Fed Rate Cut Delay May Impact Inflows Into India, Says Vikas Khemani

Vikas Khemani: I think if you see the US Fed has already indicated that there will be a cut in the course of this year and interest rates have  peaked out and it's only a matter of time how it sort of comes down and I think you know, we will have to see in that context, but as for the Japanese rates are concerned, they have been in a very, very low trajectory from a very, very long period of time.

So, I would read that the Japanese economy is recovering after a very long time. You know, we've seen a lot of positivity around that. But I would say that globally speaking my point of view is that the U.S. rates are coming down, it could take time depending on data dependency and all and that will determine a lot more global macro factors, because I think that's really all of you know, rise had happened in the last couple of years. I wouldn’t think that a very, very big impact would come from the Japanese interest rate moment, this is only a small tweak. So I don't think that will have a major impact, per se. That's my view, I'm not a big expert on global macros.

Vikas Khemani: If the Fed kind of delays the interest rate cut, it could have some impact on that because the emerging market flows are directly linked to this interest rate cycle. The good part is that the interest rates have peaked out. Another interesting part is that the Indian currency is not expected to depreciate to that extent; there is a kind of natural hedge available on that. So flows should start trickling in. I do believe that the ‘24 calendar year would be a good year of flows. But having said that, any delay in the rate cut can have an impact on the flows.

Vikas Khemani: Absolutely. It's very natural that when you have a year like ‘23, which was a stellar year two across the board, especially mid and small caps, it's a very natural thing for it to consolidate and, you know, because you can’t have this kind of a year very often. But having said that, you know, these are the kinds of years of consolidation only are the years when you kind of construct your portfolio that is where you get good quality companies at a reasonable valuation. I have no doubt about that in my mind.  

So, from 2024, you can keep your expectations low. At the same time, this is also a great year to build your portfolio. This is how I would see. There could be sideways movement, there could be some more correction. While I'm saying this, I don't expect a deep correction in the market, but I feel a deep connection will come only if there's an unexpected 3-4-5 sigma event, which you can't model for. But otherwise you know the normal connection happens only because of two reasons: liquidity and leverage and both are very well placed as far as the Indian markets are concerned. The leverage factor of the market itself is also very very low.

Margin funding book of the collective market is very you know, small given the size of the market cap. So I think it is the leverage which generally exaggerates the market falls.  So I don't see a major deep cut in the market. At best, I think probably I assume and except for something unexpected, but I think it will kind of trickle in and it will kind of remain sideways consolidation time correction might happen and that's a good thing to happen in any bull run.

Vikas Khemani: It really depends on your time horizon. Of course, there are better options than I.T. as well. So I'm not saying that there are no better options. I mean, probably Pharma would be a very interesting one as compared to I.T. just if you look at the growth perspective and the change in the entire environment that is happening and also you can always look for alternatives and not saying that but when you construct your portfolio, it's a balance. of pretty much a lot of factors and I.T. definitely offers a good hedge and for as far as we are concerned we've been very constructive on specially the mid and small cap I.T. where the growth prospects are very high.

We are very constructive on I.T. Companies which  are focused on E R&D space. We are very focused on companies which are more focused on the product. space. So that is where I think the real growth lies. So you know, I.T.  can't look at it with a broad brush. You have to even while the sector is growing at a moderate growth within that there are many companies that will enter 20% plus, and our jobs is to identify those companies and kind of bet on that/them and if one is able to find that with a fresh capital or existing capital, that makes no difference you can definitely put in because I.T. continues to remain an interesting play even over the next eight-10 years and I.T. will be a pivot.  I.T. today is very different from what it was 2k time.

So I think every time there transition technology happens, there is a pivot which happens most I.T. companies do that and today they are pivoting towards AI and related technology. Apart from Cloud digitisation, cloud migration. So this sector will keep evolving. I have no doubt in my mind the sector will be relevant, it will grow from here. It will continue to kind of deliver good value creation.

Vikas Khemani: I.T.services are not going anywhere, within that I think ER&D will be a faster growing part. So ultimately, as an investor, what we are chasing, we're chasing basically growth and growth at a reasonable valuation. So wherever you find this, especially in any sector, growth is what determines the outcome. So if you're able to get a reasonable valuation at a good growth then I think the sector by and large governance is not an issue. Most companies are good.

So you find a business with a good traction to go for it and those are the kind of companies especially ER&D as a space is going faster than conventional I.T. services and that's the reason most of the places/players we have are having a larger portion of that, which is driving both profitability and the growth. The conventional model also continues to do well. It's not that, you know, it's under a lot of stress and it's not really but that also continues to do well. So ideally when you get both combinations or accelerated in the form, you go for that.

Vikas Khemani: I more specifically meant for Pharmaceuticals and of course, Healthcare has wider this thing including hospitals and diagnostics and all. The Pharma piece has reasonably good legs. It's come out of a long hiatus, and I think we're seeing the demand environment in the U.S. changing significantly.

We're seeing CDMO and CRO getting in you know, in my opinion a decadal shift from China plus one, of course right now because the biotech funding drying up, its been a bit slow, but if I take a 5-10 year view, I think you know, just like how IT services grow, you will see CDMO CRO companies will grow over the next 10-15 years and I wouldn't be surprised if there are many CDMO CRO companies which could be two-three lakh crore market cap in the time to come and this will happen in front of our eyes. So you know, again, depends on the time horizon and portfolio location. It's a combination of all but we remain very positive on Pharma as a segment and CDMO, CRO and a sub segment of that.

Vikas Khemani: Just like how you see that after such a sharp run, It is very natural to consolidate and in case of some PSU I think probably a bit of an over stretch that's also happened. So you know, again, it is not PSUs, you can;t broad basket but there are PSUs where still there is a lot of value, of course some part of the deep undervaluation went away, today they are in a fair value zone.

But I guess as you know, the transition and transformation continues to happen. I think we will see more valuation re-rating happening. So I would say a large part of that is done and now mostly that the earnings growth as the Indian economy keeps growing and also you have to look at sector specific, you really can't look at each PSU in the different sector will have a different labour force for growth and delivery of returns.

We've been very very bullish and positive on PSU banks. We haven't sold any. We continue to remain invested because we think that will do well and in the Power sector we have been  quite bullish and we continue to hold, we haven't really sold anything because I think this kind of consolidation, correction temporary things will come in every market cycle and we would like to just continue to hold and play out the full story.

Vikas Khemani: To be honest, we haven't really bought any of the oil market shares. That's why I'm saying that you have to look at different sectors. If we do well we think there's a good management control on the fate of the company and the sectoral tailwind, unless we are convinced about these two, we won’t buy and specifically in the PSU segment in any ownership matter. But especially in the PSU segment, especially oil marketing companies, you will know that it's not the CMD of the marketing company that doesn't control the outcome in the lots of variables. So you're generally kind of taking a bet on that.

Vikas Khemani: I think you know, very often we get a question about what is happening with the valuation and what is happening to the markets. So when you zoom in, you're worried about here and now short term. In this note, we're trying to say when you zoom out, your perspective can be very different on the Indian story, you can look at very, very different aspects and if you are zooming out and seeing let's say, next 10-15-20-25 years your perspective on how to look at in equity investing changes completely and this is what we're trying to, you know, kind of say here, in this note. As you know, India is embarking on the journey to become a developed country by 2057 which means that we will have 29 to $30 trillion of GDP, which will be 7x to 8x. from here. So, what are the possibilities as it happens, why we think it can happen, you know, and in India there are many changes that are happening.

To give you an idea, today's corporate profitability at the country level is $150 billion. In 2001 it was $8 billion and despite all kinds of uncertainties in the last 22 years, you know, Indian corporate profit has become 20x.  Now, this corporate profitability will go from $150 billion to a trillion dollars by 2025. It means our market cap will be between 18 to $20 trillion. It means our Nifty will be anywhere around one lakh. 

Now if this is the kind of journey you have in the next, you know, 10 to 12 years, then you don't really worry about what will happen next quarter. Not to say that I mean our job is to keep an eye open and you don't really try to say well and book a profit and come back five five % cheaper.

So if you look at this perspective of our next you know, 10-12 years, a massive amount of wealth will get created and you just focus on participating in that without getting bogged down by the short term intermittent noise, which is always there in the market and this is a perspective we're trying to build.

Also, we are trying to say what has changed in India. Why do you think it's possible this time around? You know, India has always been a promising country but you know, that is where we are saying there are big mind shift change that has happened in India and those mind set changes are which are driving, you know, number one, which I always say that India as a country has moved from incremental mindset to exponential mindset. Today, we are executing everything at a rapid pace. You know, as of yesterday, kind of mindset. This is a very big change and a big departure. From the past. Likewise, India doesn't operate from a constrained environment anymore. We think we have resources for everything and we don't act like a poor country anymore.

Our mindset has changed from the big time on that. Like that there are many six seven tectonic shifts which have happened which we think you know, will make sure India will reach to that, you know, size and scale over the next 20-25 years at least. Our conviction on that is very high as we analyse, again, that is very well articulated in the note in a very detailed manner, that what are the big departures from the past and what are these tectonic shifts and what will drive the future of the country.

So we think that we are in a massive wealth creation cycle for next, you know, 10-12 years of course, what 25 years but the acceleration will be far, far, far more higher in less than 10-12 years. So, you know, that is one way to look to capture rather than worrying about, you know, what will happen over the next few months. So, this is our whole perspective, what we are calling the Bharat Amrit Kaal period, what will happen.

Vikas Khemani: Yes, absolutely. So one is that opportunity we are showing and then how do we capture it around that we have a fund called Bharat Amrit Kaal Fund  which we are launching and you know, you will see that you know, coming out soon, and so how do you capture this massive wealth creation opportunity ahead of us and that is what we'll be talking about.