Tag: et now

Ajay Srivastava, BFSI News, ET BFSI

Banking & Finance

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We will see more and more of this happening because the sheer demand of loans has collapsed in the economy and that is the challenge for the economy and the banks, says Ajay Srivastava, CEO, Dimensions Corporate Finance.

There is a very aggressive home loan rate war out there. Kotak Mahindra Bank has reduced home loan rates to 6.65% till March 31. SBI is giving it at 6.70%, HDFC Bank and ICICI Bank at 6.8%. How are you reading into this? Would the ticket sizes of these home loans be much lower than pre Covid times?
It is an indicator that there is nowhere to lend. Most companies are able to access capital and they have realised that when capital is available at these valuations, why the hell borrow money? Let us dilute. So across the board, we see QIPs, PE fund raising, sale of companies. I do not meet a promoter who wants to borrow money at the end of the day. He is likely to raise capital and keep it in the bank.

The lowering of home loan rates come out of the sheer desperation of not having enough avenues to lend money to. How much can you lend money on personal loans, unsecured loans etc? That is not the smartest way to play the game. Historically, the housing loans have been the most stable platform for most of the institutions. HDFC ruled the roost and would continue to do so because their DNA and the cost structure are very different.

These banks will often come in, play the game and try to get you as a customer but all it tells you is that there are no borrowers of significant kind and they have run through individuals as borrowers because who wanted to borrow, you did not want to lend to and instead are targeting those who don’t want to borrow. So, it is very peculiar. You will see more and more of this happening because the sheer demand of loans has collapsed in the economy and that is the challenge for the economy and the banks. So yes, it is down there but not so much that we get excited.

Would you buy HDFC? It is a fantastic business but the stock is underperforming?
I do not think it is underperforming. The stock got rerated quite sharply. I have a holding in that stock and I do not sell it. It went from Rs 1,500 to Rs 2,800. It got back to Rs 2,500, if I am not wrong. It is an incredible franchise and they have done a remarkable job at doing two things — balancing corporate real estate loans and individual real estate loans, doing side investment as well. And of course there’s the holding company. They hold the best bank in the country, the best life insurance company, the best AMC in the country. That is the India story at the end of the day.

What they do not have is Fintech in their portfolio. So, they have got a problem there. Maybe they will come in there through HDFC Bank. but There is no better surrogate for Indian economy than HDFC as an institution. The problem is it is so over owned as a stock that if FIIs decide to sell or one large FII decides to dispose it off, there will be a large correction in the stock.

As a retail person if you are starting your life, that is the stock I want to keep for my children’s education, for my retirement. It is in a separate category. Do not evaluate it day-to-day. Instead, 17 years from now, this stock should pay for your son’s education.



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The elephant is ready to dance, says SBI’s Dinesh Kumar Khara, BFSI News, ET BFSI

Banking & Finance

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For the first time the intrinsic value of the State Bank of India is being acknowledged by the market, says Dinesh Kumar Khara, Chairman, SBI, in an interview with Nikunj Dalmia of ET NOW.

Things are looking up for SBI. It is the only large bank which has raised capital and where the moratorium numbers are surprisingly better than what even private banks have reported. What helped you?
We have not raised any equity. But we raised tier two bonds and tier one bonds as well. But for both the issues, we could create a benchmark and even raise some MTN also where the pricing was much lower than that raised by any Indian corporate in the recent past. That way, we have demonstrated to the world at large that global economies also have got confidence in India. That is one very important part.

The second part is that for the right kind of risk, people have enough appetite for investing and that is what has happened. Coming to the other question relating to quality, for the last couple of years, maintaining the balance sheet strength has been our major focus and that is the reason when it comes to our corporate book — the legacy book — we have provided almost 89%. In terms of the resolution percentage which happens through various channels and the one-time settlements which would be through the National Company Law Tribunal (NCLT), leaving aside a couple of outliers where we had actually realised almost about 90-95%, on an average our recovery percentage is in the range of 20 to 25%. If you go by that, we have made provision for about 89% of our corporate book.

So, we have factored in the potential shocks as far as the asset book is concerned. That is one of the major reasons why we are in a position to showcase much better quality. Apart from that, the underwriting practices have improved quite significantly. We have brought in place another intermediary layer known as the Credit Review Department. From the point of view of the corporate book, it has gone a long way in terms of improving our asset quality. We took this initiative about three years back. That has started paying off very well. The other aspect is about the collection effort on the ground and that has also been supplemented very well.

What is your view on the economy? Things are looking up now?
Yes, I fully agree with you. The kind of things that have happened right from the day of the pandemic and the way RBI came in and ensured that there should be enough liquidity all around — was a major game changer. That gave a whole lot of confidence in the financial sector entities and the next step was to ensure that NBFCs should not get into some kind of a liquidity crunch.

I would also say that the initiatives taken by the government to ensure that enough cash is left in the hands of those who really need it was another major step. All said and done, in the first quarter, we had seen a situation where there was hardly any economic activity but nevertheless, we had seen that some of the core sectors like iron and steel had started responding well.

From the second quarter onwards, we started seeing the unlock happening and even in the first quarter when there was a lockdown in the majority of the towns in the country, the rural economy was thriving, That was a major plus. From the second quarter onwards, wherever unlocking was happening, there was a definite revival of economic activity.

The third quarter saw confidence coming back. The news about the vaccine in the very beginning of this calendar year and the start of the vaccination process on January 16 went a long way in terms of rebuilding confidence.

Today, some of the sectors like auto, iron and steel, auto ancillaries, all the OEMs, some of the cotton exporters are all thriving. On top of it, the recent Budget announcements have been made to give a push to the infrastructure sector. It will certainly give a further boost to sectors like steel, cement. These are the core industries and when they get into the growth path, naturally the whole economy moves on to the growth path. It is expected that the GDP growth in year FY21-22 would be around 11%.

Normally we have seen that the credit growth in the system is slightly better than the growth in GDP. So, normally we will take a multiplier factor of 1.1. So with that kind of a situation for 11% GDP growth, I expect the credit growth to be somewhere around 12% to 13%.

Right from the beginning, at State Bank of India, we have seen our retail asset books continuing to grow at a very healthy pace. Not only that, the quality has been very good as well. These are some of the factors which gives me a very happy feeling about the economy and as well as the banks.

The challenge for SBI is that you have to take care of all the social obligations as ultimately State Bank of India is the country’s bank. On the other hand, what is good for social obligations is not good for shareholders. How would you manage?
 I do not think so, I would not subscribe to this thought that what is good for the social obligation is not good for the shareholders. I believe in coexistence of all the sub segments of society. Even there, we have come across situations where when we lent money for supporting the social obligations, it has gone a long way in terms of supporting the economy.

For instance, when we started our Jan Dhan Account, it was a zero balance account. Any bank, if they had a near-term perspective, would have seen it more as a liability and as an expense. But we went ahead and opened all those accounts, and today the average balance in each of these account is not less than Rs 2000. That means that we have been in a position to channelise the savings of the largest sub segment of the economy and you would probably agree that it will go a long way in terms of formalising this economy.

With the economy set fot 11% GDP growth, I expect the credit growth to be somewhere around 12% to 13%.Dinesh Kumar Khara

Once the formalisation happens, it is for the good of the banking system. We have to look at it in these terms and similarly when we are supporting people for setting up their ventures through various activities which could be even Mudra loans etc, it is generating employment on ground. As far as the quality of these advances are concerned, it is a journey we have to guide them through. We have created financial literacy centres all across the country. The idea is to really educate people about the benefit of borrowing and repaying on time. It is an investment for building up this economy and the more we invest, the more we will reap the fruits going forward.

How did you convince your employees to stay motivated during the pandemic? The ATMs never dried up, the bank accounts were always working. People’s money was safe. We are looking at an army of about 200,000 people.
In this fight against Covid, all of us were together. We have always communicated with them, we have conveyed to them that we are equally concerned and also we ensured that they follow the protocol right from day one. So depending upon the local administration guidelines in terms of how many people can come and attend the offices, we always ensure that we are fully compliant with the local administration and ensure that our people should follow all the protocols required for maintaining safe distance.

Secondly, our leadership constantly communicates with the workforce and very proactive steps are taken to ensure that the anybody who has suffered from Covid, is extended the treatment in time. We have health workers in our system who have proved their worth quite a lot during this period. They have ensured that not a single person goes unattended.

At the corporate centre, we are very closely monitoring what is the kind of a situation all across the country and wherever required, we have guided them on ground. Partly, it was the precautions taken by people, partly management and our employees being cognisant of the fact that we have to render uninterrupted services and ensure that the wheel of the economy keeps moving. It was a national cause and we demonstrated that we are very much part of this fight against Covid and we will see to it that the economy does not suffer.

Did you get a smile on your face when you saw State Bank of India stock going up 15% after the numbers were out?
Of course! It was a big morale booster and it so happened on that day I was meeting the leadership of all the circles and I could see the enthusiasm in their mind and perhaps they all acknowledged the fact that for the first time the intrinsic value of the State Bank of India was being acknowledged by the market.

I am using a tag line saying elephants can also dance. Is the State Bank of India ready to dance now?
I would say that we have gathered the required muscles for any elephant to dance. For dancing, the muscle has to be very strong so that is something which we are focussing on for quite some time and now I think we are in a position to dance.

So let us define what is in front of you. Muscle is CASA which you already have. There is a clear path to economy. Let us put the two together. Are you on the brink of a new credit cycle?
Yes, we have thought about how we should move forward. The retail engine is doing pretty well and so we will continue to consolidate on that. When it comes to the corporates, I would say that the SME and the large corporates would be the two. Capacity utilisation as of now is upward 55% in the economy. When I slice my book on corporate advances, 70% would be about term loans and 30% would be on account of the working capital. Normally, capacity utilisation and the working capital go in sync. As the capacity utilisation improves, the working capital availment starts improving.

As of now, the working capital availment is not very high and that will be addressed. Secondly when the capacity utilisation moves towards say 70-75%, people will start looking for creating new capacity and that is when we will start seeing a lot of new investment proposals. It is not that we do not have investment proposals. We have got a very excellent pipeline when it comes to the infrastructure and road sector, but this pipeline will actually grow and that will show up in our credit growth numbers also.

Also, what we have seen is that when it comes to small ticket loans, co-lending is perhaps the way forward and that is how we would like to support our smaller SMEs. I would say that we have invested well in terms of creating our capability in terms of addressing the need of the economy and we are actually very eagerly waiting for the moments when we can start lending in a very big way.

Are you consciously trying to be number one in all the subsidiaries also with the exception of life insurance?
I would put it like this. We would like to have our natural market share. For all the financial sector activities, what matters most is the distribution. We in State Bank of India have the largest distribution network of more than 22,000 branches, various sub-segments of the financial sector for instance, insurance — both life and non-life — generally have a preponderance of the agency channel. Our companies also have those channels. They have got the additional advantage of the bancassurance.

Similarly, when it comes to the asset management company, we have all the channels. We are into bank, IFA, we are into national distribution and we are also in corporate distributions. We are ensuring that all our companies are equally vibrant. In addition to that, they should have very active bancassurance channels, working like a second engine for all of them. It is my natural ambition that we should be all number one.

The home loan market is a very competitive one. You are growing a market where competition is large and technology is at play. Why are you so keen to grow that business?
In a portfolio, there are various sub components. I feel home loan is one such activity which actually encourages the core sector quite a lot. Unless and ,until home loan grows, the core sector growth can get stagnated. Being the largest player and having the largest reach, we are trying to see how we can improve the efficiency in operations.

Efficiency in operations will help us in cutting our costs. Our credit cost is already quite low as far as home loans are concerned. If at all, operating costs also come down and with the kind of CASA which we have, we would be rather the market leader in terms of pricing also. That is what my ambition is and I would actually like to price home loans at a right price point. A very large population of the country still has an aspiration to own home and the younger generation is also aspiring for home at a much early stage than earlier generations.

With transparency in pricing, we were in a position to encourage such people to come forward and acquire homes and help them to accomplish their dreams.

Do you think home loan rates and fixed deposit rates in India have bottomed out ?
When it comes to liabilities, the rates are also a function of the inflation and more so in a economy like ours where a very large population does not have the benefit of any kind of a social security. For them, the interest earned on the fixed deposit of the bank or for that matter the postal deposit is he main source of earning on an ongoing basis. We have to keep in mind the interest of a very large segment of depositors in mind but at the same time it is a very fine balance which we have to maintain. Ours is a growing economy. We have to ensure that the interest rate for the lending also should not go up significantly. That is something which keeps all of us busy in ensuring that the fine balance is always maintained.

We should be in a position to maintain the interest rates on deposits and may be home loan for some more time to come at this rate, but as far as deposit rates are concerned, it seems to have bottomed out.

One fault line and which is a legacy problem for SBI is the cost to income ratio. It is a challenge which you have inherited. How would you address that challenge?
I fully acknowledge that this is a major challenge and I would like to also mention that there are certain rigidities in the cost structure of the bank. I would rather like to focus more on the income stream. We have got about 23000 odd branches and we have started investing quite a lot in terms of the business correspondents (BC) and customer service point kiosks (CSP) also. Today we have got about 79,000 odd CSP kiosks. Wherever possible, we were trying to keep cost in check.

Secondly, we would like to significantly improve the income stream from each of these branches. I have actually given a call to my top leadership team to identify opportunities through which they will generate more and more income. It can be locker income, it can be cross sell income, it can be any fee-based income. For each of the branch, there will be a focus for generating income.

What about YES Bank?
When we went into YES Bank, the market reacted quite negatively for our stock but when we look back, it was a major step in ensuring the financial stability in this economy. If we start evaluating that decision, the way the bank is coming back on track, I would say it was the right decision at the right time.

But it will remain an investment and whenever the time comes, you would like to monetise it?
It will remain an investment but the time to monetise is not now.

Two-three years?
Time will tell how the market will be at that point of time. But nevertheless, I always believe that price is a refraction of the intrinsic value. Once the bank is on the right track, the market will reward it.

How do you want the world to remember your legacy? What is your vision?
Legacy is a derivative of what a particular leader does. From that point of view, I would say that I have got a very sharp focus on ensuring that the efficiency of operations are excellent and that should get reflected in the numbers in due course.

How has life changed for you in the last four-five months? Anything that keeps you wake up at night?
Discipline is very integral to the functioning of any CEO and that continues to be my area of focus also. But I have earmarked some time for myself and I normally try to stick to that. But if it involves travelling etc. then I have to compromise. So, there is a slight change in my disciplined behaviour or the schedule but apart from that, many of the priorities for the bank that keeps on engaging my mind and every new day is a new day for me.

What is the lighter side of Dinesh Khara which nobody knows?
I will have to think more about it, I do not know if at all I have any lighter side.



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Shyam Srinivasan on why Federal Bank restructured book is half of estimates, BFSI News, ET BFSI

Banking & Finance

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Customers who have gone for loan restructuring between December and March 31 will be roughly about 1-1.2% of our portfolio, says Shyam Srinivasan, MD & CEO, Federal Bank

Earlier, you had projected that Rs 3,500-crore loans will need to be restructured but the request has come for only Rs 1,500 crore. It is great news but how did this drastic fall come about?
The big difference between last quarter and this quarter is the reality. People have started seeing businesses doing better and generally the preference is not to be a restructured customer. December end is one milestone as in the retail and corporate customers had a chance to seek restructuring and we have seen experientially people have not opted to. Either they have paid or the situation is too bad for restructuring. I think this has worked out quite well. Customers who have the ability and belief that they will do well and will recover have sought restructuring and that number thankfully for us between December and March 31 will be roughly about 1-1.2% of our portfolio as opposed to our original belief that it might be higher.

We are largely out of recovery mode and are in growth mode now. Credit growth has increased. How do you think retail demand will play out – home loan, personal loan, auto loans? Also how will corporate side fare in comparison?
Retail has done well on a year on year basis. In terms of growth, it has been quite encouraging, particularly some products. If you really anchor January 2020 as one and then December 2020 as the other, in most businesses. it is running at about 100-120% of the January run rate. I believe the run rate will pick up from here as things improve and the economy shapes up more constructively. Thankfully for us, our gold loan business is doing remarkably well and our erstwhile SME business (captured as both commercial banking and business banking) has registered very strong sequential growth and YoY growth is almost nudging early teens.

Other than core large corporates where we saw de-growth, we believe all the other businesses have started seeing a very positive trajectory and that should continue. The corporate will be a little more muted. Also, there is probably an irrational pricing exercise. We are watchful about that.

Do you think a recovery in the corporate growth could be delayed? Will the budget play a vital role? Is it linked to a new capex cycle?
The pick up in corporate growth is probably going to be a little more delayed. We are all hoping the Budget sets the tone. It could give some fillip in certain areas. There may be a more meaningful demonstrative action around the longer tenure infra and nation building activities which typically create downstream exercises as projects go on-stream. I believe that maybe by the second half of this calendar year, a pick up will come through and that will filter through the system.

On the asset quality front, once the SC judgement is lifted, will it bring pain to light or will we have further normalisation of irregular accounts?
I think it is likely and I do not know if the Supreme Court has heard everybody a judgement may be passed sometime in this quarter, this month or next and that will bring to a close the lack of clarity on how to deal with this whole standstill but from a business point of view, we have all ensured that the treatment is to be given exactly the way if the accounts were to slip or otherwise. We all hope that some clarity emerges in the next few days and that overhang goes away so that people know where they stand and how to progress.

But will the environment pick up and things improve? There is vaccine-led optimism and there is a certain sense of comfort that the Budget may provide stimulus. A bunch of stuff is happening and could lead to a more encouraging recovery if not immediately but certainly by the second half of 2021.

Does a low rate environment pose a risk to the bank’s deposit franchise because people will now look to switch to higher yielding assets?
This is a little in the realm of speculation, We do not know which situation plays out but I have seen for many years that these theories come but the market and the banks and the system are mature enough to find that almost everything coexists. There may be minor tweaks here and there, but I do not believe that we will come to a day where banks deposits would not grow but all other categories will grow exponentially. That maybe a little far fetched.

There may be minor shifts in trajectory but not material. The banking system for a country like ours which is relatively unbanked even today is a very deep opportunity. I do not think deposits will evaporate and all gravitate to one asset category which typically tends to be the riskier category, I do not think that is a reality, at least I cannot foresee this for many, many years.

What is the outlook when it comes to digital marketing? What is Federal Bank doing to tap that opportunity?
For the first time we have dedicated five pages to outline the various things that happen digitally, just to point out we are now truly a meaningful player with digital capabilities. Over 86% of our transactions are digital whether it is account opening or transaction banking. Our digitally originated business is now a very material part. Products like personal loans are originated digitally. There is no hand touch, no human involvement, it is all technology driven and is completely automated.

In terms of transaction banking, our range of offerings compete with absolutely the best and we are seeing volume pickup on that count. That is how we have seen sharp growth in CASA and all this is driven by the digital capabilities and that will remain a focus area. We are the first and only bank probably to do facial recognition for our employees to log into our systems and the first and only bank probably. So all our staff show their faces and log into the system.

The RBI stability report says that NPAs could go as high as 14% system wide. However, the results from private banks seem to suggest otherwise. What is your outlook?
I do not think it is a question of who has got it right or wrong. It is actual scenario planning versus what happens on the ground. If every scenario planned were to happen, then that is one outcome but the reality on the ground sometimes tends to be better and sometimes adverse.

In a stressed situation, people may react very differently. When the forecasts were made, some assumptions were made but thankfully we are doing better than the assumptions and all of us hope that it continues to do better. Within this also, there will be a spectrum. Some will be at the better end of the spectrum and some for historic reasons could be on the other side of the spectrum. So you cannot generalise on this.



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Samiran Chakraborty, Citi, BFSI News, ET BFSI

Banking & Finance

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2021 could be a year when both the RBI and the government will have to plan for at least some amount of normalisation, says Samiran Chakraborty, Chief Economist (India), Citi in conversation with ET NOW.
Digitisation and work from home has changed fortunes of Indian IT sector in terms of availability and optimisation. When the real economy shapes up in the post Covid world, are these factors which could surprise us and create a lot of upside?
It is quite possible. It could work both ways. On the positive side, we have seen a significant improvement in profitability in the September quarter numbers for companies. Even if you adjust for factors like travel cost or advertisement and promotion costs or to some extent even wage cost, there still seems to be a residual element which could be attributed to productivity improvement.

On the other hand, because of all these physical distancing protocols to be maintained in different kinds of services and in some cases even may be in manufacturing, there is a decline in productivity which has led to somewhat higher prices — part of the reason why inflation has picked up during the Covid period. It is not just simply because of the lack of mobility issue but it could also be due to the fact that companies are being forced to abide by these physical distancing protocols leading to some productivity decline.

Both the things are working simultaneously but my sense is that over the next couple of quarters, looking at the productivity data and for wage cost, travel cost etc. we will have a much better sense of how much permanent improvement in productivity is contributing to this profitability.

We have got three important data points which are different. Bond yield is at a multi-year low, forex is at a multi-year high and rising fiscal deficit. We do not know how things will move in the Budget. How important are these three variables to judge the economy?
At least for the first two, there is a strong element of RBI intervention which is keeping those two variables where they are. Fiscal deficit is more in the control of the government to decide where they want to put it. Now while we are all discussing the nascent economic recovery, we have to keep in mind that this recovery is to some extent on the crutches of the fiscal and monetary stimulus and 2021 could be a year when both the RBI and the government will have to plan for at least some amount of normalisation.

It may not be done immediately but in the latter part of the year, normalisation will probably become a necessity and that is where these variables will start playing an important role in the economy. We are not thinking of any policy rate hikes in 2021 but to some extent surplus liquidity in the banking system might get normalised which means that rates in the system go up a little bit. So, the 10-year government bond yields can move up to about quarter over the course of the year. On the exchange rate side, the big dilemma is that because we are having a current account surplus or at least a much lower current account deficit and huge amount of capital inflows, there is a constant pressure on the currency to appreciate which the RBI does not want to do because we are simultaneously following a self-reliant India campaign and putting some sort of import curbs to promote domestic manufacturing.

If the RBI is intervening so much that it is creating surplus liquidity that will militate against the RBI bid to tighten liquidity at the latter part of the year, how RBI manages between the two is going to be very critical for 2021.

On fiscal deficit we think it is possible for the government to target about a 4.5% fiscal deficit in the Budget this year on the back of slightly lower than 7% fiscal deficit and GDP last year and that is possible by so much of expenditure compression. But if the economic growth is normalising, then the revenue side will improve on the tax revenue side while on the non-tax revenue side, a lot of divestment proposals which could not fructify in FY21 might be carried over to FY22 and help the FY22 revenue collection. 4.5% fiscal deficit and GDP in our view is quite possible for next year.



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Mark Mobius is bullish on 3 themes in India, BFSI News, ET BFSI

Personal Finance

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Low interest rates, weak dollar to power fund flows into emerging markets, says Mark Mobius of Mobius Capital Partners

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.



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