 20% growth coming through. Premiumisation is playing out. Customer spending is playing out.
So within IT by the way, which is considered a relatively slower sector. I think there are companies which are probably growing at 18-20% within ER&D space, which is the fastest growing segment in that space. Product-oriented companies, again, are doing very, very well. You can find those companies also in this space. So look, there are pockets of opportunities. You know, we look at broader themes, and then go and narrow down within that space, what goes faster, what delivers better risk reward, and then we look for those kinds of ideas.
You've been constructive on IT. There has been a bit of a rally. But some of these rallies get punctured at times, by some developments. The latest being Accenture, saying that, hey, we'll do the promotions only six months out and some people take it as a sign of there being continued stress?
Vikas Khemani: No, IT is one of the most closely watched sectors. I think, you know, every small item gets used and, you know, or analysed. My way of looking is very different. Look again, while directionally, I think the sector is bound to grow. Now you can argue whether it will grow at 8%, 10%, 12% or anybody's guess. I think Nasscom has given great guidance in terms of how the sector is growing. You know, the only thing is we have to find out what offers better risk reward and what sector can grow.
This year also the IT sector has done very well. If you see many IT stocks are up between 50% and 80% and if you look at the last two years you know, many stocks in our portfolio between 100% and 300%. So, you know, the point is that while, of course, you know very large IT companies will always have a challenge in terms of growing, because the base is very large, and a bit of internal changes are happening in terms of technology changes, and they are kind of going through that phase. But fact is that directional, it's going well, you know, we are not negative, on IT as a sector, and I have said in the past also that, you know, IT is also good play on Fed interest rates going down, and that has started playing out in last six months, the moment indication of the Fed cutting it came down, right.
Still, in my opinion, a lot of transformative work in the U.S. has not started. Lot of companies were so far spending only barebone, you know, required money on I.T. development. But I think the transformation work is yet to happen, because every company needs to spend more on Tech, more needs to spend more on digital technology, otherwise it won't be relevant and still there are wide opportunities for that. So I think we are constructive on the sector. Now which company to play, and all is a matter of which segment to play, the matter of, you know, choice by each of us.
That's completely understandable. Vikas, what about other forms of non-manufacturing space? So, for example, BFSI, I know from a previous conversation that you've told me that if India has to grow the way everybody envisages it, Banks are a sure-short presence there.
What about non-banking names? We missed that part the last time that we spoke. So, both lending, non NBFCs and non-lending financials. How constructive are you? You may be constructive at all, but in the pecking order, do they come lower down in your overall portfolio or are they right up there?
Vikas Khemani: We could see some bit of, you know, pressure on NIMs coming through and hence, you know, about six months ago, eight months ago, we had more aligned our portfolio towards non-credit as well as non-bank. So we own very large NBFCs in our portfolio, which have done pretty well. We own, you know, non credit players, life insurance companies, which have again done well. So I think we kind of made that, you know this, and that does not you know, mean that we are not bullish on the credit segment, but there's a bit of intermittent, probably 12 months consolidation and 15 months consolidation possible.
Hence, you kind of adjust your weights towards some of the names which you think can deliver better return in order to generate alpha, both credit and non-credit, are going to do well, I think, like again, if you take 10-15, year view, whether it is insurance, whether it is wealth play, whether it is any segment, you think we are significantly underpenetrated. As wealth creation happens, as per capita income goes through more and more savings get channelised through the same sort of two or three channels, whether it is, you know, capital markets, whether it is insurance companies, whether it is mutual funds.
So, all of them would be, you know, growing reasonably well. We own AMCs, because we think that they are structurally in a good place from a growth perspective. So, all these things I think, do make us look very, very good. Right now, we are a little bit more overweight on non-credit and non-bank places, but we are not negative per se on banks as well.
Okay, my final question Vikas, I'm not asking to comment on this one, but at times, it becomes my job to ask you about the most spoken about thing, and that is Bajaj, Housing Finance, and the fact that yesterday, as of yesterday, the market cap of that one name eclipse the market cap of 10 subsequent housing finance names. Is this a sign of exuberance, or is it the market paying premium to a quality franchise?
Vikas Khemani: Bajaj Group obviously, is most you know, sought after. They've always been trading at a premium, whether it is NBFC space or this one, I think there's a huge sort of premium for that governance and execution, which is well deserved and Sanjiv is a good friend. So, you know, very, very good. I mean, I don't sort of analyse that we like the franchise, you probably find valuation slightly expensive at these levels. But, you know, look, which is own. I would not call it exuberance, but at the same time, I think, yes, we have to be careful.
There are stocks where there is no exuberance. There are no stocks we are able to find interesting places, market level, I still don't think we are in exuberance mode. Yes, there are pockets of signs of worry risk is getting developed. When you see poor quality companies also going public, good quality management, going public and getting valuation is one aspect, but more worrying aspect to me is poor quality management, poor quality businesses going public and getting good reception. That is my biggest worry, where a lot of retail investors and, you know, lose money permanently. That is what I will always caution against. In Bajaj Housing kind of cases, you may not make money, but you will not lose money and that's at least, you know, the good part.
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