Indian Equities Resilient Amid Global Cues, Poll Volatility: Mahindra Manulife’s Krishna Sanghavi

Krishna Sanghavi: I guess for anybody who has been in this market for the last 20-odd years or maybe 25 years, I think the excitement is palpable and it's possibly, you know, we've been born through it, having seen 2004 and 2009—extreme events of a circuit down and circuit up.

So if you have gone through that, obviously the election actually becomes, you know, something which is more of an excitement rather than something which is relevant from a time perspective.

So the time perspective is very simple. In 2004, Nifty would have been wherever it was. Today, we are at nearly seven times or eight times that of Nifty. Market cap would have been far more. So I think that economic journey is honestly far more critical on a longer term timeframe.

But we all need some data points to get interested in a shorter end cycle and maybe elections give us an opportunity, maybe every five years in India.

If you go to 2004, honestly, we had a circuit down and 2009 circuit up and those two memories can never go away from an average memory recall. It is always going to be there that election can create those extreme events and that's where you know, we are for last 40 days going through this.

Krishna Sanghavi: You're right. I mean, you look at 18th April as a so-called relevant date, which means that on 19th April Indian election started. And for all this discussion about election and opening polls, etc, we are around 2% up from 18th April and maybe global markets are up nearly 4%. I'm using the S&P 500 as a so-called most appropriate benchmark.

Now, when you look at this way, Indian markets are connected to the global markets as much as the Indian economy is connected to the global economy. The relevance can change at various points of time but you know, the macro picture of India being a subset of global economy and Indian markets being a subset of global risk appetite global sentiment, that won't go away, irrespective of elections.

Krishna Sanghavi: Honestly speaking, it's tough to predict when there are 97 crore people likely to vote as eligible to vote and we don't even know how many actually end up voting. That's why the debate about voter turnout, so it is just not really something relevant.

Krishna Sanghavi: It's really tough. So as I said, go back to the history of 2004-2009 kind of examples. You have history and it is the same history you use for a 20-year cycle or a 10-year cycle on the investment front. The answer is no.

India's economic journey—and maybe the market acceptance and wealth-creation part—honestly is of far bigger potential than worrying about something as you said clearly just a three-day more event.

Maybe somewhere on 4th June by 12 noon or so, whatever time broadly, all these debates might be addressed.

Krishna Sanghavi: I think broadly, over time, we realise that equity as an asset class is going to create value. From an asset allocation perspective, either the wealth manager or the investor himself have done their own bit of asset allocation.

So my guess is, maximum cash of 3–5% range is in a way the upper limit based on the type of the fund. So if it's a small cap, I'd be more towards maybe 5–6%. If it's a large-cap oriented one, it will be much lesser. The idea is to generate alpha through stock selection, etc.

So average cash, even if I go back to maybe last four-year history and even in the Covid times, we never went to double digit cash in the fund.

So, I mean, cash of 3–5% somewhere is there. But there are always enough number of stocks, which maybe defensive, maybe some stocks which have relatively a different kind of behaviour on an event and slightly more longer term implication on the Indian economy. So not so much of cash.

Krishna Sanghavi: I think, let's look at a broad consensus market rather than our own because of the bigger picture available there.

Indian economy, if you look at it, you know, we've grown at around 11% on nominal last year. So, economy-wise if you correlate the earnings around, let's say 12-15% range, and maybe the bigger share of earnings last year actually has been banks. The lenders have earned a slightly more disproportionate share of the profit pool because of the interest rate regime.

I think that is one thing, which we need to be aware of because that's something which might just go away next year in FY25, because the base is so strong that the incremental growth cannot come in.

Otherwise, I think, it is fair to assume, you know, 12–15% earnings growth for FY25, which is relatively more in line with the long-term trend. But the other macro picture is, we need some sort of volume growth.

A lot of money has been made through margin front in FY24 and we do need some volume growth and hopefully that's something to watch out for in FY25 whether which set of market, which set of sectors can actually deliver the volume growth for economy. But otherwise, margin-led gains are broadly part of the base. We can't have a surprise there in FY25.

Krishna Sanghavi: You are right. I think, the first Budget of the five-year term is essentially very interesting, because the government is going to lay down their own priorities, their own thoughts on what they intend to do.

And to my mind, yes, the Budget is going to be an event, which can help us from the economy side, because, the 4th June event is possibly a single-day event but what is spoken in the Budget is more or less a blueprint for what the government intends to do for the next five years.

And when you go back to it, in the last 20 odd years, the Indian economy has seen a nominal GDP growth rate of 12%. I think that number has not really changed. And 20 years is a long period, enough elections in between, etc.

To that extent, that macroeconomic connect for how Indian economy is responding to the global economy, in terms of getting our own share of exports… and our own relevance to global markets in terms of the growth economy, which is getting its own rank growth. We would have been 16th rank economy or so 20 years back. We are now fifth. That track is intact and that's what is a big picture honestly, for all Indian market investors.

Krishna Sanghvi: So, what we observed really, around a year back, is that assuming all this you know, global piece of China Plus One is going to play out, whatever the government of India policies on PLI and Atma Nirbhar Bharat is going to play out, what we realise is that you really need some sort of comfort on the core economic sectors to be available to India, when the Indian economy needs and the idea is somewhere in FY27, FY28, we might just not have enough amount of either power availability or a steel or aluminium capacity or refining capacity, because let's face it, in this entire debate of Atma Nirbhar, PLI, China Plus One, what we're doing is manufacturing replication.

So what some factory in Germany is using as a power from the German grid or Chinese labour is being paid off in a Chinese factory or, you know, fuel being used in some other country, we intend to get it done in India.

So our need for that steel or that power supply, or that petrol, diesel for logistics is going to increase and if you follow this, luckily, these industries have a 3–5 year gestation period. So it's slightly easier to predict the demand-supply mismatch, which may happen in 2027-28. In fact, the power policy document last year was an eye-opener —that we need so much power growth.

Recently, Vietnam has asked the iPhone manufacturers to reduce power consumption, which means, you know, some of this activity when they're outsourced away from China into any other geography, any other country, that country is going to have a nice growth pattern available for those industries.

Unless you are investing now to create that power plant or a steel plant, four years down the line, or five years down the line for consumption, core economy need is something which honestly looks very exciting, pretty attractive. I agree valuation can have a role to play but that's a nice, sweet spot.

Manufacturing is a core thing, which is PLI, which is Atma Nirbhar Bharat, you got a nice piece where India actually has a population, a demography of 140 crore people. So the market is available, policies are in place to either do import substitution, which means something which we are already consuming just needs to be replaced by Indian manufacturer, or China plus one kind of, you know, potential opportunity either from a global side or from a government of India incentive structure wise, but some Indian companies can manufacture for the world.

So, I think that manufacturing piece is somewhere very well-integrated to this thought process on what can play out for India in next 3–5 year journey.

Krishna Sanghavi: Clearly, export-oriented theme, especially these are all manufacturing related.

If you look at macro again, India's market share in global manufacturing or global export share is quite low vis-a-vis what maybe China’s. Even if you're able to get a little bit out of that, it's going to be a material growth rate for India and to that extent, yes.

Let's look globally also. The US, for example, are doing their own version of the PLI, which means they also want to manufacture something in the US vis-a-vis what they would have outsourced in the past.

So there is a global capex in place. Whether it's something like a Cummins kind of example or if you look at the power sector where renewable energy is creating its own share of demand for infrastructure, their own power sector front, and I think that piece is intact.

Any Indian company, which is able to have these quality controls in place and are able to supply to a global customer, I think they're going to have reasonably good growth.

Krishna Sanghavi: There are companies who are capable of reaching those quality controls required. Scale maybe a challenge because the requirements, vis-a-vis what those companies are today, might be very large. That's an opportunity actually of little bit of a capex, which is required to achieve those bigger skills, but capability-wise, we believe quite a few companies are available.

Krishna Sanghavi: We are actually launching a manufacturing fund. In fact, we launched it today itself.

When we are launching a fund, obviously one is aware of what is a global macro as well as what you know about the Indian government is doing and maybe Indian corporates’ ability to respond.

So, opportunity is there. If I look at our own manufacturing fund, obviously, one is a global opportunity. Other is, as I mentioned earlier, 140 crore people. We want to consume everything whether it's an automobile, whether it's FMCG, whether it's Pharma.

So it's not only global piece. It's going to be in a far more inclusive in terms of ability to manufacture any product, either import substitution, which is actually very large. Our non-coal imports are pretty large and if something can be done to cater to that demand itself, it is going to add nice to India's GDP as well as to those corporates.

Krishna Sanghavi: I think the bigger piece is the worry on the US economy and what can lead to some sort of slowdown in the clients of these companies. I think that's something far bigger on the market mind rather than too much about the issues.

The debate about what AI can do, or to some sort of jobs in the IT service industry can be there but it's slightly early honestly for anybody to have a full-fledged view on what actually can play out. Too many opinions right now, but the bigger piece right now is the worry about some recession or slowdown in the US economy which can impact the business in the near term for these companies.

Krishna Sanghavi: For me, PSU, in a way fits a little bit into the core economic theme. If you observe, all those core economy sectors have a nice presence of some PSU company in steel, power, aluminium, refining, etc.

More specific to the defence, you know, kind of opportunity, I think that's a new opportunity which came up in India just two years back or so—the moment we went for this Atma Nirbhar Bharat as a thought process, as a policy.

So again, same thing. I think the opportunity is huge and valuation is always going to be an open end across the market, not only for defence. I think any industry which has a slightly longer runway, worry about valuation is slightly debatable.

How much to worry about, because you never know the kind of growth rates these companies enjoy. But one has to be cognisant that this is a replacement demand.

Also, to an extent you know, it's slightly better on that front end. What India already is spending abroad is possibly going to be replaced by India spending on its own purchases.

Krishna Sanghavi: On defence, I think they are pricing a slightly longer term timeframe. So investor-wise, you need to be aware of a longer term perspective, rather than the extreme short term. Valuations are rich.