ETMarkets Smart Talk: Allocate 60% of equities to resurgent India themes for long-term wealth creation: Vinay Jaising

In an interview with ETMarkets, Jaising said, “Have 65-70% in strategic portfolio allocation of long-term ideas and 25-30% as tactical short-term trades” Edited excerpts:

We started Samvat 2079 on a strong note. Do you think the worst is now priced in terms of geopolitical concerns, rate hike, inflation, etc?
2022 has seen the sharpest Fed Policy tightening over the last three decades. The rate tightening cycle which began on March 22 from 0%-0.25% is likely to end at 4.75-5% levels by March 23 (400bps until now).

Markets have priced in the bulk of this 500 bps tightening. However, what is unknown is how long the policy remains restrictive after a sharp delta. This is likely to weigh on consumer and business sentiment. It will also have an impact on corporate profits which is likely to be negative for equities.

2023 will be about when do the central banks pivot back to growth support v/s inflation fighting.

With most commodities peaking in response to the slowing global economic growth, inflation has likely peaked.

Coupled with a high base coming into effect from Apr-23, inflation readings should start moderating significantly and converge towards the Fed target at a materially faster pace in 2H-23.

Uncertainty relating to the geopolitical crisis and its resultant impact on oil prices, is a key unknown. Despite China lockdowns due to zero Covid policy, slowing global growth, and the US significantly tapping into strategic petroleum reserves, oil prices continue to hover above $90/bbl.

Surprises to the expectations – negative or positive – about inflation and central bank actions will be a result of geopolitical developments and their impact on oil prices.

After the recent correction, benchmark indices are just 3-4% away from respective record highs? How do see valuation stack up when compared to other EMs?
India has been one of the best-performing (local currency) markets globally in 2022 given the resilience of the domestic economy.

In a slowing and turbulent world, Indian equities are trading more like a defensive theme, thereby at elevated valuations throughout the year.

In a slowing, muddle-through world, the valuation premium of India will sustain. However, given the extent of the valuation premium, the upsides could likely be restricted in a stabilizing world.

The valuation premium of MSCI India to MSCI World is 50% and MSCI EM is 100% – more than 3 Standard Deviations higher than its long-term average.

What is your take on the September quarter results which have come so far? Do you have more downgrades than upgrades in the forthcoming quarters?
Around 170 companies in Nifty500 pack have reported earnings until now. Revenue and PAT for this universe have grown 19%/1% (ex Financials 33%/ -19%).

Margins for ex-Financials are down ~550bps to 13.6% from 19.2% YoY and 15.6% QoQ. With the correction in commodity prices, volumes in 2H-F23 should start aiding Revenue growth.

With high-cost inventory being worked through by companies, margins should stabilise and are likely to sequentially recover (ex of inventory adjustments).

In the second half, as demand picks up in response to the robust festive and wedding season and moderating inflation, corporate India’s revenue & profit growth should begin to recover.

On an overall basis, earnings downgrades are outstripping upgrades largely due to margin pressures. However, as an absolute percentage change to the index, it could be smaller at 4-5% since banks constitute ~33% of index weightage and 30% of earnings and have grown 45% YoY in F2QF23 for results announced so far.

Rupee has been all over the place. A lot has been talked about depreciation and appreciation. Where do you see the currency headed? And, does it also mean that firms with high Dollar debt will be under pressure?
Despite having a ~25% share of the Global GDP, USD has a share of 85%+ of the global trade due to its reserve currency status. 2022 has been a year of divergent and uncoordinated monetary policy stances by major developed central banks.

Fed’s sharp monetary policy tightening has not been matched by ECB, BOJ, BOE or PBOC. Thus, the rising rate differential has been a huge source of USD strength.

In line with other global currencies, rupee, too, has been weakening against the Dollar and India’s forex reserves have depleted to almost 8.5 months of imports.

However, it is important to note that according to RBI, 2/3rd of this depletion in the reserves is due to the revaluation of the US treasury assets. What is of concern is the depletion of the reserves by $4-5 billion a week.

Apart from USD, INR has been relatively stable to appreciating against most other global currencies. Also, the REER suggests India should be fairly valued at around 85/$ levels.

So long as oil prices remain contained below $100/bbl, INR should remain range bound. The risk to INR primarily comes from oil prices moving sharply north of $100-110/bbl range, thus forcing RBI’s hand with higher domestic rates to contain external sector risks.

In an environment of weaker INR, higher interest rates, and tighter money supply, firms with high debt, especially unhedged high dollar debt, are likely to be under pressure.

Which sectors are you bullish on and why?
We like themes with strong-to-medium-term revenue visibility and/or margin resilience and high ROCE. We are overweight on India resurgence plays –Autos, Consumption, and Industrials all of which faced the brunt of the disruption.

Our biggest overweight is in Pharmaceutical/ Specialty Chemicals and Agro Chemicals, which we believe are MAKE IN INDIA stories.

We are underweight in NBFC, Energy Technology, and Metals. We are equal-weight Private Banks.

If someone wants to invest say Rs 10 lakh in Samvat 2079 what should be his/her portfolio asset allocation strategy and why?
We are bullish long-term on India due to corporate India’s high earnings visibility, strong productivity, and structural thematic stories emerging. Thus, we expect sustained long-term outperformance in Indian markets.

We would use three approaches for asset allocation

a) Systematic investment in the market – Invest 30% upfront and the remaining spread over a year equally every month. This could help in any market volatility.

b) Invest ~60% of equities into resurgent India themes and over 15% in dollar plays especially MAKE in India stories. The rest can be one-off ideas.

c) Have 65-70% in strategic portfolio allocation of long-term ideas and 25-30% as tactical short-term trades.

Diwali adds glitter: 39-tonne gold worth Rs 19,500 crore sold this Dhanteras, up 30% YoY. Households are still tempted to invest in gold vs equities. Or it would be wrong to equate the same as both are for different purposes? What are your views?
Gold and equities have both given almost 15% returns on a longer-term basis. Gold is down 13% in the last six months and at the same time, Nifty is up 6%, thus making gold cheaper relatively.

With markets becoming expensive, and incrementally more marriages coming up post the COVID lockdowns being removed, we are not surprised with the resurgent India theme even playing out in gold purchases as can be seen in the results of Companies like

as well.

Having said that, Titan is one of the stocks we own in our discretionary PMS to play the gold consumption story and rising demand.

How should one play the small and midcap space?
In the small-cap space, there are good quality names in the logistics and the financial space which have very strong long earnings growth visibility, falling under our India resurgence story.

In the mid-cap space, we see many especially chemical, agro, and pharmaceutical companies which have very strong long earnings growth visibility, falling under our Make in India theme.

Both together should constitute at least 30% of one’s portfolio for relatively high-risk investors.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)