Stockpicking With Top-Down Approach Is The Way Ahead, Says Macquarie Capital's Sandeep Bhatia
The comeback in the staple companies that is happening is not going to be something eye-popping, Bhatia says.
Despite higher valuations, the current market will offer opportunities for stockpickers with a top-down strategy, according to Sandeep Bhatia, managing director of Macquarie Capital Securities (India) Pvt.
The best way to characterise the Indian market right now is that it is "solid top-down but a stockpickers' market from here on". India is the only high-growth market that has political certainty, the head of India equity told NDTV Profit's Niraj Shah in an interview.
There is a clear lot of uncertainty politically across the globe and India has moved past its election cycle and is now essentially focusing on driving growth up, Bhatia said.
The real challenge from here on is not to look at only Bajaj Finance Ltd., HDFC Bank Ltd. or any of the large consumer staple names, according to Bhatia. "I think growth is not going to be a big positive surprise there."
Sandeep Bhatia. (Source: NDTV Profit)
The stockpicking has to happen in the sectors that are outside the favourites, Bhatia said. "We like the capex story, select pharma names and that's where the stockpicking skills will come through."
In the near term, the only thing that can be a positive or negative surprise that can come is from the budget that is scheduled for July 23, he said. "But other than that, it's going to be individual stock selection."
There should be a much broader and stronger earnings growth story if the Nifty has to deliver another 15% growth. The comeback in the staple companies that is happening is not going to be something eye-popping, Bhatia said. "It is going to be better than the last couple of months but not better than other sectors."
Watch The Interview Here
Edited Excerpts From The Interview:
Sandeep, what do you tell your clients about Indian market, which is currently trading optimally at expensive levels? Is it go bottom up instead of top down, or is it some other strategy that you would advocate?
Sandeep Bhatia: I think the best way to characterise the Indian market right now is to say that this is solid top down, but a stock pickers market from here on.
I think what is helping India is the fact that India is the only high growth market, which has political certainty. We saw the French elections come through on the weekend. I think that probably is a gridlock as far as the French Parliament is concerned. We are heading into an uncertain phase for the US political calendar. We don't even know whether the current Democrat candidate will remain the candidate for the election.
So there's clearly a lot of uncertainty politically across the globe and India has moved past its election cycle and is now essentially focusing on driving growth, which is why it should be a stock pickers market and a bottom-up stock picking cycle.
Do you reckon numbers can make up for the earnings expectations that are there and give the valuations support, or are you circumspect on the valuations at which Indian markets are trading at currently? How do you guys, as a house, expect earnings to be in Q1 or FY25?
Sandeep Bhatia: I think you're really raising a valid point. I think one should be very circumspect for the market always. You know, the past performance is no indicator of future performance. We know that line everywhere.
I think the real challenge from here on, is not to look at only the a Bajaj Finance or HDFC Bank or any of the large consumer staple names. I think growth there is not going to be a big positive surprise. I would be happy if they continue to deliver what they're supposed to deliver. Therefore, the stock picking has to happen in sectors, which are outside of favourites.
So we definitely like the capex story, which is panning out. We like selected pharma names. So that's where the stock-picking skills will come through. In the near term, I think the only thing that can be a positive or negative surprise, both ways will be if anything comes up in the Budget on the July 23, but other than that it will be individual stock selection.
Do you reckon it will be a tough choice between the three—focus on capex, fiscal glide path and consumption that might be needed while into the partner states’ demands—or can all three be managed with the finances and resources at hand of the government?
Sandep Bhatia: Exactly the question, which we discussed in the morning meeting here.
I think the last bit, which is the partners' demands and in terms of central support, the only thing that logically should happen given that no spending can happen overnight. It takes time. these demands cannot be met in full. It's a political bargaining point. We have to remember that.
Second, you know, even if support is granted it has not to be granted because Rome was not built in a day. So any capital city or any support that is needed will take a couple of years to get built out. So it can be staggered. So I don't think the whole quantum or the period in which the support is given should be overestimated, as a short or very high amount of support. If that is what is done, that's a good thing.
The fiscal glide path is the most important thing. I think, structurally, India needs to have low interest rates on a sustained basis, lower inflation on a sustained basis. That requires fiscal deficit to be brought under control. We did not give up on fiscal rectitude even during the Covid period, while the problems of inflation and high fiscal deficit, which the US or large European economies face are because of the overspending that happened during the Covid.
On whether the election outcome can change that, I don't think it should and I hope it won't. So that's it. I think we just need to hold our breath and do what we have done till now and continue to do that and move in that direction. The demands of the coalition partners can definitely be met over a period of time.
Okay, so Sandeep, would it be consumption versus capex or do you think from a markets perspective it will have equal stuff for both?
Sandeep Bhatia: I think it should be more capex and fiscal rectitude. Consumption actually happens organically, if there is confidence in the economy, if there is job creation, and if inflation is under control. Otherwise consumption, if given a steroid shot, is a boost. We don't need that boost. We just had the election. Even in the Budget, which was presented on Feb. 1. Of course, at that point in time, there was overconfidence to some extent. I would say that there will be no political challenge given the elections that are coming up.
So there was no real big consumer push, which happened at that point in time. Now that the elections are behind us, we should continue to go down the fiscal glide path and build our reserves in terms of fiscal space, if we need to spend later, rather than use that right now, which is just both fiscally irresponsible and politically not wise.
Are staples making a comeback, or is it too difficult to call that from a market perspective?
Sandeep Bhatia: The staples’ comeback, which is happening right now, is not going to be eye-popping. That is the way I see it.
It's going to be better than the worst expectations, which we had in the last couple of months, but not better than something that is happening in the other sectors. So that's how you should position it. It's not going to be an overweight sector in our portfolio in a hurry.
Sandeep, what do you make of banking? There was a bit of a rush in HDFC Bank and some others in the hope that things will improve. Q1 is seasonally weak. Is it weaker than what you thought?
Sandeep Bhatia: I would want it to be stronger. So the short answer is yes, it's weaker than what I would have expected it to be. We'll wait. People are saying the heat was too much, therefore whatever. I think I want to see one more quarter or so. I don't see there is any structural problem with banking. But yes, it could have been better.
Therefore, if the biggest weightage of the market hasn't come out with the best of numbers, what makes up for that disappointment? Would it be tech? Would it be energy?
Sandeep Bhatia: Given the importance of the banking sector, if it doesn't perform for the full year, and we are extending this to the full year, then I don't think anything else can make up. That's the short answer, which again goes back to the first sentence and the first part of the interview where I had said that it has to be a stock picker’s market.
To expect the market to deliver headline Nifty from here, another 15% plus, double-digit plus, requires a much broader, stronger earnings growth story, unless you continue to rerate Rerating can happen because of fund flows and so on and so forth. But per se, nothing can make up for a shortfall if there's a full year shortfall in banking.
After Accenture's numbers, a lot of hope got built in that maybe Indian IT could turn the trick as well. If there is a Trump presidency, can BFSI make a comeback and therefore will it start getting discounted? What do you guys think?
Sandeep Bhatia: Yes. IT is something that we have liked. We like specific names there. Whether it's a Trump presidency or a Democrat candidate presidency, impossible to say now. I don't think anyone in the US can take these political bets right now.
I would just focus on one thing as far as the US is concerned—whether it has political stability. Even if we have a Presidential election, it may still not have political stability. And that—political uncertainty in the US—would play out across the globe. I think we have all through this year just cut the number of Fed rate cuts that can happen. If there is political uncertainty to have another big rate cut cycle and a big boost the economy may be difficult for the Fed to give you. So let's wait for the presidential elections.
IT is definitely at the margin better than what one thought. Therefore, that's the way I would play it. It cannot be the driver for the entire market, per se, both in terms of earnings or headline indices.
Can E&RD, smaller IT services or product companies, etc, do better even while large-cap IT finds it difficult to show in very high growth?
Sandeep Bhatia: Yes, of course. That's the reason why we like Persistent. That's what I think is what we have to build when we look at stock picks. So, clearly this IT sector is something which will have individual names which can buck the overall Fed rate, US Presidential cycle. Trump is coming and boosting the economy by tax cuts. All that can be bucked if you are in the right set of names because they have other organic business drivers.
Do platform businesses like TBO Tek, Zomato PB Fintech look interesting to you, or is it not that wide a market for you to track?
Sandeep Bhatia: We track some names. We have been concerned about valuations, which are baked in, in these names. These names, therefore, to continue to perform from hereon require a great precedency to happen and a broader bullishness about the entire tech sector and so on. Though they are not directly playing on that market, per se, it requires a major tech side bullishness to continue to happen. But we have been concerned about valuations on all these names.
Can energy do the trick, or is it too volatile to predict?
Sandeep Bhatia: So Macquarie is an energy house. So I think energy is going to be good as long as global growth is good. We expect global growth to hold up. So energy will be good. That is the way the thought process flows.
I think all these names have multiple stories. So if there is Green Energy happening, that’s good and nowadays with what is happening in elections a Trump election or even the European electrons show that some of these climate change pressures are actually reducing. So even carbon energy is doing well. So energy is definitely something which both green and carbon-generated energy, both are good spaces right now.
I think the politics in the west is wearing away from this extreme leftist kind of politics, which has dominated fo more than a decade in those regions. Therefore, unfortunately, some of those pressures on cleaning up the energy cycle is definitely abating, which is why both green and traditional energy names will do well.
What to do with industrial metals, considering the China recovery is a flip flop? However, in Bloomberg interviews, EM fund managers suggest that they expect some recovery there. Is there a bet to be taken on commodities and commodity stocks for the second half of the year?
Sandeep Bhatia: I think this is a very good question. I would say two things. The China bet, which the fund managers are taking is a financial bet. It is not necessarily an economic bet. Financial bet, because it underperformed. Its valuations look good. It is the second-largest economy on market currency terms and largest economy on purchasing power terms. So you cannot ignore China. So that’s a financial bet which fund managers are taking.
On the flip side, we know that India is expensive. So I think metals, the view is as global growth is holding on, in fact global growth has surprised for most part of this year and China will not allow the metals cycle to go completely out of hand. So the government and the producers will control the supply of metals and will ensure that prices remain remunerative.
So there is no big dumping that is happening, per se, though there is significant over capacity and issues in China. So on that basis, Indian metal names can also do well. So that’s the thesis. The thesis has two legs to it. One,the global growth remains in green and remains in 1.5% to 2.5% global GDP growth range. Not too hot, not too cold. And, China manages (its supply), because everything is controlled in China and metal companies will not create a price collapse.
