Global Markets Could See Volatility Next Three Months, Says JM Financials’ Vinay Jaising

Vinay Jaising: It is a perfect storm and a great day to chat up with you as well. Pardon me if I don't do justice, because there's no real answer to what you're asking. But let me make an attempt.

Did we not know interest rates would be cut this year? The answer is yes, and when the moment of truth comes close by, that's the time when the market corrects. Now, despite knowing the interest rate cut, if I were to go back just 2–3 days, Nasdaq was up 14%, CYTD 20% last year and growing at a CAGR of about 15–16% in five years. Now, if you keep that in mind, and you start seeing how Nasdaq fell by about 2–2.5%, and even the futures of Nasdaq is down by about 2–3%, what you're saying is, despite all that CYTD Nasdaq would be up 7–8%, even if there's a correction in the future.

So, you know, a lot was priced in, in the market. The market was looking at euphoria, and actually, when they realised interest rates are being cut for the reasons like there is a probable global slowdown coming up. That is what now investors are grappling with now. So stocks or companies, which have done very well, where valuations have got frothy, be it the magnificent seven or otherwise, they are being questioned and I think that's the right thing. These are healthy corrections, because you're cutting interest rates in the US because there's a problem, not because you want the economy to grow a lot faster. So, I think, that's the first point.

Going to the second point. What is Japan doing? You know, Japan is raising interest rates. That means the yen, which had depreciated substantially, there were question marks over what will happen to that in the future. And, it has led to Japan correcting by as much as 17% in the last month.

It was one of the most preferred markets last year, because you were seeing inflation come up, earnings growth come up. Now courtesy interest rates moving up and question marks over the yen versus the dollar are creating another problem with the Japanese market. So that again has not become a safer haven.

So now the question is, which is the best performing market in the world. And that leads you to India, which even after this correction is up by 19–20% on the MSCI, CYTD. So, people are probably looking at a risk of trade as against a risk on trade. Yes, valuations are important, but people are looking for relatively good earnings growth and liquidity.

As far as IT is concerned, if there is a global slowdown, you're already seeing the interest rates of the US come below the 10-year rates, come below 4%. Less than six months ago, they were around 5%. So you've seen a sizable change in the interest rates, which means yes, interest rate cuts are imminent for the wrong reasons, and that would lead to probably slow down in the order books for IT.

So people who are hopeful that the worst is behind them may be surprised. So we come from that camp, actually. You know, we are underweight on the IT sector for quite some time. We know the absolute valuations are not extremely bad. They're pretty much where they are, but yet, you know, they still are at pre-Covid levels. So, we think, it's a nice time to be underweight on IT, as we talk.

Vinay Jaising: I think, if you look at the 10-year chart, it's exactly what you're saying, which is, close to 4%. So 5.25% is already being factored in, in the bond market—having a cut of as much as 100–125 basis points over 3–4 months. We don't need to be as acute on whether it will be 125 in three months or 125 basis points in 4 –5 months. But I think that will become a consensus.

So remember, six months ago, we were talking about seven cuts and even more aggressive cuts coming in. In totality, I think that's behind you. Probably, a six-month forward comment of 4% interest rate in the US for 10 years, as well as a 4% interest rate for Fed a 4–4.25% is a lot more real.

Now, when that happens for the first couple of months, my bet is people will realise why that has happened—you're seeing delinquencies and mortgage rates, you're seeing credit cards, you know, payment problems happening from the retail customer. You're seeing capex slow down in the US and when you see all these things getting added up, the market will probably short-term correct before they realise that the cost of capital is going down, which is good news for the market.

But that will be 3–6 months forward. So six months forward, you'll probably see the market a lot more stable to moving up. But in the next three months, I see a lot of volatility in the global markets.

Vinay Jaising: My bet is, volatility with a downward bias, just because the markets, especially depending on the market you're talking about, just because the market, let's say Nasdaq, is still up 10–11% in like 6–7 months. It's had a wonderful run in the last 2–3 years. So, you know, that arresting some correction in terms of valuation probably is warranted. So I would tend to believe, in the next couple of months, you're a little more conservative on the market than aggressive.

Vinay Jaising: It's a beautiful question. You know, I had a table made for you.

Let me talk about global liquidity before we come to Indian liquidity. If I were to look at peak liquidity, or M2 in the market, if I just take China, Eurozone, Japan and the US, that was somewhere close to $92 trillion 6–7 months ago. Now it's down by $5 trillion. It's at about $87 trillion. The maximum reduction has happened in Japan, followed by a trillion in Europe and the US. It's very marginal in China.

So that also tells you the reason behind the volatility, if the downward bias could happen in the US.

Now, in India, it's exactly the other way around. You know, you've got a couple of engines firing. The first engine firing is what you just mentioned. You know, our estimates. You know, we have Dharmendra, our data analyst, who helps a lot with looking at this data.

His calculation suggests about 5–5.2% is the overall percentage of AUM, which the mutual funds have cash on hand and that's about Rs 1.5 lakh crore. That's a lot, because the AUM itself has gone up so substantially. At Rs 1.5 lakh crores, you're talking about 15 months of SIP data coming on a month on month basis. So they have a lot of gunpowder. Now, if you look at where this ammo gets used, normally the mutual funds use a lot more in the small-cap space, then the mid-cap space and the large-cap space.

So as far as I'm concerned, the domestic liquidity followed purely by mutual funds, we are not even talking about retail India, which is also singing. Today about 1–1.1% of overall GDP comes in from retail India and shares and dividends. So that's another $30–35 billion coming on a yearly basis. So I think retail and domestic money, be it through mutual funds or directly, is going to help the market have a cushion wherever there is a fall. So I would tend to believe that in the shorter term, you may see some corrections, but that's a time wherein domestics will start buying substantially, and then earnings growth.

This time, the earnings growth results which came out were tepid in my eyes. But the earnings growth will be equal to what you would expect in terms of absolute market returns in the times to come.

Vinay Jaising: Let's break the sectors up into two. But as you rightly put it, if China would have grown, things would have been far more interesting for both the metal sector as well as the chemical sector, but between the two, and again, I'm putting the pricing of the stocks into the picture as well for India. We would be a lot more bullish on the chemical sector, because, you know, they've corrected substantially and depending on the product you're talking about, the sales realisation per ton for a lot of the chemical names are closer to the bottom. You've seen good rain. I would say concerns of El Nino, La Nina are behind you. So that should lead to even agri growth as well as chemical growth, courtesy domestic formulations do better in India.

So for us, chemicals we'll have a bias over the metal space. But, you know, in the metal space, there are some, I would say, interesting names, which are not directly metal related. They are more related to recycling, where we are looking at in a very big way. But our bet—because of what's happening in China and the global slowdown—should be more on chemicals because their sales realisation, the Ebitda margins are close to the bottom, and you can see upsides coming in on there.

So, though the P/E may look a little higher than the stock price, you know, when the earnings are so low and they're set to move up, you may actually see, in the next year or year-and-a-half, much better days for chemicals. So, it is a nice time to nibble and buy these names.

Vinay Jaising: We're sitting on under 3% of cash. We strongly believe, it's our duty to buy cash proxies when we want to, because lots of stocks keep on doing well as cash proxies as well. We have just under 3% currently.

Having said that whenever we get cash, including this 3%, we are deploying it as we talk. We think there are a reasonable amount of spaces, as absolute stocks don't look at the indices, but as absolute stocks, where you can keep on nibbling and making the position stronger, specially if there are corrections. That's what we're doing currently.

Vinay Jaising: I don't think it's the earning season or even the Budget, which has made us make changes, but it is just because of our outperformance and some stocks which have done so much better in capital goods and industrials, whereby what we've done is we've added some value-added metal names. Though I said, metal as a space would not do very well, but you have some recycling space in metals, which are very good. ESG stories, you know, which we are looking at, and healthcare and specialty chemicals. We are betting on that as well, substantially compared to where the market weightage is.

So in these two spaces, we are incrementally increasing our overweight position. We will still be very, very overweight on capital goods and industrials given the chance, you know, we keep on, still cutting down our IT, space, energy space.

In financials, we are relatively underweight, though the financial sector had, I would say, not not a great result, but not a bad result. But mostly, our calls are being taken more so for the medium to long term, where we are seeing, where the government is spending money, and where we are seeing, you know, where the company's return on capital employed is substantially higher, then it's passed, and where we are seeing growth at reasonable valuation. So these are the parameters, which we are using when we are buying any of these sectors.

Vinay Jaising: In the rural front, I would say, not just rural, but, you know, rural and semi urban front, what has enthused us in the results, I would say, are the housing companies.

There, even if you were to look at the Budget, we are seeing the amount of inflows with the government is putting it in PMAY being substantially higher. So that's where we are betting a lot. So even in the banking stocks, we're looking more at the housing part. But pure rural play, pure FMCG plays, we are relatively avoiding it. Even when we look at FMCGs, we're looking at some bottlers, you know, which have been doing extremely well, you know, food and drink companies, which have been doing extremely well, even historically adding to that some ammo in consumption. But you know, that's not rural led that we're looking at. Just consumption growth, just because the reach of these companies is increasing.

Then, you have, I would say, technology-run consumer names, which we are looking at in the food chain. So, for us, we are not looking at rural being a big rate of change of earnings for any companies because, if you make the change of earnings from 4% to 7–8%, these are cash proxies for us. We are buying growth.

You know, for us, if you're buying growth, we prefer looking at companies which have much higher earnings momentum. Case in point, companies like, let's say Varun, companies like, let's say Zomato, companies like Trent in the past, you know, where the growth is just getting stronger and stronger. Those are the names we keep on studying virtually every day.

Vinay Jaising: It's crazy, right? You can buy me coffee sitting in your office, just by a plug of your hand, and I'll get some good Starbucks coffee sitting out here. So that's one thing it's doing. You know, it's making every room into a restaurant, you know, to keep things better.

It's using the telecom concept. I think, you know, what it's doing, it is increasing the ARPUs, which an investor spends by telling them, if you want the products fast, you should start paying us an ARPU. Become a gold customer. And technically, you know what they're doing is? They're increasing the ticket of what you're giving them, purely for the service they're doing. Plus, they have wonderful tieups with the restaurants. So, you know, probably they get supply a little bit faster when their orders go up and, you know, people are consuming more.

So the ARPU of a single investor or single consumer for the products it's having is increasing. So if subscribers grow, then the ARPU per customer goes up, and obviously their margins will go up, because, you know, you don't start spending more on cost. So at one end, Zomato is doing really well on its core business, which is transmitting food.

But then at the other end, even Blinkit, they're doing pretty well out there. They're increasing their gamut out there. You know, earlier it was just, I would say, packaged products. But you know, I won't be surprised, as they keep on increasing, you know, they'll become a full-fledged, you know, e-commerce network down below there. So both these together are a perfect engine for Zomato, you know, in the future, to start growing aggressively, as it has done in the last couple of quarters.

So, you know, 25% plus topline growth, a much higher Ebitda growth and the path to profitability in two years. I think, all these are making investors very, very positive on looking at a company like Zomato.