The bigger issue was not so much the equity markets. It was really how the basis risk on the hedge fund trade was appearing that it would completely blow out. And they responded to that and they said, look, let us pause for 90 days or thereabouts.
The other way it could have played out was the fact that they would have completely changed the face of how the global business is done, right back to the early 1970s, 1971 when the gold standard was decimated and 20-25 years of Chinese disinflation so the globalisation and the way that has played out.
So if that is not happening, one of the easier ways to look at it is that India gains in the first order advantage as even you have put out, which is to say that if the duty on India is less than the duty on every other country, that is relative benefit to India exports to US a very small percentage of its GDP and therefore there is no direct impact in and of itself. But here we tend to forget that there is to a second and the third order impact that happens. The second order impact clearly is that dollar is falling, crude is falling because there is implied assumption of recession now getting priced in. We cannot have it both ways in a way that the recession will happen, which is why crude will fall but India’s exports will not get impacted, so that is point number one.
Point number two, which is the third order of impact that will happen, is that if China is not allowed to export into the US, then it will try and flood every other market that it is allowed to export to.
Now we have seen this story play out with steel in the year 2015 to 2018 onwards, where they started supplying to the Philippines, Thailand, and the Asia-Pac region. The same thing could happen and India does export to a lot of these countries; even within India, China could start dumping a lot of material within India.
So, it is a little more nuanced situation that we have been presented with. We cannot have it in one way or the other. It is one of those times where you need to take a calibrated and balanced call. We can discuss how it plays out in valuations in the next section, but I think it is much more nuanced than the way we see it in the first order.
The point that you were highlighting with respect to the crude fall that we are seeing that maybe the markets are now factoring in a possibility of a recession and when this scenario is seen to be hitting the markets, the picture was not that great. Help us understand in context of the Indian markets what should be the strategy right now because despite such days where we are seeing one way move up of all the global markets across, the trend of late has been risk off and we have to face that because though the people are hiding in the largecap space, but the smids have fallen very drastically and that is a bigger damage to the people’s portfolios. So, what should be the strategy for the viewers right now and what should be the learnings from the past recessionary cycles?Jigar Mistry: So, see, let us talk numbers for a while. So, let us say if you take a five- or ten-year rolling return data, you will find that the EPS and the share price growth have always been very well coordinated. You can take an index of your liking or you can take a company with a long enough trading history.
You will find that whatever has been the EPS growth or a free cash flow growth, the share prices rise only in an equal proportion.
However, in the past few years, especially in the small and midcap space until September 24, that got dislocated in a meaningful fashion. I will come to the numbers there, but I will first run you through why that happened. So, if you look at the overall ownership of equities in India, retail owns a smaller proportion than FIIs in total. I am talking retail excluding mutual fund, ULIP, and life insurance. So, net-net in their homes, retail and HNI investors own more, slightly less than FII ownership.
However, when you split this in two parts, you take the top 250 companies, which will be the large and midcaps, the FII ownership is predominantly housed here, whereas in the small and microcaps, so companies number 251 on the chart, retail owns three times dollar to dollar compared to FIIs.
Now this has a meaningful implication when I give you the next set of numbers that when you look at the bottom of the market in COVID, March 2020, take each and every listed entity, multiply it with retail ownership, that number totalled to something like 16 lakh crores. By September 2024, that number had ballooned to a whopping 67 lakh crores.
So, as a cohort, retail investors generated a wealth in excess of 50 lakh crores and obviously 50 lakh crores sounds like a lot, so to put it in context, how large that number truly is, whatever India as a country saves in real estate, gold, silver, equity, debt market, and bank deposit on the net level, last year was around 14 lakh crores.
You have about, say, 30-40 crore Indians saving about 14 lakh crores. You had two crore active Demat account holders who had generated 50 lakh crores in wealth, predominantly in the small and microcap space.
Many of them were first-time investors and they started thinking that I have to keep investing in the same smallcap, same illiquid stocks and mutual funds, and it is a one-way street, things never reverse.
By September 2024, if I take the smallcap three-year cagr, the difference in EPS and share price was something like 12% compounded into three, it is about 30-35% froth that had gotten built in.
Now, if over five years, your EPS and share price always aligns and over three years you are sitting at a 30% froth, there are two ways in which this situation can resolve.
One, the indices flatline and earnings catch up, but that typically happens when the investors are a little more mature and have been in the markets for long and in absence of this, you start seeing a complete collapse, which is what exactly has transpired with the smallcap index.
Now, today, if I take the three-year cagr, in largecaps we are below earnings growth, the share prices are now below earnings growth and in smallcaps they are fully well aligned.
So, the only question remains is that when you pull the pendulum so far to the right and today it is at equilibrium, does it stop at equilibrium or it goes in the opposite direction with an equal force so that the equilibrium can be established?
Our sense is that whereas things and news flow is great right now, there needs to be a compensatory effect for the pendulum to swing in the opposite direction and that would be the time when you would have seen us at least as Buoyant Capital, so that is broadly how we see the markets over the next few months and years.
A lot of portfolios will have to be rejigged and reallocation will have to be made. How should one look at doing that? I mean, look at gold also which is considered to be a safe haven in this market but that has also run up quite a bit, it is sitting at record high levels. How much of an allocation can one make to gold? Is this the right time to get in? Can we do that or how should one reallocate their portfolios now?Jigar Mistry: So, we can look at it in two parts. One is the broader asset level call and a lot of people may be far more qualified than I am to make that, but the only way in which I see this is that if you are trying to upend global order and rule-based system that has been set for at least 60 years, 70 years now, 65 years or thereabouts, since Richard Nixon yanked the dollar off the gold standard in 71.
So, you have at least seen it for a fairly long period of time, 50-55 years and now if you are trying to set up a new system, where do you go to.
Every country would want to fall back on something that they know, which was gold physical asset, you cannot increase supply beyond usual levels and therefore, sentimentally speaking gold is a great asset.
But I leave it to the experts to decide on how much weight, etc. Now within equities, I can run you through the way in which we are approaching investing to that and there are a few sectors, if we run through the same mechanics of EPS growth and share price growth with sectoral slabs into place, then we realise that a few sectors are reasonably well poised, like say banking, financials, or healthcare, or say cement and materials in general and therefore, those are the sectors where Buoyant Capital which is a fund that I have run is focusing on, that is sectorally speaking.
Within market caps could have gauged from my previous predilections, that essentially, the fund is basically focusing excessively on the largecap space for the past six months, that has been our scenario and as I said, if you get an opportunity on the other side, which is the smallcap index cracks more, that is when we will be looking to have a larger exposure to smallcaps.
Now, there have been times in the past when we were in excess of 60% in this small and midcap space, immediately post COVID, immediately after the Russia-Ukraine crisis, but today is not that time, at least in the collective wisdom of Buoyant Capital.
Within financials, any particular pocket that is looking interesting to you right now between the different ends of the market along with the public and the private diversification we have?Jigar Mistry: Yes, see, one space that is still not looking great is the MFI space because that is a situation where the management, for the lack of a better word, has not thrown in the proverbial towel yet, which means that the situation has to get a little worse before they become attractive assets.
Now, within the stable business with a reasonably high allocation to secured lending, private still look a lot better to us because publics at the end of it will have some amount of restriction on how vastly can the ROEs expand beyond the current levels. So, privates, publics, and then unsecured/MFIs is the order that we would want to focus on.
