Sandeep Bhatia, MD & head of equity India, commodities and global markets, Macquarie Group
Macquarie Group Country Head Sandeep Bhatia says he expects Indian markets to perform better than the expectations that existed when the pandemic was raging. He cited two reasons: political stability and the fact that it is an “extremely domestic-focussed economy.” In an interview with CNBC TV18, Bhatia said two things to watch out for would be forex reserves and how long US interest rates would continue to increase. Edited excerpts:
We’ve kind of wondered often enough about the Indian market’s outperformance, sometimes scratching our heads, wondering how far this will go and how long this will continue. What is your sense now, Sandeep? Because out there in the US, this mini bear market rally that we were seeing looks like it’s already coming to an end, but it’s not doing too much damage.
I think what you’re asking is what is top of mind for all of us here. I remember Charles Dickens’s opening lines in his book A Tale of Two Cities — It was the best of times, it was the worst of times. So clearly, for India, it’s the best of times, for the rest of the world, it’s the worst of times. And the question that you’re asking is how long can India be in the best of times when the rest of the world clearly seems to be suffering. I think India will do broadly much better than anyone would have expected, when we were in the COVID season, for two reasons.
One, I think India has a much more stable political environment, both internally and externally, than the rest of the world, especially Europe, faces. And the second thing is that we are an extremely domestic-focused economy. We are going to drive this by our own consumption, by our own production, and by what’s happening within India. So this clearly makes India more stable than the rest of the world.
The only thing that I’ll look out for are two factors. One, where are the forex reserves are heading?. If we see any sharp declines, especially around from $ 530 billion of forex reserves that we have now to, let’s say $ 450 billion, then that’s clearly a cause of worry for the rupee. And the second issue is how long the rate rises in the US will continue.
Currently, we expect the rate rise cycle to go into the first half of next year. But if this continues for all of 2023, if inflation becomes very persistent, India will definitely have an impact. But right now, in the Diwali season, enjoy it and take a correction. If there’s any correction, use it to buy. Okay. Enjoy it. That’s the most important thing.
Tell us, what are the big themes now? What do you think will outperform because the big play in the last one year between last summer and now is to sell IT and buy banks. What next?
So I think the easy thing to say is that continue to buy banks, continue to buy the domestic consumption, also go into domestic capex stories. So I don’t think we need to pivot away from the domestic economy.
I think that has been our saviour in the last one year and that will continue to be our saviour. But there is one interesting idea that we have been pushing and let me tell you, we are getting a lot of pushback, and that is to buy IT. I think it has underperformed.
It is like ITC. ITC had two-and-a-half years of such bad news. And despite the fact that it’s a very solid company, cash-generating, it was ignored by the markets because of the whole flavour of EST . I think the IT sector is in that zone and I don’t expect any quick returns in the next six to nine months for the IT sector. But for long-term investors, (after) these kind of declines and (at) these valuations, if you have a two-plus-year timeframe, at least two-and-a-half to three-year timeframe, the next six months will be a good time to buy IT and then stick to the large cap stocks. Whether it is TCS, Infosys, HCL Tech.
These stocks could see some declines if the US goes into a major recession. But if we believe (US President Joe) Biden, there’s only a very slight recession that you will see. So to that extent, this is the anti-consensus call to push, but that will take at least six to nine months or more.
Do you believe that the time has come now, if you’re going to be having a good credit growth cycle and credit costs are going to cool down, it’s time to start allocating some money to PSU banks as well?. Or do you think it’s better to stick to the large private sector banks?
State Bank of India is our preferred choice. If you see the private-sector banks, the public sector banks have cleaned up their act. We will go through a capex cycle. The only thing that I am worried about is if they are, group-wise, concentrated exposures that these public sector banks have ended up taking in the last couple of months. And that is something that we are not very clear about today. And therefore the preference would be to have weighed the portfolio in the banking sector. The banking piece in the portfolio should still be 80% weighed in favour of private banks. And the only good public sector bank, I think, would be State Bank of India. India is going through a good capex cycle, but we have seen that this runs for two years and then there’s always some trouble and public sector banks get caught up.
So to that extent, we have to be careful. We are still at the beginning of this category cycle. I would think that many people would say capex cycle has not even started. But yes, we should definitely still be inclined towards private sector banks.
What else are you very excited about? Like IT? Where are you seeing values, money making opportunities?
See, the broader capex scene continues to be attractive. So L&T looks attractive. I think the other thing that we need to look at is consumption. It’s again a completely out-of-favour sector. We have had not great rural outcomes and therefore consumption will remain weak. There are some high-quality names.
We need to see a connection in those high-quality names before we buy them. So keep an eye out for the FMCG (fast moving consumer goods) staples, but I would peg them below IT because it has already corrected and it will eventually benefit from the rupee depreciation. I do expect the rupee to continue to remain under pressure at least till the first half of next year, till June.
So IT will benefit in the next two years with these rupee corrections which are happening right now. FMCG will be after that, but not in the near-term. So that is one sector that I would look out for. But nothing to press a pedal on right now.
Since you spoke about FMCG, right, ITC is not only the 52-week high, but you have others. There’s Nestle, there’s Page Industries that have done pretty well, both, and are in fact at 52-week highs. You think there’s a valuation headroom here for any of these companies at all? And what are the pockets that you look at within consumption and FMCG?
So I don’t expect any valuation headroom for FMCG companies. If there are any restructuring or potential spinoffs, then that can create opportunities in FMCG companies. But other than that, I think earnings growth and steady earnings growth, when that gets valued in an environment, let’s say in 12 months’ time. The whole world is in a crisis and consumption is weak, but Indian consumption looks good. That’s when FMCG can perform if the money’s come through. But if there are any restructurings in the FMCG name, if there is corporate restructuring, that could be a trigger.
