India to be core holding in FII portfolios ?

Manishi Raychaudhuri, veteran investor In Asian Equities, says “from a foreign investor’s perspective, India would still remain a core holding. But at the same time, tactically, there is a case for increasing weight relatively on the North Asian markets. And in these North Asian markets, I would definitely include Hong Kong, onshore China and Korea. And notice that in many of these markets, including Japan as well, there has been a degree of influence from the government in terms of directing the companies to create value for investors.”

Raychaudhuri further says: “Foreign institutional investors (FIIs) are gradually waking up to the fact that while India remains kind of a bi-decadal story, over the next two to three decades, it is going to be a core holding in their portfolio and it is a long-term bull market with several fundamental factors falling in place.”

Everybody here in India is saying that in 2024, the flows will head to China from India because India is an expensive market and has done phenomenally well in the last two-three years and China is turning out to be pretty inexpensive. How do you look at it? You have an eye on both these markets, do you think this could be a trade-off for most of the FIIs?

Manishi Raychaudhuri: I think there is a merit in that argument. It is quite correct that greater China equities, particularly Hong Kong and onshore China, are quite inexpensive. In fact, there are markets which I am tempted to call ridiculously cheap right now. The market is seriously under-owned. In contrast, when one looks at India, it is priced to perfection. The valuations seem to be discounting not just this year and the next, but also maybe another two to three or five years. This is now getting gradually reflected in the sort of consensus opinion or the consciousness of foreign investors.


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We have seen significant inflows into China over February and March through the northbound stock connect. In contrast, in India, January and February were quite pedestrian in terms of foreign flows. March was decent, but that also was taken up by, to a certain extent, to a large extent by the IPOs and block deals. The foreign institutional investors are gradually waking up to the fact that while India remains kind of a bi-decadal story, over the next two to three decades, it is going to be a core holding in their portfolio and it is a long-term bull market with several fundamental factors falling in place. In the near term, the valuation concern is playing in terms of the kind of pattern of flows that you are seeing right now.

Since you are saying that the Chinese markets are quite inexpensive, Indian markets are priced to perfection, does it mean that you are tilting more towards the other emerging markets rather than India? What is the pecking order right now?

Manishi Raychaudhuri: I think from a foreign investor’s perspective, India would still remain a core holding. But at the same time, tactically, there is a case for increasing weight relatively on the North Asian markets. And in these North Asian markets, I would definitely include Hong Kong, onshore China and Korea. And notice that in many of these markets, including Japan as well, there has been a degree of influence from the government in terms of directing the companies to create value for investors. There has been a significant uptick in buybacks, a significant uptick in dividend payment, and in some cases, even better communication to investors.

In Korea, the government is urging private sector companies to create value for investors. We have seen that in Japan. We have seen that in certain directives from the Chinese authorities as well. It underscores the fact that the governments are also conscious of the fact that they need to bring in foreign investments into these markets and are acting towards that end.

Specifically want to address what is happening within the small and midcap space here in India. A sizable correction is out of the way and that is where the insatiable appetite is, even in the recovery which has happened in just the last two odd trading sessions is the mid and smallcaps which are most sought after. What are you making of this sort of disconnect that we have here within the largecaps? What is happening with the broader end of the market?

Manishi Raychaudhuri: Despite the correction that we have had in the mid and smallcaps over the past one month or so, it is still very difficult to find pockets of growth at reasonable valuation in these universes. There was a tendency of investors to move towards largecaps which we had seen in the early part of this year.

I think investors should still adhere to that kind of an action on the market right now. If you look at the price earnings multiples, even the broader indices, the mid and smallcap indices are possibly in the range of about 25 to 40. Not every stock is justified by the future growth projections. In case of largecaps on the other hand there are a few sectors that have underperformed. Private sector banks, for example, some notable good quality private sector banks have underperformed for the past three years. So, there are some interesting pockets that have emerged in the largecaps, not quite so in the mid and smallcaps.

The manufacturing and premium capital good companies are catering partly to the country and partly to the world. Specific manufacturing funds are being raised in India – Viksit Bharat Ambition 2047. There are two narratives coming. One, the Indian manufacturing plays have become expensive. The other narrative may be good, but says India’s manufacturing ambition may not be very easy to achieve like China did in the last two-three decades. So, should one be riding these names? What do you make of this conundrum?

Manishi Raychaudhuri: So, in terms of government policy and the momentum in favour of manufacturing, there is certainly a case for a long-term bullish opinion and I would tend to agree with that narrative. On top of that, we are in a geopolitical situation that favours some degree of alternative supply chains being created. If India is able to place itself in that supply chain momentum, in that supply chain creation, then certainly there is a case to be made for long-term bullishness for these stocks.

At the same time, certain things are still not in place. For example, these kind of supply chain creation needs a significant degree of skill creation as well. Do we have people with adequate skills in these activities? That is what the jury is still out on and that is what the investors would be looking at over the next few years to kind of make up their mind as to whether these stocks would be long-term successes or whether some of them would fall by the wayside.

What do you make of the future of the banking sector in India because there has been an entire regulatory overhang, but overall there is this expectation that credit growth is going to slow down a bit, the interest rates are going to turn as well. What is your view on how the banking sector is placed right now?

Manishi Raychaudhuri: Forget about India over the next two-three quarters, but look at the next five years, ten years, or maybe a couple of decades. Then if one has to play broader economic growth, then one has to play the banking sector because think about it, the economy is ultimately private consumption, government spending, investments, and net exports. So, out of these, at least two significant segments are driven by and supported by the banks.

Therefore, the growth in the banking sector is almost inextricably linked to the growth in the broader economy. If we believe that a real GDP growth of, let us say, 7%, a nominal GDP growth of 10% to 11% is the order of the day for the next decade or so, then there is no escaping from the narrative that the banks would be a significant participant in that growth.

Now, having said that, there are some banks which would significantly gain market share and these are the private sector banks. Even after they have been around for almost 30 years, I still think 65-70% of the market share is still with the public sector banks and that would obviously get whittled down as we go along.

The private sector banks also have the advantage of far better asset quality on the average. So, I would seriously focus on them. I know there have been concerns about decline in CASA, current account and savings account, because money has moved to the equity markets and away from the banking deposits, but those are really short-term hurdles or short-term headwinds and if you are able to look beyond them to the long term, there is no escaping from long-term bullishness on the banking sector.

Harry Byrne

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