A victory of Republican candidate Donald Trump in the presidential elections in November will be a good trigger for US equities, while Kamala Harris' win can be a dampener, but India will not see any significant move, according to Nandik Mallik, chief investment officer of Avendus Capital Alternate Strategies.
"The frontrunner (Donald Trump) in the race has been market-friendly," he told NDTV Profit, claiming that a Harris win could trigger a selloff. "But India is low beta, we would not fall as much as global markets."
He said another global factor to watch out for in the short term is the decision of the US Federal Reserve on interest rate. The central bank is expected to cut rates for the first time in two years, a move that can drive up equities worldwide.
However, a Fed move does not mean a dovish turn for the Reserve Bank of India, Mallik said. "The RBI is in no hurry to follow the Fed. It would be more concerned about the (interest) rate gap. The RBI would be happy to let the rate gap increase," he said.
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The fund manager said Indian markets were less swayed by foreign sentiment than what used to be a decade back and domestic investors now take the lead.
The local sentiment is strong, a recurring theme now is the buy-on-dips. Interestingly, many global passive funds allocate money in different geographies on fixed formulas like GDP contribution and population, according to Mallik.
"In each and every factor, India's weight is increasing. There may come a stage where irrespective of valuations, due to demographic advantages, the allocation will keep increasing," he said.
Watch The Conversation Here
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Here Are The Edited Excerpts
So, have you been concerned about market valuations in the recent past and did Q1 do enough to kind of, if not allay those concerns if you had them in the first place, but to at least live up to its billing?
Nandik Mallik: I’m not so concerned. I think our markets have been faring/behaving very well. In fact, if you look at how the markets have behaved, we have become low beta.
So previously, what used to happen was global could be down 5%, we would be down 7%, global up 2%, we are up 4%. Now what's happened is that the global economy is down 10%, we are down 3% or 4%. On the way up also, global is 5%. We are at 2% or 3%. So that's why I don't think, let's say, even valuations are high. I don't think that's a cause of concern, because markets in general have become low beta and people who have made wealth in the last two or three years have actually made wealth by holding on to the portfolio for long.
So, in that case, I think the high valuation concern is a lesser issue as of now. Things like you know, people putting money consistently in SIPs and funds, I think those things are more important and one important factor which people have ignored is how the rupee has behaved. So, in the last week, you talked about the carry trade, you know, JPY moving from 160 to 140, going back again. I don't remember when the rupee moved from 83 to 85 band. I don't remember the last time it happened. So, rupee has been fairly stable, which shows that possibly from a macro perspective, we are fine.
Markets, you know, earnings will keep coming, going but we are a growing economy. We are still not exactly. developed markets, but I think we are not in that EM phase as well.
Let's assume that last week was a turbulent one because of the whole JPY thing and so on and so forth. Are we looking at calmer times ahead because we are one week closer to a Fed event. JPY will not now react as much as they did because of the BoJ Governor doing what they've done and the fears of that hard landing in the U.S. seems to have ebbed a little bit. So, are we looking at calmer times ahead?
Nandik Mallik: Yes, I would ever think so. More so because the Fed has indicated that the rate cut is around the corner. Now from this stance, I don’t see at least a rate hike happening. So, the only two possible scenarios are either status quo with a lower probability or possibly a 25 or 50 basis points cut.
I don't think we should be concerned because the RBI in my view is in no hurry to follow the Fed. I think RBI for the time being would be more concerned on the gap between what our rates are and historically they have been much higher. So whatever little talk people do about the RBI following the Fed, I think it's a long way down the line.
RBI would be very happy to let the rate gap increase, even then they will be much lower than what the historical numbers are and I will want to say RBI has done a wonderful job at controlling or let's say, see how Rupee has been panning out.
In fact, after the last policy, most assessments I've seen the first rate cut move from Feb to October. But the RBI Governor was very clear that food inflation is bothering him, so he's in no rush and like I have to talk to you about, you know, the big topic this weekend, and we've been seeing how markets have reacted. I think when that first set of tweets came out, big things came in, sort of from Hindenburg. Everyone was wondering oh no, what's going to happen now, what happens to our investments, what happens to markets? Fair to say that markets have ignored something which showed no credibility?
Nandik Mallik: So, markets haven’t ignored it 100%, the next time this happens, the market will ignore it 100%. So, the last time this happened, if you remember, the reaction was much steeper on the way down. This time, the reaction has been a bit more mild. So, markets haven’t, you know, completely discounted it, markets have reacted to it.
But the more this happens, and the more consistently they keep happening on a regular basis, then at a point of time, markets will not even talk about it. So for example, the media channels are not discussing it first thing in the morning. Two or three more sessions like this, and you know, people will not talk about this only.
I remember after the exit polls and after the elections, there was talk about how exit polls were rigged and short sellers made money, but you know, even from those levels, Nifty is higher now. So, the more of these kinds of things happen. I think it's good for markets, because you know, our market participation is fairly deep.
This tends to show that everything is in order. So, you know, the more these kinds of things come it's actually good for long-term stability.
Having said that, let's look specifically at what the allegations are, what the responses have been, because for us to just shrug off and say okay, markets are deep, that's fine. But this time round, especially Hindenburg seemed like they were grasping at something or the other?
Nandik Mallik: I think we should have an interview in which we should interview you because you know you have put the points perfectly. So I will not want to say it in black and white so much but it’s evident as to what’s happening. That is the reason possibly why even equity markets haven’t reacted so badly and the research which they have done seems to be fairly on the poorer side you know, the kind of arguments which they have given the kind of data points which they have pointed out. So, again, it’s a good thing that these things are coming because this just shows how, how fair and how resilient the markets are.
So, what happens next Nandik? What's your sense? Let's assume that there is an event like this, which has brought the market down a little, maybe it brings the market down low along with what's happening with global markets, who knows. But let's assume for whatever reason, the markets were to correct a little bit 1–2% or what have you, because we are closer to that event, and because you're saying that this is worse, per se, a non-event. Are you a buyer, I mean, were you sitting on a bit of cash around elections? Have you deployed all of that already or are you in the process of deploying it? Are you a buyer currently, what are you doing?
Nandik Mallik: See, if you look at the data on the third or fourth of June, there was a sharp crash and then, there was a bounce after that. I was surprised that most of the buying was done by the retailer slash that segment. So, it seems there are people with a good amount of cash ready with them and it looks as a status quo. If nothing happens on the global front, then at least a major dip would be bought into.
Just one follow up there. Is this that we are closer to the Fed rate cut, typically a Fed rate cut, and since Covid lows, the Fed has moved the market more than anything else. We are closer to the Fed event if you will, I mean good hypothesis that September will see a rate cut. Domestic mutual funds are sitting on over a lakh crore of cash. Is it prudent to think that there is a higher probability of an upside on the markets over the next three months versus the downside?
Nandik Mallik: Yes, I would tend to agree with that assessment. More so if nothing happens in the global front, because people are focusing on the Fed part but I think the more important event is the U.S. elections and the frontrunner at this stage has been a President in the past. Typically that gentleman has been, you know, more market friendly. So, you know, the Fed event together with the probability of that event panning out, I think the chance of an up move is higher. Valuations are high, you’re correct, but then I would still assign it, the chance of an up move to be higher.
Let me reverse that question. If Kamala wins and Trump doesn't, would that be seen as a negative for the Indian markets?
Nandik Mallik: At this point of time, I think it would be bad for global markets at least the U.S. markets is what my assessment is, but again we are low beta. So very surprisingly, we have become low beta. We definitely should not fall as much as what the U.S. does.
Okay, I take that point of being low beta. One thing that we are quite sensitive and reactive to specifically on individual companies and stocks are earnings and typically in a market like this, earnings take centre stage. We're pretty much done with Q1. What has been your assessment?
Nandik Mallik: Not very great, to be very honest. But I think earnings in the present setup would be secondary, because rates start coming up. You know, that funding pressure would ease. So, a lot of even if let’s say the earnings are going off by a few basis points here and there would be more than compensated from the funding pressure, the release which the corporates would get.
In terms of what has, you know, the good, bad and ugly, overall you're saying they haven't been that great. What has been the standout, in terms of this was a miss, can I pick up financials because the commentary has been consistently that deposit growth is a problem. There seems to be no change on the horizon, which would, you know, clear up that picture.
Nandik Mallik: My view is, and I’ve shared it multiple times, that you know, there are some tax arbitrages between various options available to investors. So, my favourite example is arbitrage funds, which get classified as equity taxation, but for all purposes, they are debt funds. But they get taxed at very low rates.
So you know, till the time you have these kinds of imbalances, the dice would be loaded a bit against the deposit size/sites. But I think deposits are a cause of concern in banks. But, again, it's easier to address for example, addressing these imbalances are fairly you know, they have to come from the authorities. So it's not something which is in the hands of the banks.
Lower net margins, raise your deposit rates?
Nandik Mallik: Then raising deposit rates also has its implications.
So then to answer because from an investing perspective, are banks good shoes-in or do you like other places?
Nandik Mallik: Banks, I’m a bit more positive on is because they have underperformed so much in the recent past and it’s not that banks are lightweight in the Nifty Index 35-40%. If anywhere between 35 to 40% of the weight is these banks, the index has to move. See, I think most of the people who invest in banks are long-term investors; they typically don’t like to invest in banks for three or four months.
Or foreign investors who have been MIA for a large part of this year.
Nandik Mallik: So and then this talk about relaxing the cap on foreign holdings. These things happen that you never know, because the regulators won’t, you know, announce in advance that something like this is around the corner. I think it’s a good time for sector rotations and sectors which have done badly, let’s say in the recent past. Status quo should do well. So, banks fall in that category.
Just on that question of, you know, foreign investors coming in or global money coming in. Do you see that changing post the two events we've been talking about the rate cut expected in September and then the U.S. elections?
Nandik Mallik: I think we’re past that stage for now. Foreign investors decide which side Nifty is going. I think it’s turned a complete circle with domestic investors, domestic fund flow sentiment primarily drives. Foreign sentiment is important, but then it’s not what it used to be 10–15 years back.
So, I think the local sentiment is strong and what seems to be a recurring theme is buy on dips. What can interestingly happen in many of these passive funds, and now they're growing in size, so what they do is they allocate to different geographies and countries and typically they have a fixed formula, it can be by GDP, it can be by population, whatever.
In each and every factor I see India's rate increasing only. So, you know, we may come to a stage where irrespective of valuations you know, because of the demographic advantage or let's say other advantages, which India has, that allocation will only keep on increasing.
Abhay Agarwal, founder of Piper Serica, joins me now on the show, for his perspective. We'll talk markets, we'll talk direction but, you know, wanting to know what you made of all of the events over the weekend. Round two of Hindenburg hit job allegations and then the responses to it?
Abhay Agarwal: I have for me, you know, frankly, as I’ve been saying, it’s a non-event. I think it’s done by an organisation that is known for this kind of activity. As an investor, I pay no attention to these kinds of, you know, mudslinging allegations where, you know, very selective facts or some data being thrown in.
You know, I saw the report that they put out, I mean, frankly, that kind of stuff will be done by, you know, a graduate-level analyst in a fund like ours to dig up that data. There's nothing credible in it. I mean, it's just a bunch of facts.
I have to ask you if ever an analyst came to you with that data and claim that this is good enough to put in a report. Would they get fired?
Abhay Agarwal: They really don’t get a job with us or anybody else you know, not only us, I mean what is it, you Google something, you find something and then you put it out and say, you know, selectively because I’m sure they found something else, but they selectively chose to use this data, which shows nothing I mean, there is nothing material in it. So I don’t even know why there is even this interest on social media.
Maybe it will stay for a couple of days and it will die out. But it's a non-event. I mean, it doesn't matter. I think the only intent of Hindenburg probably is to make some money off it, which if they fail to do, you know, everybody will lose interest. But at the same time, I think since this has been put out and so much discussion is taking place especially for a very, very credible position of the chairperson. I think the onus is on the Indian government to take note of this and to make sure these things don't happen, that people just don't make allegations from overseas and have no repercussions around it.
They have the legal forum, they can go to if they have a problem, you know, but putting it out in the media, there's only one intent which is to mudsling and benefit monetarily. from it. I think once both these efforts fail, hopefully this will stop. But I think my worry is that as the Indian market grows, and we attract more and more foreign capital, some of these attacks will continue from different directions. It is not for me to say how the government should react to it. But definitely there's some mechanisms that should be put in place, especially to protect the small investors you know, who may worry more about the markets after reading this.
Most certainly Abhay, those answers kind of echo what Nandik Mallik was telling us. He is with us in the show as well. Abhay, just one follow up there. A set of people that I spoke to overnight said that you know, in the remote chance that the markets were to react to this or any other event, they will be happy because they will get a chance to buy at better valuations and lower levels. If that were to be the case, depending on what kind of cash you are sitting in, would you use dips to buy currently, post earnings, post this but closer to the Fed event. Are you a buyer in the markets currently?
Abhay Agarwal: I have been a buyer on dips for the last six months and we have been discussing that but recently, our thought has changed and it has nothing to do with Hindenburg reporting. Please can we clarify, it has to do more with the on-ground data that we are getting right now because we do a lot of research with the channels and you know, we try to on regular basis understand the domestic consumption pattern and we are seeing a remarkable slowdown, much worse than we expected at the retail consumption level for discretionary consumption items.
Typically, what would happen is by now the channels will be building inventory for the festival season. But that has not happened, and the retail shopkeepers and distributors have very limited confidence as of now about festival sales. I think that is happening because of a couple of reasons.
There is a remarkable slowdown in funding options available to the retail borrowers to engage in discretionary consumption. Rates have gone up, money is not as easily available as RBI has tightened the bank lending to NBFCs and to unsecured borrowers by increasing the risk weightages and I think the impact of that is being seen now with a lag.
So lack of credit availability, increase in taxation, it has hurt negatively the sentiment in the budget. I think we look at it from one perspective from a capital markets basis. But I think the deterioration in consumer confidence because of higher taxes is something that people haven't yet realised.
So, I think looking at that data and then looking at the fact that we are going into the U.S. elections and there are enough geopolitical tensions all around them, they're escalating all over the world. We are not buying the dips right now and I think what we will do is we'll wait for the events to play out and look at the next quarter earnings. So, we have increased our cash allocation, and we plan to sit on it for the time being even if we see sharp market corrections.
Okay, Nandik, is that a thought in your mind too, that the festive season may not turn out to be as strong as people usually expect festive seasons to be? Your view could be different than Abhay’s, of course?
Nandik Mallik: No. So, I think that doesn’t really matter. Given the amount of money and the quantum of money, which is sitting with let’s say, domestic mutual funds and institutions, because at some point of time, they will have to invest and it’s not that there’s a valuation at which everyone will, you know, come and start buying.
So someone will try and preempt that and for some people maybe a 2% correction is good enough, for some people maybe a 4% correction is good enough, for some funds they are waiting for 10% correction. But you know, if at 2% correction, the bigger players come in, then that 10% correction may not come. So, even if they say there is some slowdown given the amount of liquidity which exists in the system and given that our markets haven't really fallen that much. So many people may think it may or may not be the right thought process even if I invest if the downside is limited, they may as well invest some money now, because if we look at the last two or three years, four years, I don't think the Nifty has fallen by more than 10% the last we should remember is somewhere around 2018 or 19.
After that, I don't remember, you know, markets except for Covid of course. Covid was an outlier. So you know if people are okay with the loss and time value of money, you know then muted festive season etc. Yes, conventionally they have historically, you know, depressed relevance stocks but may not matter given the current context.
A lot of commentary that we're seeing from the results season is a lot of consumption-led companies talking about how rural growth is coming back. Without fail, every major FMCG company has talked about rural goal growth outpacing urban growth. Now one could argue that it's on a relatively lower base, but do you think that this is one big theme to watch out for over the next few months?
Abhay Agarwal: Yes, absolutely. I think we are seeing more government support to the rural economy. Money is percolating down and that’s why we were fairly bullish early in the year. Remember, we had a discussion that how we are bullish on the whole agrochemical space, and I think that space is already laid out pretty well for us and continue to play out because if farmers have more money at their disposal, they like to use part of it for consumption and part of it for increasing their yield from the land that they own or till.
So, there is definitely robust demand for agrochemical seeds that we are playing out and I think farmers have that confidence. Then it will lead to higher farm level incomes and if abundant credit is made available to farmers when they need it two times a year, then I think the rural economy will be in good shape.
But again, farmers are not savers. You know, the farmers typically either consume or spend money on their farm. So the problem with the rural economy coming back is that one, you get one six month window where people spend and they buy, you know, SUVs and cars and motorcycles, consumer items.
But then in the next six months if they don't get good pricing for their crops, again the cycle turns down for the rural economy. So I don't think anybody should build a case to invest purely on the sustaining recovery of the rural economy. It's very cyclical, and the cycles are also pretty short. So that's my caveat to anybody who's looking at the recent recovery in rural consumption to build an investment case around that.
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