Month: January 2021

What really makes the financial market is a combination of fear, greed and FOMO and they all were tasted in 2020. What do you think will be the dominant behaviour of 2021?
Fear was definitely the big issue in 2020 and in 2021, this is going to go away because gradually people are going to realise that they cannot be afraid of Covid or any other illness. We can overcome these illnesses. A number of vaccines have been developed, a number of treatments have been developed and we should not be fearful of any of these illnesses. I am very optimistic for the New Year.

They say markets always climb the wall of worry and they always come down on ray of hope. Nine months ago, brokerages were racing to find the lowest point for the market. Now they are racing to find the highest level of the market. Don’t you think there is too much excitement? Will 2021 be a year of great return?
It would be a year of good returns. I cannot say it will be a great return as we have had a tremendous recovery. Since the beginning of last year, the markets have done very well and particularly India has done exceedingly well. We have quite a bit of money in India and I believe that Indian market will do quite well but you must remember that the economic statistics this year are going to be very good for countries all over the world because we have a situation of so called negative growth or shrinkage of economies around the world almost without exception.

When you compare 2020 to 2021, the numbers will look very very good. That will give a lot of optimism to the markets. Now the hope is that the central banks will continue to feed liquidity into the markets and I believe they will. The US Fed has already signalled that they will do that and I believe we are going to have a good market this year.

In the October to December quarter, emerging markets made a comeback and the dollar declined. Was this more of a year-end adjustment or is the trend where money is moving back to emerging markets and the decline in dollar is going to be the big trend for 2021?
That is a very important point because investors in emerging markets worry most of all about the currency. That is the question that we most frequently get, how about the currency? In some of these emerging markets, there has been an incredible appreciation against the US dollar. The Brazilian real is in double digits of growth against the US dollar and you find all over the world many of the emerging market currencies have strengthened against the US dollar.

I believe going into this year, this trend will be maintained or even increased because more and more money is looking for home outside the US because interest rates are very low in the US and in Europe and they are looking for better returns and that means emerging markets. I think the trend will continue with slackening of emerging market currencies.

What should one expect from US tech stocks for 2021 because that really is the anchor investment for the world — for ETFs, for S&P investors and even for US bluechips investors?
The US tech stocks are in such a dominant position that they will continue to do well. I am not saying they are going to rise dramatically but I think they are going to maintain the leadership and will continue to rise but the real opportunity will be outside the US in countries that are now taking advantage of the technology, particularly in the frontier markets where technology’s having an incredible impact on businesses in every direction.

The US tech stocks are in dominant positions in many areas. Take Apple. I am in Dubai. If I go to a mall, I see a line of people waiting to get into the Apple store and that gives you an idea of the tremendous dominance they have. Microsoft is in the same position but as you said, they have gone up quite a lot already and the appreciation probably will not be as dramatic as we have seen before but the emerging market tech stocks in India, in China in other parts of the world will do better and you will see better appreciation.

Do you think India is in a very formidable position and suddenly stars have aligned for India? There is a focus on China plus one policy which is bad news for China and good news for countries like India. Also given what is happening to crude prices, a lot of money may not go to Russia and even Brazil.
I believe that the performance of the Indian market is attracting more and more investors around the world. They realise that there is an incredible opportunity in India and you must remember China will continue to do well but from a bigger base. So the percentage increases will not be as impressive as in the case of India. And you must remember also that the technology that is being developed in the US, in China and now in India, is going to have a bigger impact on the Indian economy because for the first time many of these technologies are being used and disseminated throughout the Indian subcontinent. This is a very exciting development.

The last time when we spoke, you said you owned three stocks in India. Are you planning to make that four or five this year?
I would like to but we have an idea that it is important to have a few but very good stocks. We do not want to have more than 30 stocks in our portfolio and of course we must be diversified. India is the biggest now but we want to be diversified. We are looking for better opportunities all the time and that is true of the stocks in India too.

If we have to split your pie into various countries at what percentage is India now?
India now is 20% of our portfolio which is the largest allocation. It is followed by Korea, Taiwan, China. Then we have a little bit in Turkey and South Africa, Brazil. Brazil is significant at about 10%. We are pretty well diversified but India is the biggest.

What do you like within India? Can you give me a flavour of the themes and the ideas which you currently have?
You might say we are standing in front of a train that is running at high speed and with lots of cars and there are great opportunities. In our portfolio in India, we emphasise the medical area and that does not mean pharmaceutical but medical services is one area; education is another area. Third is anything related to infrastructure, manufacturing equipment used for infrastructure and home building. There is going to be continuing demand in India but we are not biased towards any particular industry. Rather we are biased towards companies that have good corporate governance, good ESG credentials. We work very closely with companies in which we have invested to improve their corporate governance. We believe that good companies, regardless of what industry they are in, are going to perform better if they improve their corporate governance.

Does that mean that you will not buy across the world anything which is non-ESG compliant, that includes perhaps thermal power projects even PSU companies?
Yes, that is a very good point. Power and general mining are non-ESG compliant but we will not be dismissing these industries out of hand. However, if we find an industry — be it a power producer or mining company — who are improving their corporate governance and ESG credentials — then we would favour that industry.

But it is true that it is difficult to find such companies. For example, in India, the largest part of the power is coal and the companies that produce that are polluting and it is very difficult for them to change unless they change the fuel or move into a different way of producing power such as wind or solar or some other type of non-polluting power generation.

Do you think emerging markets for next three years can give double digit returns?
Oh yes no question about that because you are getting economic growth that is high single digit. In the few years that will turn into double digits and the economic growth rate is reflected in the stocks that you buy.

At what point in time you would say that liquidity runs the risk of reversing? Could it be inflation, could it be global growth?
In modern monetary theory, there is a whole new thinking about money supply, inflation etc. In the book that I have just written, I have written that we are now in a situation where because of technology, we are getting better productivity and lower costs. So we are actually seeing a deflation. Central bankers are going to have to begin thinking about a completely new paradigm and if you look at the case of Japan, they have been printing, printing and printing but no inflation. I personally think it is a wonderful thing particularly for people in lower income brackets as they benefit from deflation and lower costs. It is going to be interesting to see how the central banks react to this new philosophy.

If a client walks up to you and says here is $5 million you are free to invest, give me options. I am looking for absolute returns, I can digest 15-20% volatility. How would you invest that?
Well, of course, they have those parameters. I would definitely put 70-80% in emerging market stocks, equities and the rest maybe in the US market. But I would say all of the portfolios got to be equities and not fixed income and it should be in emerging markets because if they are willing to tolerate the volatility that you see in emerging markets, then that is where you want to put the money.

Would you throw in Bitcoin and gold in that portfolio?
No, I would not put Bitcoin in the portfolio because Bitcoin is very difficult to evaluate and to put a price on. It is purely based on faith and it is quite opaque. It is difficult to know where the supply is and where the buyers are etc. I would not put any into the cryptocurrencies.

Aren’t such high levels of retail activity in the equity market classic signs of high participation and euphoria?
There is no question there. There is a gambling element that you see and of course Robinhood app is probably a good example where people can trade almost free of charge. Of course, there are hidden charges that you do not see but people have the impression they can trade freely and move from one stock to another. And yes, they treat it like a video game in many ways.

Lots of young people are piling into these stocks but you must remember that is only one part of the total market. The biggest part of the market is pension funds, ETFs and other funds that are more rational in their investment behaviour. But there is no question that individual stocks will be pushed all over the place by traders and so called gamblers using low- cost techniques to trade. That is particularly true in the US but increasingly true in emerging countries as well.

India has received lion’s share of flows which have gone to emerging markets. For the quarter gone by, the number was over $6-7 billion. Why have Indian markets seen such a large influx of flows when frankly on a headline front only incremental changes have happened and nothing big has happened?
The market is looking forward. The largest part of the money now particularly with this tech revolution taking place is looking forward. For example, a company like Tesla was losing money for many years but the stock price kept on going up. People are looking five years, 10 years in advance and with such low interest rates, the price earnings ratio becomes less relevant.

For example, if you have an interest rate of 1% the reciprocal is 100 times. You can have a PE ratio of 100 times or more and of course if you have negative rates, then the PE ratio can be anything. People are saying okay this company is losing money now but it is growing. Its sales are growing and the return on capital is good and I believe in five or 10 years it will be an incredible company so they drive the share price up. Now of course some of this ends up in disaster but a lot of it has worked out. So, you have to take a different view of how to evaluate the market because of the deflationary environment that we are in.

2020 was an absolute blowout year for Tesla. Should one look at the market cap of Tesla and get excited that it is the future of automotive and the decline of crude has started or can we ignore the price action in Tesla as more like a bubble?
It is not necessarily about the automobile industry, it is about the electric automobile industry. Electric vehicles are becoming more and more popular around the world because governments are favouring these types of vehicles. So the automotive industry will survive and thrive as they adopt the EV model.

Now that means demand for gasoline will not be as high as it was in the past. If the electric vehicle market covers the globe and that is no guarantee, there are still millions of people that will be using gasoline powered engines because either it is cheaper or because the availability of electricity is not there.

If you look at a lot of the frontier markets, electric power is very unreliable and it is not easy to plug in your car to get electricity. So I believe there will still be a demand for petroleum. And you must remember petroleum use is not only for transportation although that is the largest use. There are many other uses for petroleum — plastics and so there will still be demand. There has been quite an appreciation of various commodity prices.