Don’t get caught up in economic sectors in short-run: Kunal Kapoor, Morningstar
Companies with tech advantage have an edge in today’s world as they can change trajectory.
What is the bird’s eye long-term view on the state of the market? While on one end, the government is doing its bit to counter the economic slowdown and has started off with cutting corporate tax rate, introducing reforms for the real estate segment as well as disinvestment, it seems like there is a lot more in the pipeline?
The path is good and it just shows the amount of work that needs to be done to get to where you need to be. India has done a lot of right things, but a pretty big slowdown has taken place in the manufacturing economy around the world and you are seeing the impact of that here now. What is interesting is when you look at the Indian data, it reflects more of a localised issue as opposed to global issues.
The China-US trade has been impacting some markets like the US and China materially. In India, there was an export slowdown but there was also a domestic slowdown which is what the government is trying to contend with fully.
Where does India sit when it comes to the map of key global markets? Of late, we have seen a resumption of fund flows, Is that just on a better environment on Wall Street post the trade issues having kind of gone into the background? Are we still falling behind other emerging markets?
There is a little bit on both sides. Clearly, we are living in a world where a few headlines tend to drive flows. For better or worse, we are definitely seeing that and one day there is a trade agreement and the next day, there is none and that tends to drive a lot of interest.
With India, the big challenge if you are a FII is that the markets are continuing at a strong pace and have hit highs. The currency has been weak and certainly from the perspective of someone with a rupee account, it has gone well; but someone who sits in a say Dow-based account, it has gone less well. When you think about the Indian and other emerging markets, you cannot just look at it from the perspective of the actual returns. You have to look at the currency impact as well and that certainly have been negative for India of late.
It seems a truce is likely very soon between US and China. Things are headed in the right direction but it is not done till a peace accord is signed. Which way do you think the entire situation is going? Can India derive benefit if indeed China were to lose?
Your guess is as good as mine but one way I would think about it is that the trade war has been going on now for a few years and if you look at whether viable alternatives have emerged in a meaningful way in the short run, the answer is no. I would say that it has been less about a shift from an emerging market to the next. Clearly there has been some aspect of it. But the bigger issue is that there is a realignment, away from this notion of global trade being a great thing. More and more governments including in India and the US are trying to do things locally, I do not know if that is going to mean a willingness to pick up and shift from one market to the next. I would venture to suggest that in the short run, more and more attempts would be made to do things closer to home than ever before.
Headlines helped to decide market mood and we have seen the government here make all the right noises. We had Ray Dalio speak out last week talking about how he perceived the Prime Minister being very active in taking the right risks and attempting new policies. But do you see value currently in the market in terms of picking up something right now?
In terms of Indian markets, I just look to what our analysts are doing right now. When our analysts put together portfolios today, they are under the benchmark when it comes to Indian exposure and particularly had been underweight in certain smaller and midcap parts of the markets. Obviously, those have corrected a little bit and our analysts have been indicating that they are adding back a little bit. But certainly, from a global perspective, our analysts are not saying that India is favourably positioned from a valuation perspective.
Are there certain themes you are interested in — be it consumption, cyclical or a certain strategy — with which you approach India?
One of the things that always surprises me in India is when you look at the holding period. By that, I mean how long people invest in certain things. People are constantly trading — trading stocks, trading funds — and that is not necessarily the right approach.
Ultimately, India has a positive aspect of having this demographic dividend that is bringing more people into the workforce, giving them the option to contribute which if you are a company that is ultimately dependent on the Indian economy, the Indian consumer, in the long run that should be positive for you.
From my perspective, you have this great opportunity to identify good companies with reasonable prices and just own them or identify good mutual funds. We are comfortable with the process and understand what it is and just own it for the long run. That is how I think about investing in India I because it has good long-term macroeconomic factors. I would suggest not to get to caught up in the short run economic sectors. It does work over the long haul to be disciplined in that way.
‘90s was the beginning of the IT boom. It was the time Infosys, HCL Technologies and Wipros of the world were formed and the world discovered them. Then came some of the old economy cyclical names. Then came the consumption boom in the early 2000s and the last five years have really seen the financialisation theme come to the fore. Would the next big set of movers come from the financialisation, the unorganised sector coming to the organised sector as part of the financial sphere or will there be a new theme which is going to dominate investment?
We can all agree that the way technology is impacting every industry is critical today when you are doing any analysis. Our analysts will tell you that the exciting companies and the ones that are worth keeping an eye on unnecessarily always are the ones that invent technology. But it is the ones that are using technology to transform the way they do their business. It is included in the financial sector where you have complete digitisation taking place.
People are changing the way they provide experiences whereas the ones you might have needed to go into your financial institutions, may not need to do that in the future. You can do that all in your phone. All these are exciting things and if I am an investor, the question I am asking is less sector focussed and focussed more on companies I like. I am looking at whether these companies have an opportunity to transform their business using technology. Even in old economy sectors like agriculture, some fascinating things are happening that can really change the trajectory for companies long-term because ultimately, the stock market is basically trying to provide prices based on a company’s ability for growing. You are just kind of discounting it back.
Are manifold returns still possible or are you moderating return expectations?
It is always good to have moderate expectations and you particularly should have moderate expectations after such a strong run around the world. The reality is that despite all the noise around the world in the past three years, equity returns, fixed income returns have been strong with the possible exception of Europe which has been much weaker.