How are you looking at the overall sentiment for the emerging markets and in particular for India? The mid and the smallcaps too have been outperforming.
It is a fascinating time. Markets are very strong globally. The dollar is fairly weak and that is usually a fairly positive outlook for the emerging markets. Like a lot of other global markets, the emerging markets too have pushed up, including India with gains year to date. Broadly speaking, we are in an interesting phase. We are approaching the US elections. Geopolitical concerns are re-emerging or simply not going away. Yet the markets are pushing higher. Emerging markets still look quite attractive to us. There are better valuations here. But I guess the counter argument to that might be that like all other markets, there are cheap parts of the market and expensive parts of the market.
What do you make of the move across the IT stocks in India and also as a theme playing on global strength?
Indian IT looks very well placed particularly in the context of not only what is going on globally but also the slowdown in the domestic economy. Indian IT also has other attractive characteristics and it is more external as opposed to internal and it is playing into those structural trends which have intensified in the Covid period. It is difficult to build a valuation case around Indian IT or IT generally but obviously it does have structural factors which probably will ensure that investors will continue to look at it and the sector should remain well for some time to come.
Pharma is also making a little bit of a comeback. Within that space, would you still look at the frontliners or across a broader spectrum of pharma names?
In pharma, one needs to know each individual company and what is going on because the space has shown tremendous volatility around individual names with regulatory filings and news flows. Some of the leaders in this space are liable to less volatility and so sticking with the leaders makes sensex but there are some interesting small or midcaps coming through which do have interesting angles to play. It is probably worthwhile having a barbell approach in mainly largecap names and maybe one or two smaller ones as well.
Banks are a problem area for the markets right now. Despite bouts of fund-raising, banks have been the biggest laggards and unfortunately they may have the biggest weightage as well?
Yes, absolutely. The banking sector has its fingers in virtually every part of the economy and with the impact that we are seeing on economies around the world and in India as well, it is difficult to understand from a bad loan perspective, how big the challenge will be and how much government will take part. That uncertainty is clearly keeping investors at bay to an extent. One can argue there is value there but unless there is clarity on how long this downturn is going to last and till a vaccine is found and with so much uncertainty, it is a very difficult sector to play at the moment.
Another factor is the polarised nature of the market. The leaders are getting bigger, be it platform companies, be it pharma companies. IT perhaps is one standalone case where just about every stock is moving up. Will the big only get bigger and the smaller ones consolidate or get left out in the race?
That is obviously a trend which we are seeing globally. It is a real issue for a lot of investors at the moment because these big plays which suck up all the money seem to carry on doing that. However, I think that we are approaching a shift in the market. In developed markets, we are likely to see inflation make a comeback next year. It is hard to believe that at the moment but with all the data coming out and with inflation rising, we will see a change in leadership. This will be a global change and it will also encourage value.
Old economy stocks could take up leadership but not in the near future. It could probably be next year’s story as opposed to this year and leadership probably will stay with the big boys and the money flows will continue to be focussed in the large cap leadership names.
How are you looking at NBFCs? As per recent notes, the post Covid capital raise from NBFCs now aggregates a whopping $3.4 billion. Is this a sector that one needs to look at closely?
The whole banking and NBFC space is crucial in the function it provides to the underlying economy and to the Indian market. Well capitalised NBFCs will prove to be very important for India when the economy starts to get out of this Covid crisis. NBFCs do have the skill set to reach certain markets which the banks still can’t. This space is very interesting and foreign investors like the NBFC space. Obviously in the short term, like the banks, the underlying uncertainty is providing a bit of a headwind to the space, but that would not last forever and there are some very well managed companies with huge opportunity sets. So, it is a very important space and investors should have some exposure to that space.