Tag: stock market

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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In duel with small investors over GameStop, big funds blink, BFSI News, ET BFSI

Personal Finance

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Across most of America, GameStop is just a place to buy a video game. On Wall Street, though, it’s become a battleground where swarms of smaller investors see themselves making an epic stand against the 1%.

The funds serving the financial elite are starting to walk away in defeat. Big bets they made that GameStop’s stock would fall went wrong, leaving them facing billions of dollars in collective losses. All the wild action pushed GameStop’s stock as high as $380 on Wednesday, up from $18 just a few weeks ago.

The stunning seizure of power gives some validation to smaller-pocketed investors, many of whom are encouraging each other on Reddit and are trading stocks for the first time thanks to brokerages offering free-trading apps. It’s also left more investors on Wall Street asking if the stock market is in a dangerous bubble about to pop, as AMC Entertainment, Bed Bath & Beyond and other downtrodden stocks suddenly soar as well. The S&P 500 set a record high earlier this week, though it fell Wednesday.

Two investment firms that had placed bets for money-losing GameStop’s stock to fall have essentially thrown in the towel. One, Citron Research, acknowledged Wednesday in a YouTube video that it unwound the majority of its bet and took “a loss, 100%” to do so. But Andrew Left, who runs Citron, said that does not change his view that GameStop’s stock will eventually go down.

“We move on,” Left said. “Nothing has changed with GameStop except the stock price,” He also said he has “respect for the market,” which can run stock prices up much higher than where critics say they should be, at least for a while.

Melvin Capital is also exiting GameStop, with manager Gabe Plotkin telling CNBC that the hedge fund was taking a significant loss. He denied rumors that the hedge fund will fail. The size of the losses taken by Citron and Melvin are unknown.

Before its recent explosion, GameStop’s stock had been struggling for a long time. The company has been losing money for years as sales of video games increasingly go online, and its stock fell for six straight years before rebounding in 2020.

That pushed many professional investors to make bets that GameStop’s stock will decline even further. In such bets, called “short sales,” investors borrow a share and sell it in hopes of buying it back later at a lower price and pocketing the difference. GameStop is one of the most shorted stocks on Wall Street.

But its stock began rising sharply earlier this month after a co-founder of Chewy, the online seller of pet supplies, joined the company’s board. The thought is that he could help in the company’s transformation as it focuses more on digital sales and closes brick-and-mortar stores. Its shares jumped to $19.94 from less than $18 on Jan. 11. At the time, it seemed like a huge move for the stock.

Smaller investors were meanwhile exhorting each other online to keep GameStop’s stock rolling higher.

The raucous discussions are full of sarcasm, self deprecation and emojis of rocket ships signifying belief that GameStop’s stock will fly to the moon.

“WHAT IS AN ACTUAL RATIONAL SELLING POINT, (ABOVE 200? 500?) SO I DONT HAVE TO WATCH THIS TICKER EVERY SECOND UNTIL FRIDAY/MONDAY????” one user wrote in a Reddit discussion Tuesday afternoon as GameStop soared. “I HAVE NO IDEA WHAT I’M DOING,” adding that they had other things to do.

There is no overriding reason why GameStop has attracted this cavalcade of smaller and first-time investors, but there is a distinct component of revenge against Wall Street in communications online.

“The same rich people that caused the market crash in 2007/08 are still in power and continue to manipulate the market to get even richer, we are just taking back our fair share,” one user wrote on Reddit.

“hey mom i can’t come up for dinner,” another user wrote. “i’m bankrupting a 10 figure hedge fund with the boys.”

Beyond personal attacks, the battle has also created big financial losses for Wall Street players who shorted GameStop’s stock.

As GameStop’s gains grew and short sellers scrambled to get out of their bets, they had to buy shares to do so. That accelerated the momentum even more, creating a feedback loop. As of Tuesday, short sellers of GameStop were already down more than $5 billion in 2021, according to S3 Partners.

Much of professional Wall Street remains pessimistic that GameStop’s stock can hold onto its immense gains. The company is unlikely to start making big enough profits to justify its $22.2 billion market valuation anytime soon, analysts say. The stock closed Wednesday at $347.51. Analysts at BofA Global Research raised their price target Wednesday – to $10.

All the mania is raising some concern that investors are taking excessive risks, and reporters asked Federal Reserve Chair Jerome Powell on Wednesday whether the Fed’s moves to support markets through the pandemic is helping to push stock prices too high.

Powell downplayed the role of low interest rates and pointed to investors’ expectations for COVID-19 vaccines and more stimulus from Washington for the economy as drivers for record stock prices.

The Securities and Exchange Commission said Wednesday that it’s noticed all the volatility in the market, though it did not name GameStop specifically. The agency said it’s “working with our fellow regulators to assess the situation and review the activities” of investors in the market.

Later Wednesday, the Reddit discussion group where much of the GameStop stock push has taken place, called r/WallStreetBets, was taken private, making it inaccessible to outsiders. Some longtime users also took to Twitter to say they could no longer access it. A Reddit representative confirmed that the group’s moderators took it private but gave no other comment.

In addition, the gamer-friendly platform Discord shut down a text and audio chat group also called r/WallStreetBets for “continuing to allow hateful and discriminatory content after repeated warnings,” the company said in a statement.

Discord said it has been monitoring that group – called a “server” for historical reasons – for “some time” due to repeated violations of its rules, including hate speech, glorifying violence and spreading misinformation and issued multiple warnings to its administrator.

“To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks,” Discord said. “We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate.”



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Nifty ends above 14,500 aided by financials; Sensex jumps 800 points, BFSI News, ET BFSI

Personal Finance

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At close, the Sensex was up 1.72% at 49,398.29, and the Nifty added 1.68% at 14,521.20. About 2077 shares have advanced, 861 shares declined, and 139 shares are unchanged. Nifty bank index traded green at Rs 32,424 adding 1.94%, while BSE Bankex ended at 36,730 up by 1.95%.

Amongst the top gainers were- IDFC First Bank at Rs 50 adding 7.50, followed by RBL Bank at Rs 254 (-4.03), Bank of Baroda at Rs 75 (3.70%), PNB at Rs 36 (2.96%), ICICI Bank at Rs 546 (2.49%), Kotak Mahindra Bank at Rs 1,887 (-2.17%), Bandhan Bank at Rs 362 (1.77%).

Nifty Financial Services ended at 15,614 adding 2.41%. Amongst the top gainers were Cholamandalam at Rs 437 adding 7.01% followed by Bajaj Finserv at Rs 8,924 (6.82%), Indiabulls hsg at Rs 240 (6.75%),Bajaj Finance at Rs 4959 (5.07%) and Power Finance at Rs 122 (4.17).

Other key takeaways

Indian Railway Finance Corporation IPO subscribed fully:
The public offer of Indian Railway Finance Corporation has been subscribed 1.01 times on January 19, the second day of bidding, largely supported by retail investors so far. The IPO has received bids for 126.7 crore equity shares against offer size of over 124.75 crore equity shares (excluding anchor book portion), the subscription data available on the exchanges showed.

The portion set aside for retail investors witnessed subscription of 1.95 times and that of employees 18.27 times, while the reserved portion of non-institutional investors was subscribed 17.4 percent and that of qualified institutional buyers 0.02 percent.

Gold Updates
Gold prices on the MCX in the futures market were weak by a tad and this is in line with international gold pricing. At around 11:38 am, gold on the MCX quoted down by Rs. 44 or 0.09% at Rs. 48850 per 10gm. Silver on the other hand was firm at Rs. 65507 per kg.

Internationally price of gold has gained as a larger US bail-out outweighs any firmness in the dollar. Furthermore, back in India the roll out of the coronavirus vaccine which began on January 16, 2021 is seen as a positive propelling risk sentiment and in turn taking the sheen out of safe haven assets such as gold.

Rupee Updates
Indian rupee erased some of the gain but still traded higher at 73.22 per dollar, amid buying seen in the domestic equity market. It opened 11 paise higher at 73.17 per dollar against previous close of 73.28. The dollar-rupee January contract on the NSE was at Rs 73.32 in the last session. The open interest increased almost 15% in the February series while marginal decline was seen in January series contracts.

Wall Street ends higher:
U.S. stock futures moved higher early Tuesday as Wall Street looked to bounce back from a rough week ahead of President-elect Joe Biden’s inauguration. Futures contracts tied to the Dow Jones Industrial Average rose 166 points. Those for the S&P 500 and the Nasdaq 100 also traded in positive territory.

The move in futures comes after a slump for equities last week. The Nasdaq Composite and S&P 500 lost 1.5%, while the Dow was off 0.9%, respectively. It was the worst week for the three major indexes since October.



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Bank credit grows 3.2% in first nine months of FY21, BFSI News, ET BFSI

Banking & Finance

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Bank credit grew 3.2% to Rs 107.05 lakh crore in the first nine months of the current financial year, against a growth of 2.7 per cent registered in the corresponding period of 2019-20.

In the fortnight ended March 27, 2020, bank advances stood at Rs 103.72 lakh crore.

Bank deposits rose 8.5% to Rs 147.27 lakh crore in the April-December 2020 period as against an increase of 5.1% a year ago, according to the recent data released by the Reserve Bank of India.

The sharp accretion in deposits during the year was due to the safe haven appeal of banks.

In the fortnight ended January 1, 2021, the year-on-year growth in bank credit was 6.7% and 11.5% in deposits, the data showed.

CARE Ratings in its recent report had said the bank credit growth has returned to the levels observed in early months of the pandemic — average bank credit growth in March and April 2020 was around 6.5%.

The bank credit growth in the fortnight ended January 1, 2021, increased compared to last fortnight (December 18, 2020) which can be ascribed to an increase in retail loans.

However, the credit growth remained marginally lower compared with the year-ago period (7.5% as of January 3, 2020) reflecting subdued demand and risk aversion in the banking system.

Lenders are being selective with their credit portfolios due to asset quality concerns, the rating agency said.

According to the recent Financial Stability Report, under a baseline stress scenario, gross non-performing assets of all banks may rise to 13.5% by September 2021, which would be the highest in over 22 years, from 7.5% in September 2020.



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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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New investor? Here are 3 mutual fund categories for you to invest in

Personal Finance

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If you are a new investor seeking to make a foray into equity investing, it may be better to start the journey with equity mutual funds and not jump straight away into direct equity investing and trading. Many investors who start investing in high-risk investment avenues such as direct equities often get carried away by the rush and make mistakes which put their investments and sometimes, the journey itself, at risk. With direct equity stocks, you have to do extensive research before investing and track the investment closely, while in mutual funds, there are experts who make the investing decisions and do the tracking. These professionals understand the stock and market dynamics more closely and manage your money with measured risk. Your first brush with mutual funds carries less risk of leaving you with a bad experience than the first brush with direct equity investing.

Among the wide variety of equity-oriented funds available in the market, you can look at three categories — large-cap equity funds, equity index funds and aggressive hybrid funds — that can help you to participate in the equity market with relatively moderate risk compared with many other equity fund categories.

You can consider investing in these funds through the systematic investment plan (SIP) route that are better equipped to absorb market shocks. SIPs also help inculcate the habit of saving and building wealth for the future. The ideal investment horizon should be long-term — at least 5 years or more.

Large-cap funds

As required by the market regulator Securities and Exchange Board of India (SEBI), large-cap funds invest at least 80 per cent in companies ranked 1st-100th in terms of full market capitalisation. These funds invest in stocks that are primarily included in the Nifty 50, Nifty 100 or BSE 100 indices. These are often stocks of blue-chip companies — large well-established organisations, often in sound financial shape with relatively good earnings potential. They generally have lower volatility and are less vulnerable to adverse changes in the macroeconomic environment compared to smaller companies.

The large-cap category can weather market downturns better during bear and corrective phases compared to other equity-oriented categories such as mid-cap and multi-cap categories. On the other hand, large-cap funds tend to underperform the smaller counterparts during equity market rallies. However, they often generate better risk adjusted returns over the long run.

Axis Bluechip, Mirae Asset Large Cap and Canara Robeco Bluechip Equity are some of the top-performing schemes in the large-cap category. These funds are rated five-star by BusinessLine Portfolio Star Track MF Ratings.

 

 

Index funds

Index funds are passively managed mutual funds seeking to replicate the performance of the underlying benchmark without active management by fund managers. They imitate the portfolio of an index (say, Nifty 50) by investing in stocks that are part of the index in the same proportion as in the index. On the other hand, actively managed funds aim to outperform their benchmarks with the help of fund managers. With no active management, index funds have much lower charges (expense ratios) than actively managed funds.

Index funds are a good option for investors seeking index-linked returns. There are currently 35 index funds in the market tracking various indices. From among these, you can consider index funds tracking the Nifty 50, Nifty Next 50 and Nifty 500 indices. The Nifty 50 is one of the most traded indices in the world and the top-traded derivative index in India. The Nifty Next 50 enables you to invest in stocks that have the potential to become part of the Nifty 50 Index in the future. The Nifty 500 index covers more than 95 per cent of the listed universe on the NSE in terms of full-market capitalisation.

Index funds that have lower expense ratio and less tracking error (deviation in returns from the benchmark) are preferred. UTI Nifty Index Fund, ICICI Prudential Nifty Next 50 Index Fund and Motilal Oswal Nifty 500 index funds are good choices.

Aggressive hybrid funds

As mandated by SEBI, aggressive hybrid funds allocate 65-80 per cent of their corpus to equity investments, while the rest is invested in debt instruments. The higher allocation to equity can help deliver good returns in the long run. Debt exposure helps cap losses in market downturns. These funds are treated like equity funds for taxation purposes.

The schemes under the aggressive hybrid fund category depreciate less during market corrections and appreciate less during rallies compared with other equity-oriented categories. Lower volatility can result in superior risk-adjusted returns compared with many other equity-oriented categories over the long term.

SBI Equity Hybrid, Canara Robeco Equity Hybrid and ICICI Pru Equity & Debt are some of the better performing funds under the aggressive hybrid category.

While the equity portion of these funds is often managed with multi-cap approach, the debt portion is deployed in fixed income instruments with varying maturities, depending on the interest-rate movement in the economy.

Safer start

It’s safer to start equity investing with mutual funds that are managed by investment professionals than with direct equity investing that involves investing and tracking on one’s own. There is a higher risk of burning your fingers in the latter.

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