How are you dealing with this volatility?
Sridhar Sivaram: Yes, I think some bit is expected. We have had a one-way market for a very long period of time. So, it is par for the course. It is good. I mean, a lot of people were expecting some sort of a correction or wanting a correction.Hoping for a correction.
Sridhar Sivaram: Yes, whichever way you put. I mean, I saw interesting statistics on this that on a monthly basis, closing basis, we have not had a 5% correction for Nifty for now 54 months.
So, the last was in March 20, which is the COVID month, so this is the closing monthly correction. And the previous best was around 30 months. So, we are at 54 months without a 5% monthly correction on Nifty.
We have been in fool’s paradise.
Sridhar Sivaram: Even now with this, for all by the end of the month if the market recovers, we do not have a 5% monthly correction. And so, these are very things which do not happen so often. So, it is good. Let us enjoy as long as this lasts. But on a macro basis, things look reasonably good. We can discuss about it as we go.
But are you churning your portfolio in a big way right now in terms of sectors, in terms of allocation, in terms of let us say the cash call, largecap, midcap calls?
Sridhar Sivaram: Yes, so we prefer the largecap right now. I mean, just look at the market. If you take just last one year, the Nifty is up 25% and the midcaps are up 40% despite the correction that we have seen. When you get such strong rallies, you do see some bit of pullback or a time correction, whichever way you see and earnings also have to catch up. So, the way we look at our portfolio is to be in stocks where we have reasonable surety or our confidence on the earnings is strong and try to be in better stocks where management quality is good or maybe slightly defensive, pharma, wherever we think the earnings quality looks better.
You had flagged off in the past that inflation has been a bit of a concern and I think managing growth and inflation, of course, continues to remain the RBI’s key priority. How do you see the trajectory of interest rates moving and what is it that you are expecting? Will we go the Fed way or will we continue to chart our own course?
Sridhar Sivaram: So, I am not in the camp which thinks that we are going to get massive rate cuts. So, we will see the inflation number which comes now, we will have a 5% handle in that because the two previous months had a favourable base effect and people were getting carried away with the base effect, calling for 50 basis points rate cut and stuff like that.
At best we get a 25, maybe end of the year because of the interest rate differentials. If Fed continues to do another 50 basis points, we could get a 25. But then I do not see our inflation going structurally below 4, at least in the next 12 months. So, I cannot see Reserve Bank really cutting in an aggressive way, maybe they will adjust liquidity in the interim. So, I am not in the camp where we think that interest rates will go down. But we have done well even despite interest rates not being down. So, I do not think it matters so much. Actually, our markets are used to high interest rates. So, it is very different from the US market which has got used to very low interest rates.
So, I think our performance of a market with low and high interest rates do not vary as much, more important is how the earnings shape up for the companies.
I have to talk about how is it that you are analysing the China piece. I mean, part of the camp believes that it is tactical money which is moving in. I mean, what else would explain the kind of FIIs exodus or selling that we have seen month to date in the last one odd week or so and part believe that if money were to move to EM funds, China may be a higher allocation, but India also will find influence.
Sridhar Sivaram: So, let us put China in perspective and I will take the Hong Kong China Index, it is called HSCEI. The March 20 low was around 9000. Our March 20 low was around 8000, the day when the markets crashed. They are now at 7500 and we are at 25000.
So, let us put things in perspective that that market has got decimated. So, obviously, when markets fall so drastically, you will get violent recoveries and we have had this every year in the last three years where we have seen China markets rally for 30-40% and then they give up again.
I am not an expert on China, but from whatever I have read, they have an issue with earnings. The economy is deflationary right now and there are pockets where earnings are good, but otherwise, it is more a value play, plus there are macro issues and geopolitical issues with the U.
So, when I speak to my ex-colleagues and funds from the US, fund managers who manage US money, there are a lot of stocks which have sanctions where they cannot buy because of US-related issues. So, I do not think this is structural in my view and we see this tactically every year and it is a 25% weight in the MSCI Index.
Fortunately, India has also gone up past 20% now, so we are reasonably big. So, it is difficult for FIIs to ignore India and there have been only two markets if I take the last 10-year performance of MSCI, there have been only two markets which have given any amount of reasonable returns. India is around 8-9% and Taiwan is also similar range. And the rest have all been basket cases. I mean, China is literally zero.
Emerging market itself has not given any returns. So, I always question this asset class even though I have been in this business and was part of an emerging markets team, this asset class is seriously under question. It has not given any returns for more than 10 years.
We will see outflows from the emerging markets over a period of time and maybe regional specific indices will take over, that is how I see it.
Yes, you are questioning the asset allocation there, but you have been a strong proponent of gold in the portfolio and that has done massively well for people this year. What is the take from here on?
Sridhar Sivaram: So, I have been a big bull on gold. My basic view is at least you should have 10% allocation in gold. The 20-year performance of gold is very similar to the Sensex returns, roughly 14% CAGR. And you can take any period, one year, three-year, five-year roughly gold has matched Sensex.
Maybe there are periods where Sensex has done better and there are periods where gold has done better. But the point here is more on asset allocation. And the other thing which people underestimate that gold is a hedge against the currency also.
If our currency over 5-year, 10-year depreciates at a CAGR of 3%, this is a hedge which gives you that return plus the gold returns.
So, as I said, I have always maintained that the Indian woman is the best fund manager by just buying gold, she has outperformed most fund managers over the last 20 years.
Some of my male fund managers who do not like my comment saying that this is, India’s current account deficit is going out of hand, yes, because of gold imports.
But people do not realise that the gold loan market is on now almost 8 lakh crores. So, the argument that this is a lazy asset does not generate any economic value is also proved wrong because of the huge gold loan market that we have. I can go on and on on this.
Despite the run up, fresh buying is absolutely okay.
Sridhar Sivaram: Our markets have also run up. It is a store of value. And if you see what has changed in the last, say, two years is that central banks have become very aggressive.
And I think that is also coming from what happened to Russia after the embargo and US suddenly closed the currency market for Russia.
So, most countries and central banks feel that what if this happens to us someday. So, if you see a lot of central banks have started to add gold.
You should add it in your portfolio.
Sridhar Sivaram: Yes, you cannot predict that every year it will give you the same return, same with our markets. I mean, if I remember right in the last 20 years, gold has had only three down years. So, it has been a very stable asset class. So, I think I rest my case.